The Advisory Board Management Discusses Q2 2014 Results - Earnings Call Transcript

Nov. 5.13 | About: The Advisory (ABCO)

The Advisory Board (NASDAQ:ABCO)

Q2 2014 Earnings Call

November 04, 2013 5:30 pm ET

Executives

Robert W. Musslewhite - Chairman and Chief Executive Officer

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

Analysts

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

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Mohan A. Naidu - Stephens Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division

Ato Garrett - Deutsche Bank AG, Research Division

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

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

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

Elizabeth Blake

Operator

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

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding The Advisory Board Company's expected quarterly and the annual fiscal performance for calendar 2013. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in The Advisory Board Company's filings with the Securities and Exchange Commission and in its second fiscal quarter news release. Consequently, actual operating -- operations and results may differ materially from the results discussed in the forward-looking statements. For additional information on the company's results and outlook, please refer to its second fiscal quarter news release. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Robert Musslewhite.

Robert W. Musslewhite

Thank you, and good evening. I'm Robert Musslewhite, CEO of The Advisory Board, and I'm joined today by Michael Kirshbaum, our Chief Financial Officer.

We have a 3-part agenda for this evening's call. First, I will give you a summary of our performance for the quarter ended September 30, 2013, covering our financial results, a discussion of some of the key drivers of our performance and our acquisition of Care Team Connect. I will then turn it over to Michael to take us through a more detailed review of the financials. And finally, I will close with an update on our top operational and strategic priorities, heading into the close of the calendar year. As always, we'll be happy to take questions at the end of the session.

In the quarter ended September 30, 2013, The Advisory Board Company revenue increased 16% to $128.3 million from $110.8 million in the quarter ended September 30, 2012. Contract value grew to $491.3 million as of September 30, 2013, up from $435.1 million as of September 30, 2012.

For the quarter ended September 30, 2013, net income was $9.0 million or $0.24 per diluted share compared to net income of $7.5 million or $0.21 per diluted share for the quarter ended September 30, 2012.

For the quarter ended September 30, 2013, adjusted net income, non-GAAP earnings per diluted share and adjusted EBITDA were $11.4 million, $0.31 per diluted share and $22.3 million, respectively, compared with $11.4 million, $0.31 per diluted share and $20.8 million, respectively, for the same quarter last year.

Overall, we are pleased with the continued performance of the business. In markets experiencing tremendous change and transformation, the member value we are providing is at an all-time high. In addition to outstanding meeting and QA scores, our growth indicates the impact we are having on our members' most important challenges. Reflecting the member value we are delivering, we continue to see strong sales and renewal momentum across the business. Across the September quarter, renewal rates continue to come in at or above historical highs, and we saw a bit of an uptick in new sales activity across our renewable programs in research and software, as members sought our help more than ever before.

Health care members that are looking ahead at the changing environment are seeking key capabilities from us to support their transition in areas like population health and revenue cycle and higher education members facing increased scrutiny on value are trying to get ahead of the curve on student success metrics through our most recent technology launch. The only place where we fell short of what we were expecting in the quarter was in the practice management business within Southwind. There, we had a combination of existing large contracts reaching their conclusion, along with not closing several new large contracts that were in the pipeline, the combination of which impacted our contract value growth metric.

Overall, Southwind is growing rapidly since joining The Advisory Board and it continues to be a tremendously valuable service for our members needing support in managing all aspects of their physician enterprises, so I'm optimistic that the September quarter is just an aberration of what has been steady and rapid growth.

As we turn attention to the extremely important December quarter, we'll look to continue to capitalize on our overall renewal strength and our sales momentum in our renewable products, as well as ensure Southwind practice management sales get back on plan.

Across all areas of the business, everyone is fully focused on flawless execution, commercial success and impact for our members. To that end, I'm excited to talk about how we are continuing to serve our health care members in new and differentiated ways against their most challenging set of issues.

The top strategic issue for us or our health care members continues to be the transition from a system where incentives are based on the volume of care provided, number of tests, scans, procedures, et cetera, to a system where the value of care is the basis for financial reward. That is a system where providers are measured and rewarded on whether they are providing the best care in the most cost-effective manner possible. In many cases, this means that hospitals and other provider organizations are assuming the risk of providing care to particular populations, for example: Medicare patients, patients covered by a particular insurance contract or delegated lives from an employer and need to manage that population to the best possible health outcomes. This is a fundamental transformation of the provider business model; and our members, as well as other players across the industry, are seeking our help in effecting this change. I am very proud of how we are answering the call.

For example, our flagship health system strategy membership program recently launched its national meeting series, which is focused on the new economics of growth in this changing market environment. Today, given the pressures on traditional inpatient-centric business models, many hospital and health system leaders feel they must choose between focusing on rapid cost restructuring and investing in their organization's futures. It is an easy trap to fall into, but trading off between austerity and growth is a false choice and one that health systems cannot afford to make. Although it can feel counterintuitive to our members, our research shows that it is imperative that they have both disciplined financial management and a commitment to investing in high-quality, low-cost pathways and outcomes. It is the only way they will be able to succeed in an economy determined to spend less, not more, on health care.

Our meeting series focuses squarely on this message and provides an in-depth look at how leading health systems are executing on tomorrow's growth strategies today. Meeting sessions include not only a state of the union on the key forces shaping provider strategy, but also best practices in the ambulatory network design, insights on tailoring care management models for specific segments of a population and the application of behavioral economics to patient engagement. From the time of the announcement of the meeting's agenda, members have been incredibly engaged with this content. Registration has been outstanding. The meeting's 3.82 GPA is among the highest for this membership, and we are seeing attachment to this very strong content positively impact both sales and renewals.

Another example of our work to address the transforming health care business model was the inaugural National Population Health symposium we hosted here in D.C. in mid-September. The purpose of the day was to bring together a diverse cross-section of parties participating in payment and delivery reform to share insights about opportunities and challenges they are uncovering in their work. This gathering was a new format for us, including representation from a wide variety of key population health players, both members and nonmembers. We had over 300 people in attendance from more than 200 different organizations, including hospitals, health systems, post-acute providers, home care companies, physician groups, insurance companies and federal and state governments. We built the day around 5 panel discussions, each with 4 panelists and an Advisory Board expert moderator.

Across the day, the panelists described their experiences with accountable care organizations, bundled payments, medical homes, commercial risk contracting, population health IT and other new structures. We also heard from several high-profile individuals in government and public policy. Jon Blum, Deputy CMS Administrator and Director for the Center of Medicare; and Senator Tom Daschle, former U.S. Senate Majority Leader, each gave keynote addresses; and Farzad Montashari, National Coordinator for Health IT, led a roundtable discussion.

The day was a resounding success. In fact, several of us noted that we have never heard the kind of buzz for meeting attendees that we heard that day. Across the day, multiple speakers and attendees made a point of thanking The Advisory Board for putting together such a diverse and progressive group, and several people told me that there's been nothing like this in the industry. The event sealed our position as a leading convener and expert on this important set of issues and continues to bolster our credibility and reputation, both inside and outside of our membership.

