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MedAsset Inc. (NASDAQ:MDAS)

Q1 2014 Earnings Call

April 30, 2014 05:00 p.m. ET

Executives

Robert Borchert - SVP of Investor & Corporate Communications

John Bardis - Founder, Chairman, CEO and President

Michael Nolte - COO, EVP

Charles Garner - CFO, EVP

Rand Ballard - CCO, SEVP and Director

Analysts

Jamie Stockton - Wells Fargo Securities

Michael Cherny - ISI Group

Eric Coldwell - Robert W. Baird & Company

Steve Halper - FBR

Donald Hooker - KeyBanc Capital Markets Inc.

Sean Wieland - Piper Jaffray

Gavin Weiss - JP Morgan Chase

Sean Dodge - Jefferies

Ryan Daniels - William Blair & Company

Greg Bolan - Sterne A.G.E.E.

Bret Jones - Oppenheimer & Company

Leo Carpio - HM Global

Eric Percher – Barclays

Robert Willoughby - Bank of America Merrill Lynch

Charles Rhyee - Cowen and Company

Jean Mannheimer - B. Riley

Operator

Welcome to the MedAssets 2014 First Quarter Earnings Call. My name is Makiva, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Robert Borchert, SVP of Investor and Corporate Communications. Robert, you may begin.

Robert Borchert

Thank you, Makiva, and good afternoon everyone.

With me today are John Bardis, our Chairman and President and CEO; Mike Nolte, our Chief Operating Officer; Rand Ballard, our Chief Customer Officer; and Chuck Garner, our Chief Financial Officer.

A slide presentation that accompanies our formal comments and webcast is posted in the Investor Relations section of medassets.com under Events & Presentations. We will be making forward-looking statements on today's conference call regarding our expected financial and operating performance which may be affected risk factors that are described in detail in our periodic filings with the Securities and Exchange Commission. There are also risk factors not presently known to us or which we consider to be immaterial that may adversely impact our performance. Therefore, actual results may differ materially from our forward-looking statements discussed today or in the future. MedAssets assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Today, we will discuss certain non-GAAP financial measures. For more information, please refer to reconciliation schedules and footnotes in today's earnings press release and presentation materials, which are posted in the Investor Relations section of medassets.com.

Following our prepared remarks, we'd like each analyst to ask only one question so that everyone in the queue will have an opportunity to post a question. Thank you.

Now I'd like to turn the call over to John Bardis.

John Bardis

Thank you, Robert, and good afternoon everyone.

We've delivered a solid first quarter to start off 2014. We recorded total net revenue of $170.9 million which decrease 1.1% from a very strong first quarter a year ago as anticipated. Excluding performance related and both periods, our Q1 total net revenue increased 1.6%. Adjusted EBITDA in the period up $56.7 million and adjusted earnings of $0.32 per share were in the middle of our expected ranges. In addition, during the first quarter, we had purchased 640,000 shares of our common stock.

As we've noted the past couple of quarter, we continue to see the weak hospital's (indiscernible) impact our GPO net administrative fee and overall revenue growth. We will continue to closely monitor this and we are maintaining our financial guidance for 2014 as we expect to see an accelerating rate of revenue growth in the second half of this year. This is supported by the 6% year-over-year growth in our total contracted revenue estimate ended March 31st.

As Mike will discuss in a moment, the man for our enterprise services continues to grow. Our new business looking and sales pipeline remain strong as our performance improvement capabilities continue to be appealing in the marketplace. In the beginning of 2014 is certainly not been lacking in headline highlighting the changes affecting the healthcare industry and then resulting uncertainty. We received numerous questions regarding the delay of ICD-10 to October of 2015. We continue to believe adoption of ICD-10 remains a question on "when" and not "if."

While the delay provides breathing room for some organizations coping with on-going financial pressures and other regulatory mandate, it may exacerbate financial constraints for other provides as committed resources or transition plans will need to be adjusted and continued for a longer period of time.

The coding complexity and reimbursement challenges that will occur to and following the ICD-10 compliance date should be a growth opportunity for our business. But we're not assuming any benefit in our 2014 financial guidance. In addition, the rate of individual signing up for healthcare insurance through federal and state exchanges picked up on that as we're headed to the April 15th.

Survey suggests 35% to 40% of exchange enrolees were previously ensured. And there was a 15% to 20% overall decline in the number of uninsured when you include Medicaid expansion. What remains unknown is at this point, the increase of covered lives and how it will translate to more consumption of healthcare services and win.

We remain confident that this will occur, but expect the care of these patients where we reimburse at lower average rate of the hospital for the cost pressure on hospitals will continue. This is one of the biggest transitions in the history of healthcare that's highlighted our healthcare business summit last week by one of our team of speakers, well-known healthcare futurist Nate Coughlin. Nate noted that the significant changes in patient demographics and reimbursement of the coming years will require all healthcare organizations to have an intense focus on cost.