Within our membership, we also continue to add to our deep set of resources for members on this issue. For example, we recently released a white paper on auditing the care management team, which profiles best practices on developing an effective care management function and measuring outcomes over time. We've also developed useful tools to help members evaluate a variety of population health investments and of course, our current national meeting series is squarely focused on this set of issues, with insights on how to develop the networks and care models that will allow members to both gain market share and proactively shape the competitive landscape.

Across the population health research, it is clear that care management skills are essential and that the adoption of key air traffic controller technology to direct care team activities is a critical part of an effective infrastructure for future payment models. This technology effectively breaks down the silos of the delivery system and establishes a patient-level intervention that both improve the quality of care delivered and meet the new financial goals of a value-based delivery system.

In that context, I am pleased to announce our acquisition of Care Team Connect. A 40-person company founded in Evanston, Illinois in 2008, Care Team Connect brings a comprehensive care management solution to assist providers in the coordination of patient care. The solution introduces a robust workflow engine into the care management process, enabling care team members across the continuum to build individualized care plans for the patient and to ensure that specific care tasks are completed.

In our evaluation of solutions in this space, Care Team Connect's workflow tool was differentiated by the fact that it was designed specifically for the care coordination processes that provider organizations undertake, including appointment reminders, follow-ups and medication reconciliation. Driven by actionable data feed such as ADT feeds, historical claims and EMR clinical data, the Care Team Connect solution differs from the majority of others in the market, which were originally designed for payer use, based on claims data and uncoordinated with the patients' care team.

Beyond just the technology, the Care Team Connect works in close partnership with provider organizations to design efficient coordination processes, so the collaborative care team is well supported by the technology. This collaboration drives tremendous impact towards the organization's specific goals, whether that be a particular at-risk contract, quality effort or pilot program.

The new capabilities, we have fantastic addition to the Crimson clinical side of the business, and I'm excited that we will be bringing this technology to the market without delay. As such, I am pleased to announce today the launch of our newest program, Crimson Care Management, which leverages Care Team Connect's technology to serve member hospitals seeking to implement a workflow tool to build their population health management capabilities. We expect to be taking this new membership to many current Crimson members and are confident that the synergies between the programs will provide even greater impact for our existing Crimson membership. In fact, those of you who were at our Investor Day in September might recall a presentation by Dr. Jordan Asher of Michigan Pioneer ACO, MemorialCare in Fountain Valley, California and Integrated Health Partners in Battle Creek, Michigan.

We are pleased to welcome Care Team Connect's talented staff to The Advisory Board Company. They have exceptional experience and expertise; and the company's values, service ethic and outstanding client relationships are a great fit with our own. I'm very excited about this infusion of talent and capabilities, and I look forward to our collective success.

Let me now turn it over to Michael to review our financial results in more detail.

Michael T. Kirshbaum

Thanks, Robert. Today's financial review Will cover 7 categories: income statement, balance sheet, cash flow, contract value, our participation to Evolent's recent round of financing, our acquisition of Care Team Connect and outlook for the remainder year of calendar year 2013.

First, the income statement. A quick reminder that we are on our March 31 fiscal year end, which means we just finished the second fiscal quarter of fiscal 2014. For the quarter just ended, our revenue increased 15.9% to $128.3 million, up from $110.8 million in the same period of the prior year. Adjusted EBITDA for the quarter ending September 30, 2013, was $22.3 million, up from $20.8 million same period last year.

Adjusted net income was $11.4 million and non-GAAP earnings per diluted share were $0.31 for both quarters ending September 30, 2013, and 2012. These adjusted numbers exclude transaction-related costs and amortization, equity and loss of unconsolidated entity, as well as share-based compensation expense. The reconciliation of GAAP to adjusted and non-GAAP results can be found in our press release.

GAAP net income attributable to common stockholders and earnings per diluted share for the quarter ending September 30, 2013, were $9 million and $0.24, respectively. Cost of services increased to $69.9 million or 54.4% of revenue in the quarter ending September 30, 2013, compared to $57 million or 51.5% of revenue in the same quarter the prior year. The increases in cost of services are due to increased expenses for new and growing programs, inclusive of our acquisition of ActiveStrategy, 360Fresh and Medical Referral Source during the prior 12 months.

Member relations and marketing expense were $22.2 million or 17.3% of revenue in the quarter ending September 30, 2013, compared to $21.5 million or 19.4% of revenue in the same quarter the prior year. We currently have 185 sales teams in place, up from 167 sales teams, as of the same quarter last year.

G&A expense increased to $18 million or 14% of revenue in the quarter ending September 30, 2013, compared to $15.6 million or 14.1% of revenue in the same quarter the prior year, due primarily to an increase in investment in our corporate development and legal groups, as well as increased investment in our IT infrastructure to support our growing employee base in a number of office locations.

Depreciation and amortization expense in the quarter was $6.9 million or 5.4% of revenue compared to $4.4 million or 4% of revenue in the same quarter of the prior year. The increase is due to capital investment in our growing technology programs, the recent ActiveStrategy, 360Fresh and Medical Referral Source acquisitions, as well as additional depreciation from leasehold improvements relating to expansion space in our Austin, Texas; San Francisco, California; and Washington, D.C. offices.

Other income net in the quarter was $1.1 million compared to $688,000 in the same period the prior year due to an increase in interest income.

Now moving on to our fiscal year income statement results. For the 6 months ending September 30, 2013, revenue increased 17.1% to $251.6 million, up from $214.9 million last year. GAAP net income attributable to common stockholders and earnings per diluted share for the 6 months ending September 30, 2013, were $12.7 million and $0.35, respectively. Adjusted EBITDA, adjusted net income and non-GAAP earnings per diluted share were $44.8 million, $22.7 million and $0.62, respectively, for the 6 months ending September 30, 2013, compared to $40.9 million, $22.5 million and $0.62, respectively, for the comparable period in the prior fiscal year.

Turning to the balance sheet. Membership fees receivable, which excludes long-term receivables, was $387.8 million as of September 30, 2013, compared to $319.2 million as of September 30, 2012. Excluding the effects of progress payments, average DSOs and billed AR were 58 days at September 30, 2013, compared to 53 days at September 30, 2012.

Total deferred revenue net of amount that we billed after 12 months was $529 million as of September 30, 2013, an increase of 17% over September 30, 2012. Excluding long-term deferred, the current portion of deferred revenue balance as of September 30, 2013, was $405.5 million, up 18% over the prior year.

Looking at cash flow, during the 3 months ending September 30, 2013, our cash flow provided by operating activities was $39.2 million, compared to $43.7 million in the same quarter last year. For the 6 months ending September 30, 2013, cash flow generated from operations was $35.6 million compared to $40.9 million the prior fiscal year. For fiscal 2014, we continue to expect cash flow generated from operations to be in our typical range of 1.5 to 2x adjusted net income.

Capital expenditures for the 6 months ended September 30, 2013, were approximately $25.9 million compared to $16.3 million for the 6 months ended September 30, 2012. For the 3 months ending September 30, 2013, we purchased $5 million of stock or approximately 87,000 shares. This brings our total share repurchase since the inception of the program in 2004 to $352 million or 15.8 million shares. As of September 30, 2013, the remaining authorized share repurchase balance was $98 million. As of September 30, 2013, our cash, cash equivalents and marketable securities balances were approximately $200.2 million, representing approximately $5.43 per diluted share.

At the contract value, contract value increased 12.9% to $491.3 million as of September 30, 2013, up from $435.1 million as of September 30, 2012. We define contract value the aggregate annualized revenue attributable to all agreements in effect in any given point of time, without regard to initial term or remaining duration of any such agreements. For contracts of more than 12 months' duration, we only include 12 months of contract value.

Returning to our investment, Evolent. At September 23, 2013, we participated in Evolent Series B preferred stock issuance. We invested $20 million in the Series B offering, of which $10 million was new cash investment and $10 million was conversion of our notes receivable purchase Evolent earlier in the year. After our recent investment, we now have an ownership stake for approximately 25% in Evolent.

Looking at our recent acquisition, we're also announcing the purchase of Care Team Connect on October 7. Care Team Connect is an Illinois-based technology firm with products that will supplement our existing suite of population health offerings. The purchase price is approximately $35.2 million, with standard escrows and no additional earn-out. Care Team Connect's last 12 months of revenue was approximately $1.5 million and last 12 month's EBITDA is a loss of about $3.5 million. We anticipate less than $1 million of dilution for the remainder of this calendar year, given the timing, and expect approximately $4 million to $6 million of dilution from the acquisition in calendar 2014.

With respect to the outlook for the remainder of calendar 2013, the following comments were intended to fall under the Safe Harbor Provisions outlined at the beginning of the call and are based on preliminary assumptions, which are subject to change over time.

For calendar 2013, we continue to expect revenue to be in the range of roughly $500 million to $505 million; adjusted EBITDA to be in the range of approximately $87.5 million and $92.5 million; and non-GAAP earnings per diluted share to be in the range of approximately $1.15 to $1.25, inclusive of the impact of Care Team Connect acquisition.

For calendar 2013, we continue to expect share-based compensation expense to be approximately $17.5 million and amortization of acquisition-related intangible assets to be in the range of $7 million to $8 million. For fiscal 2014, we expect an effective tax rate in the range of approximately 38% to 39%. This concludes the financial summary.

I'll now turn things back over to Robert.

Robert W. Musslewhite

Thanks, Michael. As we have discussed in the past, the December quarter is always an important one for us, given that approximately 40% of our sales and renewals take place during this period. In that context, this time of the year is one of great intensity for our teams, with everyone tremendously focused on outstanding execution to continue our strong performance and set us up well for the coming year.

Our 4 key priorities continue to guide us as we work to meet our goals. As always, our top concern is ensuring continued outstanding value delivery to members. Given the mission-driven staff we have at all levels of the firm, this is really embedded in our collective DNA. From providing outstanding service to delivering product innovation to documenting member value creation from our programs, our teams are always very focused here.

Last month at our Revenue Cycle Summit, we recognized Houston Methodist, Kalispell Regional Medical Center and Methodist Health System, 3 organizations that, through their work with us, achieved collective revenue cycle performance improvements of over $10 million. Delivering this type of member value solidifies our trusted position with the executives we serve and drives both our ability to meet new member needs and a continued growth of our business.

Second, we'll continue to ensure we execute at a high standard across the firm. This time of year is all about discipline, hard work and attention to detail; and everyone across the firm knows that this trifecta is required in order to continue our track record of success. In particular, our commercial organization, sales, marketing and renewals is fully staffed and bolstered by the tools and member intelligence they need to perform. All teams know that strong execution now sets up next year, yielding the revenue to invest in the future while also delivering bottom line expansion. I'm confident that we have in place the right plan, talent and tools to continue to achieve our goals.

Third, we will continue to focus on growth and invest in new product development efforts. Both health care and higher education are going through tremendous changes, and these changes in the markets we serve present unique business opportunities for us. We continue to invest in our portfolio of products and services to be certain that we are capitalizing on these opportunities and meeting members' new and changing needs. Our recent acquisitions are examples of our ongoing work to expand our offerings in new and complementary ways. In addition to strategic acquisitions, we also continue to invest in organic development of new programs to serve our members. Our track record provides us confidence in our ability to develop and integrate new capabilities that meet member needs, and we will continue this formula going forward.

Finally, we remain focused on cultivating world-class talent at all levels of the organization. Our exceptional talent is our most important differentiator as a company. Over this last year, I've had the pleasure of recognizing employee milestones at all levels of the company, from 5-year anniversaries to one 30-year anniversary. It's been fantastic to see firsthand the amazing contributions our employees are making at every tenure level. Our company growth has provided unparalleled opportunities for new assignments, new skill development, promotion and advancement. This, along with our unique culture, has led to unprecedented levels of retention and engagement among our employee base. We also continue to invest in robust training and development, accelerated programs for exceptional performers and our women's leadership group. Our talent focus is widely recognized. Most recently, we are proud to have just been named the top place to work on Modern Healthcare's Best Places to Work, Large Companies list. While these types of recognitions are wonderful, what is most gratifying is working with this tremendous team to drive meaningful impact on health care and higher education. I'm confident that our talent base will continue to build on The Advisory Board Company's success.

Thank you for participating in tonight's call. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Ryan Daniels of William Blair.

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

Let me start with one on Care Team Connect. I guess, Robert, I'm curious in the past, when you've done transactions, you've spent some time scaling those and building up the sales and advisory teams before you've launched that to market. But clearly here, you're launching it effectively in tandem with the acquisition, so maybe a little bit more color on what's giving you the comfort to launch that on a more rapid basis.

Robert W. Musslewhite

Well, I think in this case, first of all, the

technology is robust. We felt like, in this case, we looked at the work that Care Team Connect was doing with their members, they have roughly 21 members, and felt like this was a technology that we'd be able to scale relatively quickly, given the team. Second, when we did our member research, both Crimson members and non-Crimson members, this is a really important capability for them. And I think it's a differentiator in terms of their attachment to our broader Crimson portfolio. So we felt like it was important to be out in the market quickly with this solution, especially given the links to Crimson. It makes Crimson better, and Crimson makes it better in multiple different ways. I can give you some examples of those if you're interested. But in general, we felt like it was important to move quickly. We'll still make the necessary investments behind the technology of course, and that's the reason why you see some dilution next year from the acquisition. But in general, we felt like it was important to be delivering this to our members as quickly as we possibly could. And by the way, the other factor is that we have been researching this space for a long time. So this is not a space that we now need to go do our homework on what we need to do. It's very clear where this fits in the roadmap, and it's very integrated with where the direction of the Crimson clinical side of the business was going. So we felt like we kind of know the path and now it's just a question of execution.

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

Okay. And if we think about the dilution given in its launch, it's mostly in technology kind of ramping up the infrastructure there. Is that how should we -- we should think about it?

Michael T. Kirshbaum

Similar to how most of our acquisitions look, there will be -- obviously, they're incurring a little bit of loss, so we'll inherit that. We'll invest a little bit on the technology side to shore up some areas, make them more scalable, integrate with our existing offering. And we'll make investments for scale, which is hiring some staff ahead of growth that we anticipate to bring next year, and then we'll also beef up the commercial organization and hire sales staff.

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

Okay. So does the -- I guess another question for you, Michael. The EBITDA pressure that you commented from $4 million to $6 million, does that incorporate some growth in sales year-over-year? Or is that just kind of a net basis without assuming a more robust sales outlook?