He also gave an example of how accountable care organization may actually worsen hospital economics by implementing a shared savings model that will lower admissions and hospital revenue. His point is that this evolving healthcare environment will require hospital to deploy a systematic approach to reduce cost, improve quality and capture the last dollar of revenue for services delivered. Our healthcare delivery system will require organizations to operate under a dual fee-for-service and risk-based fee for value model for some period of time.

How you balance risk and incentives along with associated patient volumes will be critical and pricing pressure will be the prevailing challenge to force healthcare providers to reduce total cost and become more operationally efficient. This is essentially been that asset's perspective for a number of years and we're well positioned with the comprehensive set of data analytics and service expertise to assist providers in reducing their total cost of care delivery, enhancing operational efficiency, aligning clinical delivery and improving the revenue performance. We are focused on helping our clients improve their organizational alignment and emerge as a stronger providers of care and health outcomes for their community in the future.

Now, let me ask Mike Nolte to provide an operational update.

Michael Nolte

Thank you, John.

Our spending clinical research management segment delivered 3.6% growth in the first quarter when you exclude performance related fees. This was based on the strength of our other service fees which were up 12.4% and driven by our advisory and consulting services and our spending clinical analytics tools.

We continue to make great progress building a strong repeatable advisory business. Our GPO net administrative fee grew 0.2% year-over-year largely as a result of a strong Q1 2013 as some vendor delayed reporting from Q4 of 2012 until the first quarter of 2013 because of super storm Sandy.

As we have discussed, we are also seeing some effects of continuing weak hospital sense of strategy. Despite this, we are confident in our strategy and continue to focus on store growth. Our efforts include continuing to expand GPO contract coverage, particularly in areas like purchase services on top of what is already the most comprehensive portfolio in the industry.

We are also now deploying even more effective analytics tools which provide the insight for our clients and client service teams in a specific actionable opportunity to attack total cost. Additionally, we are in the early stages in providing dedicated clinical resources to drive conversion, assisting our clients and determining and communicating the value of making different product choices.

Finally, we are driving more category and product conversion accountability in our client management team as we work to partner even more closely with our clients. We believe the expected increases in medical acuity and patient volumes will be positive growth drivers over the long term. And despite the shorter term pressure, we are more focus ever on delivering value for our existing clients.

Our sales activity remains very strong. First quarter bookings in the SCM segment increase about 45% year-over-year from Q1 of 2013 and decline 26% sequentially from Q4 as expected, as Q4 traditionally a strong bookings quarter. Our pipeline continues to build and we see great traction with our total cost and performance management offerings.

This accelerating sales outlook is also translating into continued improvement in contracted revenue which increase 5.4% year-over-year and 2.1% sequentially driven by net new wins and renewals.

Our revenue cycle management segment showed a 1.7% decline in net revenue in the first quarter versus Q1 of 2013 as anticipated. We expect to show an accelerating rate of revenue growth in the second half of this year. Our cloud-based revenue cycle technology tools grew 1.9% versus a year ago.

We continue to see consistent growth from our claims and contract management charge capture audit and episode of care solutions. Our revenue cycle services business showed a 9.5% year over year revenue decline due to the impact or the whine down of two clients we discussed in early 2013 as well as certain non-recurring revenue from last year.

Our first quarter revenue cycle technology bookings increased 15% year-over-year and declined about 50% sequentially from, again, a strong Q4. Our revenue cycle services bookings increase more than 600% year-over-year and more than 100% sequentially as we gain the number of new clients.

Contracted revenue for the SCM segment was very strong and increased 7.1% year-over-year and 1.9% sequentially from net new wins. Included in contracted revenue is our recently amended agreement with our largest outsource revenue cycle service client Barnabas Health.

We will transition the outsource central business office operations and staff back to them by year end. We will work closely with Barnabas Health to ensure continuing of their CEO operations and in strong performance. As many of you already know, this successful revenue cycle services relationship began in 2009, and we have helped Barnabas Health transform their central business office, improving performance and productivity. In fact, we have collected more than $10.2 billion in net patient revenue over the past 5.5 years and help grow cash on hand from below 60 days to 155 days today.

We'd like to congratulate the Barnabas Health management team as well as our team members that help deliver this exceptional performance. This performance position Barnabas Health to insource its CBO as they believe greater integration across their facilities will be important to their long-term strategy. We will continue to drive performance improvement for Barnabas Health through our spending clinical research management, revenue cycle services and technology tools. In fact, we recently signed a new revenue cycle management services agreement to help them with Silent PPO recovery services in addition to our on-going denials management services work.

While it is our policy not to comment on terms of specific client agreement, we wanted to provide some context for how to think about the impact of the Barnabas Health transition on our business. We expect no change to our 2014 outlook given that the transition will be completed at year end.

Barnabas Health represented approximately $28 million of outsource revenue cycle services net revenue in 2013 and a similar amount of revenue is expected in 2014. We will see a reduction in contracted revenue of approximately $7 million per quarter beginning this quarter and will work to offset the revenue, adjusted EBITDA and margin impact on 2015.