Michael T. Kirshbaum

It does. But if you think -- if you're familiar with the way our model works, is that we will grow sales next year, but we won't get much accrual revenue from it, that we will mostly be generating contract value growth, which will generate 2015 accrual revenue. The most of the sales investments happen ahead of revenue.

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

Okay, perfect. And then maybe a quick follow-up just on Southwind. I know you mentioned some of the engagements rolled off and I realize that pulls those out of CV, so not really much of an issue other than timing. But were the couple of big ones you were hoping to close by quarter end lost? Or were those entities that are not moving forward, are those kind of still on the pipeline for the future?

Robert W. Musslewhite

Most of the specific deals that were on the table, we did not win. And like I said, that was kind of an anomaly for Southwind, which has pretty consistently brought in deals like that each quarter since we've owned them. So I think it really is a matter of more just a couple of them falling together than anything else. Obviously, we need to get those back this quarter. We are still talking to some of those organizations and there's a chance that some work develops from it. But the specific engagements, it's not like they just push for a few days. We actually just have a no decision on those.

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

Okay. And then last one and I'll hop off. Just looking at the financial statements, Michael, G&A costs were actually down modestly in the quarter. Should we be thinking of that as a better run rate going forward or anything kind of seasonal or timing in that number?

Michael T. Kirshbaum

There's a little bit of seasonality in the G&A numbers around recruiting. But in general, no, no real changes in G&A. I think the number you're using is a good run rate to use. We're still doing budgeting for next year, still making some decisions on where we're going to invest in G&A. And there probably will be some increases. I don't think G&A will stay flat year-over-year. But as we've mentioned previously, the last couple of years, we've had the rate of G&A growth be at the higher level than we normally would expect as we've been caught up with some of our infrastructure investments, particularly recruiting, IT, corporate development, NPD [ph] groups. So I would expect the rate of G&A growth to decline going into next year but we haven't finalized that yet.

Operator

And our next question is from Donald Hooker of KeyBanc.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

So with regard -- maybe going back to Southwind. I, think of -- you have your research business, your health care IT business and Southwind. So is Southwind growing? This I guess -- are the other sort of segments growing as they have in the past? And does that sort of imply that maybe Southwind isn't growing because of those lost contracts?

Michael T. Kirshbaum

I think that's correct. If you look at the rest of our business, we've seen continued strong growth in research and in software. Southwind was -- by virtue of being a nonrecurring business, when you have contracts that reach their conclusion in the last 2 years, we've had tremendous growth in Southwind so there's a lot of those contracts that are -- that have been in service the last few years. As they reach their conclusion, you need to replace them to drive growth in the business. And in the September quarter, given the number of contracts that ended and the ones that were -- that we didn't get, that we normally would have expected to get, that business was more flat than we've seen in previous quarters, and that's what has affected our overall growth rate.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Got you. And then on the technology side, and excuse me if you may have already mentioned this, but the Medical Referral Source acquisition, the 360Fresh acquisition, are those going to -- what are your plans with regards to them? Are those going to be developed into specific programs? Are they sort of more integrated into the existing programs?

Robert W. Musslewhite

I think they're -- those are 2 different types of acquisitions, Don. It's Robert here. Medical Referral Source, we'd expect to be launching a program based on that technology in the coming months. So we're working ahead to do that. We're taking it out to early members. We're conducting early launch activity, just haven't officially rolled it out as a product launch, but we're real bullish on that, being kind of an independent product offering in our Crimson business -- side of the Crimson business, so Crimson business as opposed to Crimson Clinical. On the 360Fresh side, I'd say that's more of a key capability acquisition. I don't think we'll be necessarily tracking revenue directly to it, but the power of having it in our portfolio as part of Crimson is certainly contributing to very strong performance of Crimson products. So there, you think about, especially sales where progressive organizations are looking to take on risk and they seek a partner of choice and they value kind of a broad set of linked capabilities, 360 is really important. So just as an example, if you take Care Team Connect through 360, you are able to predict the risk of readmission for a patient and you can then load that into the data that Care Team Connect is using, and it can impact their post-discharge management plan as an example. So there are linkages that 360, we're building in to different parts of Crimson. They're going to make that a more robust portfolio, if that makes sense.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Yes. And then in terms of the other products, I typically associate you with the Crimson continuum of care and the market advantage. Are those still growing as they have in the past? Are those starting to flatten out? And then I'll hop off.

Robert W. Musslewhite

No. Sure. We've seen very good growth in both programs. I think market advantage being a little bit earlier in its life cycle, probably on a more rapid percentage growth path. But both programs are still growing well, and we've seen robust sales for both across this year. So obviously, we're not sitting still. Those products have a lot of ongoing product development associated with them, and we're not -- the markets are not without others in them. So we need to stay ahead and be sure that we are continuing to serve both our current members' and prospective members' needs really well. And that's why we want to stay aggressive on the front on things like care management. But in general, those are still growing very, very well.

Operator

And the next question will be from Mohan Naidu of Stephens.

Mohan A. Naidu - Stephens Inc., Research Division

Robert, on the population health technology, over the years, you have accumulated quite a few there. Can you help us understand what you are providing to your members who are thinking about going to at-risk contract sources? What solutions you'll provide for members who are already at risk with some of the contracts? And also, can you help us understand about offerings that you have versus what Evolent has?

Robert W. Musslewhite

Sure. So on the first part, I'd say that we have tended to be investing in no-regrets capabilities. So if you look at most of our portfolio, it's very well tailored to the organization that wants to be investing in capabilities that they know they're going to need as they transition to risk, but provide very clear return on their investment today. So if you think about Crimson and its ability to reduce outlier utilization or our revenue cycle tools and the ability to improve collection against denials and contract manage all your contracts, those delivered a ton of return today, but they also position you with capabilities that as you transition to risk, you're going to be incredibly important. So managing your physicians, being sure that you use your contracts and identify areas where you're most likely to profit from at-risk investments. Market advantage is probably the perfect example of that. Today, most members focus on Crimson Market Advantage as a way of driving growth and understanding where in their market they can gain additional referrals. But if you think about what they're getting is they're getting a capability to understand how patients flow into their health system and then use our other Crimson products to understand what types of patients those are. So in a world where they start becoming accountable for the cost and quality of the care they provide to those patients, that is gold mine-type information. So it's really -- I think we've tried to make sure that all our products are -- fit both environments. There's a few exceptions. So I'd say as we've seen members -- most members taking on some sort of risk contracts somewhere in their portfolio, at least expiring to today, certainly not a great percentage of their portfolio, but at least for some of their lives getting to a more risk-based structure. We have heard the demands for us to continue to provide products that specifically help with that. So do we have a Crimson Population Risk Management product that helps segment populations in terms of risk stratification and likelihood to drive greater need for care and higher costs. Care Team Connect is obviously a care management product that's especially important in a risk environment. Although certainly, there are organizations who aren't on risk, that employ care management -- employ good care management practices that would use the technology. So things like that, but I think my -- the general answer is that we try across our portfolio to provide services and products that apply in both settings. On your Evolent question, I think I give the same answer on the Advisory Board side of it, so we do have comprehensive capabilities to ensure that members who are going to make the transition can successfully transition and thrive under at-risk payment models. And so you think about all the things that are no regrets, but it still helps them. Those are things like strategy formation, network development and management, care transformation, care management, patient engagement, all of those we do around our Crimson platform. For members that also want to compete as the leading health plan in their respective markets, that's really the sweet spot for Evolent. I mean Evolent offers health system improvement and provider-led outsourced integrated payer capability. They provide a lot of arms and legs in specific markets to really serve health systems that want to be a huge population manager, and that was always a little bit different model from what we were doing. And quite frankly, we needed UPMC's provider-oriented experience in doing that to come up with a great offering. So I think it's been a good partnership, and Evolent is certainly doing a great job in that market.

Mohan A. Naidu - Stephens Inc., Research Division

Yes, that's very helpful. And quickly on Care Team Connect, you said that some of the competition there is based on claims data and for payers' use, like that. How important is all this population health technology solutions -- need to use the clinical data in-house in the hospital versus just use the historical model from claims data?

Robert W. Musslewhite

Well, I think the trend is to continue to try to incorporate clinical data where it's valuable. The difficulties we've seen is that you can't just build a warehouse and dump all the clinical data in there and expect it to yield insight. And so our approach has been to be targeted. 360Fresh has done a great job of finding the specific information that yields the most predictive value and utilize that data in their predictive modeling. And so we haven't been -- we certainly use a lot of claims data in a lot of our Crimson work, but we also try to incorporate clinical data where it has specific predictive value to make our tools better. So I do think that most companies are trying to find ways to incorporate more clinical data in their work as it becomes more available and as companies adopt and sort of have greater EMR adoption across their -- or health systems have greater EMR adoption across their enterprises. But from a care management standpoint, I'd say that's more of a -- it's workflow technology. And so the key there is really to be sure that they are providing the ideal support to everyone in the care management umbrella. And for us, it felt like the approach that they had, that was provider-centric. And that means really understanding how the care management team on the ground on the provider side engage with patients to improve care really differed from those that were historically based on being designed for payers to use. And so it was -- obviously, the claims data is one piece of that. But the also important part is coordination with the patient's care team. And our members said that was very important to them and we felt like Care Team Connect really stands out in that category.

Mohan A. Naidu - Stephens Inc., Research Division

Yes. One last question, Michael, on the Southwind, can you help us what the revenue mix from that business is right now?

Michael T. Kirshbaum

Southwind is roughly 10% of our total business. We have about 10% to 15% of our business that's nonrecurring, and Southwind is the vast majority of it. The rest are being revenues out of consulting. It's a decent in the 10% -- 10%-plus range.

Operator

And the next question is from Jamie Stockton of Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess maybe one follow-up, Robert, just on the whole Care Team Connect platform. The business model there, should we think about it as a traditional subscription business model? Or is this transitioning toward a little more per-member, per-month model?

Michael T. Kirshbaum

The model is -- right now, their contracts are little per member, per month. I think within pricing then. So certain number of lives and you step it up when you get above thresholds. I think how we price it going forward will be a mix of those contracts. And maybe some fixed-price contract, we tested both in the market. I think it's a little too early to tell what the final structure looks like, particularly when you bundle it with some of our other offerings. But there may be a component that is a little bit more variable in the per member, per month. But those are still recurring contracts. They cover -- generally, they're entering the 3-year contracts, so you still have the long-term visibility, but you might have a little bit of pricing upside as these contracts grow.

Robert W. Musslewhite

It's SaaS technology. So again, it has a lot of characteristics of other programs. And I think for modeling purposes, I think it's going to be relatively consistent, if not a touch higher than our typical technology-based program contracts.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay, that's great. And then on the Southwind business, I get that you answered to Ryan's questions earlier that there were just some contracts that didn't go your way during the quarter. If you think about physician practice consolidation in that theme and hospitals' buying practices, have you seen any change just in the broader landscape, the pace of consolidation?

Robert W. Musslewhite

I don't think there's been a noticeable change. So you still have the trend. You still have a lot of aggressive acquirers out there. You still have a lot of incentives for physicians to team up with broader health systems in their markets, just given the investments they're required to make, the importance of coordination on the IT systems and things like that. So I don't think the dynamics have changed. We look at that very carefully obviously. And if -- when you don't come in where you want on the sales number, you look at everything that's going on. I really think it's just a question of a few things going the wrong way in the quarter and it certainly feels like we're coming in to this quarter with some renewed momentum there. So we're optimistic that we'll end up in a good place.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. And then, Michael, the -- I think versus most people's model, you came in a little heavy on cost of service and light on OpEx. I heard your response earlier where you said this level of G&A was going to be a little more normalized. Should we expect the heavy investment on the cost of service line to continue for some period of time as you guys ramp some of these newer technology platforms that you've acquired or...

Michael T. Kirshbaum

Yes. Yes, I think a lot of the recent increase in cost of services and what we'd expect going into next year is around the acquisitions. We've acquired some in-place teams, which is great. It's a good infusion of talent and technologist and IP, but the companies are small. They don't have a lot of revenue relative to the costs we're acquiring, so that mostly hits us from the acquisitions we've done the last 12 months, mostly in cost of services. If you think about through the line item of the income statement, we would expect sales and marketing and account management to roughly be the same percent of revenue year-over-year. We've seen a little bit of leverage there recently but I would expect it to still be that 18% to 20% of revenue range. G&A, I don't think needs to grow as fast as revenue going forward. We've been in growth period, but I think we can get some leverage out of that. And cost of services tends to be where our investments and acquisitions go. We had a period where we had a couple of quarters of gross margin expansion, and we've had a couple of quarters now of investment, mostly through acquisitions. And as we think next year, it's really about where we place investment dollars and setting the business up for long-term growth, and a lot of that tends to come through cost of services.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. And last question, just on the education business, you guys highlighted a lot at the Analyst Day, any update there? Are you going to start to break it out as a portion of the contract value? Or can you talk about its growth? That'd be great.

Robert W. Musslewhite

I mean from a growth performance perspective, it continues to go very well. I mean it's still a small part of our overall contract value, but I think we're seeing incredible scores and member value across that membership on the research side. We've seen good traction early on the technology launch. And so it feels like it's a nicely growing vertical. It's just still small so, Mike, do you want to...

Michael T. Kirshbaum

Yes, it's around 5% of our total contract value. So as Robert said, it's a nicely growing business. It's got a lot of the characteristics of our core -- of our health care memberships that we like, really strong renewal rates, attractive margins, good cash flow. But at the same, it's just really small. So breaking it up separately is just not that material, less than 5% of revenue.

Operator

And next, we have a question from Matt Hewitt of Craig-Hallum Capital Group.

Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division

More of a big-picture question for me. Health care providers are under a lot of pressure as you've highlighted on your calls regarding ICD-10 and Meaningful Use Stage 2 and the change in the business model for health care. How do you see analytics playing a role today versus where do you think it is on the priority list, maybe 1 year or 2 from now? I mean, is it still very early? So you've got the early adopters and 1 year or 2 from, as some of those other priorities have been dealt with, it ramps dramatically. Or is it just going to be a steady-state growth over the next 10 years?

Robert W. Musslewhite

It's a very good question, and it's hard for me to give an answer other than personal opinion or through the eyes of our members. I guess, I'll say the eyes of our members who's probably more accurate. I think analytics are becoming more and more important to the transition that health care institutions are having to face as they transition to a more value-based world. So having information from anything around a patient's risk, a patient's need for differing care paths, patient's medical history, just all -- you think of just the data around the patient that becomes really important to succeeding at becoming a good population risk manager and truly managing the cost of care down and keeping outcomes good or making it even better. That's a mammoth undertaking, and then you think about taking that information and using it in ways to inflect decision-making in realtime in the institution, you come up with a whole another layer of predictive algorithms and ways of alerting or steering that has to happen in very rapid time, almost realtime, if not realtime themselves. And then you think about everything that comes beyond the patient being cared for and all of the follow-up activity and how things that happened post discharge can change the care that's being provided and that's all just on the patient side. I haven't even mentioned sort of the contracting side or how an institution thinks about where they ought to strike risk contracts, where they're relative advantaged relative to other providers. And so what we hear from members is there's some really important questions that I'm going to need to answer if I'm going to do a good job at this. And I'm scared that if they don't have that information, I'm worried about my performance. So to us, that shouts out that analytics are going to be a critical part of the puzzle as members transition. So -- and if you look at the transition, you know it certainly has not been -- there are a very few members that have about 50% of their contracts under risk. I think, on average, 10% to 15% across the industry today is not very much. It's a lot more than a couple of years ago, but I think you have several more years of this transition starting to come into play, where analytics are just going to be critical to have.

Operator

And the next question is from Ato Garrett of Deutsche Bank.

Ato Garrett - Deutsche Bank AG, Research Division

I have one more on Southwind. In terms of the impact of the slowdown that you guys saw there, can you help me size that in terms of contract value?

Michael T. Kirshbaum

Yes, I think if you do the numbers we've given, Southwind being roughly 10% of our business and contract value it goes being relatively flat there, that's the impact between where we were last quarter in contract value and where we end up this quarter. It's mostly due to -- almost entirely due to change in Southwind's performance. As I said, it's one quarter in an honorable business. And the rest of our year really determines what '14 looks like and for '13. Given the visibility we have in the business, we feel pretty comfortable within our guidance range of 16% to 17% of revenue growth, and so not a lot of difference there, just mostly through the September quarter contract value number due to the Q3 sales and obviously, a lot of building the pipeline and focusing on sales execution through the rest of the year.

Ato Garrett - Deutsche Bank AG, Research Division

Great. And then just some organic numbers questions, can you give me organic numbers for contract value growth, bookings and deferred revs, if you have them?

Michael T. Kirshbaum

The -- well, the Care Team Connect acquisition was in October, so it's not in our numbers. The other acquisitions we did, MRS last quarter was tiny, less than $1 million of revenues. So it's basically nonexistent in contract value and deferred revenue. And then you'd have to go back to ActiveStrategy, which is 12 months old. At the time of acquisition, they had about $3 million of recurring revenue. 360 had less than $1 million of revenue when we acquired them about 11 months ago. So there's a couple of million dollars in there of things we acquired, but it's pretty small.

Ato Garrett - Deutsche Bank AG, Research Division

Okay. And any impact or any estimate on the bookings or deferred revs? Or do you think it's about similarly small for those 2?

Michael T. Kirshbaum

For?

Ato Garrett - Deutsche Bank AG, Research Division

Bookings and deferred revenue growth?

Michael T. Kirshbaum

Well, what we acquired is what we acquired. Bookings, since then -- obviously, we've continued to grow ActiveStrategy. We have grown the business fairly considerably in the 12 months, which is very early up from a small base and still the big December quarter to go. So there's no specific number. 360, as Robert mentioned, it's hard to attribute revenue to it directly because it's integrated with other Crimson offerings and Medical Referral Source is a couple of months old, so there's not a lot of sales activity in that program as of today.

Robert W. Musslewhite

We don't necessarily think about it that way. Once we've acquired the business and build the sales team around it, we're taking out just like we're taking it out an organic launch. And obviously, we can break out the numbers once we have it. But once it's in the portfolio, it's a huge focus on just the overall number across those programs across the quarter.

Operator

And next, we have a question from Joseph Foresi of Janney Montgomery Scott.

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

Just wanted to -- wanted to run through a couple of other quick ones on Southwind, I'm sure you're probably tired of it at this point. But just on the resources side there, are you redeploying any of the resources? And maybe you could give us some color around why you feel like this business slipped through and then maybe what you're doing to kind of help that in the future.

Robert W. Musslewhite

Yes. And I understand the focus on it. I'll start by just putting the overall perspective. If you look at the overall year across the company, strong growth year. If you look at Southwind, as I mentioned in my prepared remarks, Southwind has been a great growth organization across every calendar year since we've owned the business. And so certainly, one quarter missing some sales, you don't want that to continue. But on the other hand, we're not engaging in real redeployment or substantial shifts there. I mean, it is a fairly variable cost business, given the compensation model there. Most of the Southwind teams have been running very, very full; and they're now out in the market on the next wave of engagements that, we're hopeful, will come in across this quarter. So yes, there's no sort of large-scale moves to change anything at this point, and I'm not anticipating it going forward so the other thing to put in context is, this really was just a practice management issue. And so if you look at the various areas of Southwind, the practice management obviously had some contracts we didn't get. But if you look at consulting areas like clinic integration, value-based care, medical home, hospital performance management, things like that, they've perform -- they've been performing well across this year and so end up in a good year on those. And so this really is one place, and I think it's an isolated place, that we can certainly focus on across this quarter and end up in a good place. And we're all focused on ensuring that we've a better Q4 in that part of the business. So if we have the kind of Q4 quarter across the business, I think we should have, we'll end our 2014 looking at another year of strong growth, and that's our objective.

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

Got it. And you mentioned earlier in the call, I think, about momentum taking place. Was that specifically regarding Southwind? And in this practice management, I think you said already you've already seen some signs of a pickup post the close of last quarter. Maybe you could just give us a little bit more color on just the momentum and what you're seeing from that after the quarter.

Robert W. Musslewhite

Well, I think, broadly, there's -- we're feeling momentum certainly across the renewable parts of the business. As we mentioned, I feel like we're seeing very strong demand for our products and services, very strong renewals, slight uptick really in sales across software and research. On the momentum side, I guess what I'd say is we're working hard on the Southwind side to replenish the pipeline and feel good about the progress we're making. Generally, in any fourth quarter, December is by far the biggest month, and November is the second biggest month. And so you tend to be going through a quarter and you're still building pipeline early in the quarter and you're bringing it home in the latter part of the quarter. But if I look at advanced metrics, I feel like we're in the right place for this quarter and I'm hoping the momentum from Q3 across the business carries over into Q4.

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

Got it. And then just lastly, in the margin side, how do we think about that particular piece of business from a margin perspective versus the consolidated business? And any early takes on what you think -- I know you've given general color on margins in the past. Any early takes on what your view is on margins? Has it changed at all?

Michael T. Kirshbaum

Yes. Well, Southwind is our highest variable cost business. So incremental revenue there doesn't have as high incremental profitability as, say, a research product or a software product. So it doesn't have as big -- the revenue does not have as big a bottom line impact as it would in another business. So I think that's why we feel pretty comfortable with revenue guidance for this year as it turns into next year. Most of our margin leverage will continue to come from growth in the research and software programs and less so in the services business because of the variable cost structure.

Operator

And next, we have a question from Shlomo Rosenbaum of Stifel.

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

Just to -- what's the feedback you're getting for the contracts you didn't win? Why aren't you winning them?

Robert W. Musslewhite

It's a good question. I would say each one was for a different reason. This time, there's not a systematic answer, like all of a sudden, people weren't selecting Southwind. In one case, there was a leadership change, which is a risk for any of our products, just happened to be on a larger contact on Southwind. Another one was shifts in organizational priority during the contract negotiation period. Another one was they decided that they needed to wait until next year and reengage just from kind of corporate planning purposes. So it's not -- there's not a systematic thread running through them. If there was, I think we would probably zero in on that issue. I think this really was a case of a little bit of unlucky timing.

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

Okay. And there's no one out there in particular that you feel like you're losing to?

Robert W. Musslewhite

No. No, Southwind is still the market leader here and doing incredible work. And the feedback from our members has been outstanding. I mean, this has been a really important add to our portfolio in terms of the value we can deliver to individual members by really making substantial ROI improvement in terms of the financial performance of the practices. So it's still really valuable, and the value stories we've heard have been fantastic. So there's nothing there.

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

And then -- assuming that this is a one-quarter anomaly, which is what you think it is, how tough is it to overcome that and basically set yourself position yourself up for decent growth in Southwind for next year? I mean, is there enough in the pipeline? And do you have enough resources to work on that in order to grow it to have the kind of next year that you guys were hoping to have?

Robert W. Musslewhite

Well, I think, overall, the good news is you've seen an uptick on the research and technology side. And so as with -- as our business, we have relatively diversified business. It's very rare that all segments of the business are over-performing at any one given time. So you'd hope that a little bit of softness in one quarter in Southwind, you can make up for it with great performance in the rest of the business. So that's one path that gets you exactly where you want to be. The other is that Southwind is a one-quarter issue, and you come back this quarter with a very good Southwind quarter and feel like you have a lot of momentum going into next year, so that Southwind puts up a growth year next year that feels good. And both of those are, depending on where we end up the fourth quarter, very much in the cards in terms of what can happen. So I don't -- again, it's really not a different answer than I would give if you'd asked me those question, we didn't have the Southwind performance we have in Q3. Because so much is dependent on the next couple of months in sales and renewal activity. But I can tell you that the market still feels good. We feel like we have a lot of momentum in the business overall across the year. And so we're certainly optimistic that with our typically good fourth quarter sales and renewals performance, we end -- set up for a good growth year next year.

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

So it's 3 contracts in total that didn't fall the way you were expecting?

Robert W. Musslewhite

Three larger ones, yes. There's some smaller ones. But in general, I think it's about 3 larger ones.

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

Okay. And then can you go over again the Care Team Connect metrics, revenue of $1.5 million? I didn't catch the...

Michael T. Kirshbaum

Customers' revenue about $1.5 million, EBITDA loss about $3.5 million. They have about 20 customers and around 40 employees.

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

Okay. And in terms of the technology, I mean there's a lot of talk nowadays about health care technology not being ready when it's rolled out. In terms of you guys making sure that it's ready to take across your fairly extensive base and -- is there a lot that has to be invested? Or do they really put a lot of investment before you bought this, so you don't have to invest that much?

Robert W. Musslewhite

Well, the team is fantastic. They have done a really nice job with the product. The reality is on the launch pacing, we're still -- while we're getting the market quickly, we're not adding full sales team immediately. I think we want to be sure that the marketing approach works, that we're taking it to the right Crimson members early. So in terms of the pacing of the launch, while we're announcing it earlier and getting out a little faster, I don't think it's going to be as if we just open the floodgates on day 1. It takes some time to get the members coming in. So the amount by which we're investing in the technology ahead of when we're going to have a big bolus of members is going to be relatively similar, maybe a little bit faster, but relatively similar. I do think the technology is very good and it feels ready to scale. And we've seen some evidence that they've done a nice job of scaling it even across their membership, so there's also a little bit that is -- we felt comfortable betting on a little bit faster path for this technology.

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

And just in terms of the sales price, I know that it's almost impossible to justify the sales price for any acquisition you do based on metrics. But $36 million for what's going on now, is there a huge potential? I mean, is this -- I think this is a similar price to what you guys paid for Concuity. Is that correct?

Robert W. Musslewhite

Roughly similar, yes.

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

So is there the thought that this is kind of a universally needed product out there or something else that -- how did you base your metrics? And was is something that was being shopped at the time it was competitive?

Robert W. Musslewhite

This one was not directly competitive. I'd say that any technology like this in the space with the traction that they're having is going to have interest. So while it wasn't a banker-led directly competitive process, it was certainly an asset that others had interest in. So I think that's just the state of play in health care technology market these days. We look at all the metrics we've always talked about looking at. The most important of which is, if you put in our model and look at how much we're going to spend versus the return based on us taking out to market and having a successful launch, that type of analysis tends to be the most important, so an IRR and an ROIC-type metric. The reality is if we do what we know we can that we've done with some prior acquisitions, it looks like a great bargain 3 years from now. If we don't do that, it's always going to look like we pay a little too much on just an apples-to-apples basis on normal metrics. But the reality is we're buying a small company that has huge growth potential ahead of it. And so I kind of classify in that regard. It feels like Crimson -- relatively similar priced to Crimson as well, which again, at the time, it felt like it was high based on the metrics but certainly has proved out to be a good deal. So I'm hoping it's one of those that we look back on and feel like it was a very fair deal.

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

Okay, that's a good description. And then just, Michael, on free cash flow, how should we think about it? There's a lot of investments this year. Are we -- when is kind of the step effect going to finish for, let's say, this year versus last year? And are we going to be perennially in kind of the investment mode? Or are we going to have kind of a little bit of a breather and generate just a little bit higher free cash flow?

Michael T. Kirshbaum

I think you're talking about mostly the CapEx increase, because -- and that's -- we've talked about basically sort of CapEx being in the $40 million to $50 million range this year, up from last year. A lot of that is growth investment and a chunk of it is real estate, which can be -- fluctuate from time to time based on the look-forward to next year. We haven't built out a full plan yet, so we don't have perfect visibility. We'll talk about it more on our next call when we give guidance, but I still think we'll be in a period of a fairly focused investment. So I wouldn't expect it to grow up at a rapid rate but also wouldn't expect there to be a huge rationalization and a huge increase in CapEx. So plus or minus where we are now is probably the starting point for next year and there's a lot of decisions still to be made. But we are in a period where we do see a lot of opportunity for investments, a lot of, as Robert mentioned earlier, hospitals focusing on taking the data. They're just now collecting and transforming it into actual insights through analytics. And some of the programs we have can do that and obviously, we'll continue to advance that. There's a huge member need. So launching a new program, investing behind the programs we currently have is part of our CapEx and then also keeping pace with our employee headcount and growth and office locations, et cetera, has been a decent chunk of CapEx last 2 years and probably will be next year and maybe after that as well.

Operator

And the next question is from Richard Close of Avondale Partners.

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

I'll try to keep it quick here. Michael, I just want to clarify the -- with respect to contract value, you said if those contracts at Southwind did not slip, it would be similar contract value growth in the June quarter. Is that correct? So about 300 basis points higher?

Michael T. Kirshbaum

200 to 300, in that range.

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

Okay. Robert, just real quick, you obviously have compiled some assets on this population health, whether it's an investment with Evolent or Care Team Connect here and 360Fresh. Is there any fear that you have all these different parts and you don't necessarily get the synergies or the success because there's so many different moving parts. Any fear from that on the sales force? You did talk about somewhat of a soft launch, I believe, in the -- just previous commentary, just a second ago about...

Robert W. Musslewhite

Well, it's a good question, and it's obviously a risk that we need to manage. But I feel great about our ability to manage it. On the one hand, I think our sales and marketing teams are world-class in getting a product out quickly to members and ensuring that members who need it get signed up and on board. And so from that perspective, certainly, don't worry about getting the message out in the right way and in the hands of the people who need it. I think the broader question behind your question is that as we continue to make both organic development activity and acquisitions in similar areas, do they link together in ways that are appropriate for the member? And we take a lot of time both in the selection and diligence process around the deals we do, as well as with our organic development roadmaps to ensure that we are very consistent in the types of things that we launched, such that they fit with the direction that our members in the market is telling us that they'd like us to go. So to me, it's a question of, do we feel like these are all part of a consistent and unified roadmap that you could go to a member and say, here's why we're bringing you each of these component parts and why they fit together as a whole. And that is a challenge but it is upon us to do that. I think we've down it relatively well and certainly, keep working on it. The Evolent question is a little bit different because it's a separate organization, separate management team, fairly separate value proposition although there's always a little bit of gray area in terms of an organization that may not know whether they want to take that broad step to outsource a lot of their population health management functions. But in general, that one felt like a step that from the Advisory Board side, we would not be doing ourselves with any sort of reasonable amount of time and so it made sense to be still serving members who need that capability with the best-in-class organization and service offering, but not doing so under the Advisory Board roof directly.

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

And care Team Connect, I think you mentioned 20 customers. Are all those customers existing Advisory Board customers?

Robert W. Musslewhite

21. And no, there's some new customers in there that are not originally Advisory Board members. So there's a mix.

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

Okay. With respect to the acquisitions, 360Fresh, ActiveStrategy, would you say that those have met your expectations over the last year or maybe not met expectations?

Robert W. Musslewhite

I'd say they're both on track. It's early. So generally, from an acquisition standpoint, Michael mentioned this, but on ActiveStrategy, we've just taken it out more broadly to the market with the full sales team across the summer. And so that feels like it's on track with a good sales success there and are seeing a lot of value in our early members. So that's always we want to see because that creates great reference members and kind of creates the virtuous circle of -- that are attracting more members on who'd give more value, who then talk about the product. 360Fresh, again, is a little bit different because we've been using the capabilities of 360Fresh across our Crimson portfolio. But I would say that there are certain conversations with members that without that capability, I don't think we would be in the game to win, where members are really looking at a broader technology and service partner to help them manage the transition. And by having those capabilities as part of the proposal that we can put forward is tremendously important. So we're also looking at developing some new products around that capability. But in general, I think it's going to end up more as a capability play that really bolsters the work we're doing in market advantage and core Crimson and the Crimson clinical side of the business. And like I said, we'll make the work through Care Team Connect a lot better. And so I think it's just an additional differentiator that probably contributes in many ways. They're harder to measure directly with direct revenue, but you certainly can identify the places where if you didn't have it, the revenue would not have come in the door.

Operator

And next, we have a question from Elizabeth Blake of Bank of America Merrill Lynch.

Elizabeth Blake

First, on Southwind again, could you elaborate on the activity through October? Have you signed or lost any new business quarter-to-date? I'm just trying to get an idea of, I guess, how long it'll take you to replace that business that rolled off.

Robert W. Musslewhite

I mean, I think Southwind has continued the normal activity you'd see in any quarter. So I'm not expecting this quarter to be different based on early sales activity. But it's, again, very early in the quarter. So we tend to know how this quarter ends on December 31. It's kind of the nature of the beast unfortunately.

Elizabeth Blake

Okay, okay, understood. And then on Crimson Care Management, I guess, could you help us size the potential market there? You mentioned Crimson Clinical Advantage members is the target kind of audience. Maybe which types of members, specifically, would be the low-hanging fruit here? And how many of them this tool would be kind of most appropriate for?

Robert W. Musslewhite

Sure, for Crimson Care Management?

Elizabeth Blake

Yes, please.

Robert W. Musslewhite

Sure. So I think what's neat about this product is obviously, our core member base of hospitals and health systems is a very attractive market, especially those who are looking ahead at making care management investments, which is an increasing percentage of the market obviously, given the move to risk. But you also have physician practices and any other risk-bearing groups, so accountable care organizations, capitated practices, anything like that where care management is a necessary tool for ensuring that they manage the entire care continuum more effectively for, especially the higher-cost, higher-risk patients. The people within those groups are people like Chief Transformation Officer, Head of Accountable Care, CEO of the Physician Network, and a lot of those are Advisory -- great Advisory Board members today. But some of them are members that we haven't necessarily targeted with the product, so it opens up some new space in that regard.

Elizabeth Blake

Okay. Any idea as to how many members you could add over the next 12 months? Or it's still too early to tell there.

Robert W. Musslewhite

Well, I think if you go back to typical Advisory Board launches, you're not adding a ton of members over the first 12 months because you're spending the first few months with a small sales team to get the pitch right, generally on a few members and then kind of into the first 12 months is when you're staffing up the sales team. It's where you get the extra sales and marketing investment around the product. And with some sales cycle activity, you'd see some yield by the end of the first year. But I think we tend to know really 18 months to 2 years out how a launch is going, and there's kind of the boundaries from the Crimson, Crimson Market Advantage have been faster than historical average launches, and those have proceeded very, very well. We got up to several hundred members pretty quickly. Other launches that are more traditional takes a little bit longer time to get to a couple of hundred members, maybe over 4 years or so. So you certainly hope it's at the higher end of that, but it's always a little bit hard to know until you get into it and get into market. But we feel very good about the early research on this one and the important value that it delivers to members, so we're very optimistic that this will be a good one.

Elizabeth Blake

Okay, great. And then on higher ed, do you have any updated membership stats on the student success program?

Michael T. Kirshbaum

We talked of it last, I think, at our investor day. We were sort of 50 or so members in the program. And in the last couple of weeks since that happened, there's really not much update. The December quarter is our biggest sales quarter, so we expect that's when we would have our largest number of additions throughout the year. But progress still feels pretty good. The members who are using it are getting good value. There's a lot more buzz around it in the market. You hear stories. There's an article in the Wall Street Journal a couple of weeks ago about student success more broadly and how [indiscernible] more focused for college and university. So it's a program we continue to really like and expect it to be on a fast growth ramp going forward.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Robert Musslewhite for any closing remarks.

Robert W. Musslewhite

Well, thank you all for attending the call, and we look forward to seeing some of you in the coming weeks and then reporting back again in late January, early February. So thanks, and have a good evening.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!