On average, our outsource revenue cycle services business typically generate an adjusted EBITDA margin in the low to mid-single digit range. Over the past six months, we've added and renewed a small number of outsource revenue cycle services clients that have been strategic opportunities based on our broad enterprise relationships and differentiated capabilities. We remain highly committed to delivering service and performance improvement for these clients including Barnabas Health.

As our client operate in an evolving payment system, we will continue to elevate the market awareness for how MedAssets can have can have a direct financial and operational benefit to their organizations. For example, while we have been offering our charge capture audit solution for a number of years, they continue to be an excellent revenue capture safety net and compliance tool. It automates the review of 100% of patient charges enables providers to locate lost revenue from missing charges and coding errors reduces the risk of non-compliant billing of overcharges and identified issues pre-bill to prevent costly rework and late charges.

Many of our clients also use MedAssets contract management to help better forecast calculate and capture revenue by repricing their claims against contractual terms to ensure that they are getting fully paid. This is a lot of information for hospital staff to sift through, so we recently launch contract analytics to further unlock revenue cycle trending data and insights directly from contract management.

Our client executives can now track business performance with key performance indicators across different payer contracts. KPIs are used to track specific revenue cycle trends like underpayments by payer type or patient demographic so that patterns and issues can be quickly flagged, expedited and resolved.

This is also available as a mobile and iPad application so there are client executives can quickly view snapshots of data to help the health system set and monitor financial goals. Given MedAsset's unique set of capability to provide a pathway to fee-for-value, we also highlighted our episode of care solutions set in our healthcare business summit. Our episode of care services and technology help providers understand financial risk by patient or physician using our perspective and retrospective analysis and workflow base tools to evaluate and model bundled payment contracts before they're assigned.

This solution set is also integrated with our contract management tools to identify cost drivers impacting provider's profitability. And as a key innovation initiative, that begins to gain traction as providers take on greater risk in the transition to fee-for-value.

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

Charles Garner

Thank you, Mike.

As the past quarters, please refer to our financial and other non-GAAP reconciliation schedule in today's press release and on our website (indiscernible) to sales comparative to year-over-year performance.

I will comment on specific highlights and variances in our result and guidance, but would encourage you to review the accompanying slides and the press release.

On consolidated basis, our first quarter result were generally in line with our expectations. Net revenue, adjusted EBITDA and adjusted EPS all showed negative growth year-over-year as they anticipated due to the decline of 4.5 million and high margins performance-related fees compared with last year's first quarter.

We incurred $1.7 million restructuring charge this quarter, but with a small reduction, of course. There's an (indiscernible) to adjusted EBITDA and adjusted EPS calculations. The charge was slightly less than what we previously expected.

Our adjusted earnings of $0.32 per share included a penny of dilution from a higher than forecast tax rate in the quarter due to a New York State legislative change in the apportionment of taxable income to the state. In our spending clinical resource management segment, we are in $5.9 million of performance-related fee that were $4.4 million lower than last year, which was the primary reason for a year-over-year decline in net revenue and adjusted EBITDA.

Excluding performance-related fees from both periods SCM segment revenue grew 3.6% over the first quarter of 2013. Our GPO net administrative fees increased 0.2% doing part and continuing weak hospital sense of trend as John and Mike mentioned earlier. It was also a tougher year-over-year comparison. As you'll recall, the last year's net administrative fees were usually high due to the impact from super storm Sandy.

Other service fees grows 12.4% as their advisory and consulting services and analytics tools continue to exhibit strong growth. In our revenue cycle management segment, revenue single technology comprise approximately 71% of first quarter RCM segment revenue and grew 1.9% year-over-year. Revenue Cycle services revenue decreased 9.5% from the first quarter of 2013 due to revenue contribution last year and the two clients that wind down after Q2 of 2013 as well as certain non-recurring revenue from the first quarter last year.

First quarter adjusted EBITDA margin in our revenue single management segment was 21.5%, a 167 basis points decline from 2013 due to the higher margin contribution from certain revenue last year. We expect to continue to generate strong cash flow in 2014. In the first quarter, which is typically our lowest cash flow quarter each year due to our revenue share obligation and employee bonus payments, operating cash flow was up 1.4% to $17.7 million the pre-cash flow was $7.6 million.

On March 31st, balance sheet reflects 766.9 million in total bank and bond debt net of cash and net setup and it was approximately 3.6 times our thrilling 12-month adjusted EBITDA as we rolled off the high level of adjusted EBITDA from Q1 of last year.

There was no change to our capital allocation framework we reviewed last quarter. We continue to expect our leverage ratio to be at approximately 3.0 times by yearend. And during the first quarter, as John mentioned, we repurchased 640,000 shares of common stocks totalling 16.1 million upon the announcement in late February of our share repurchase plan.

Turning now to our financial outlook, we are maintaining our 2014 guidance to summarize on slide 16 of our presentation. Our other assumptions for 2014 full-year guidance are listed on slide 17. We made minor adjustments to our estimated full-year tax rate, depreciation expense and share count.

We continue to expect to generate free cash flow between $90 million and $100 million this year and invest in product innovation and our technology infrastructure to support and scale for future growth. Capital expenditure should be in the range of $55 million to $65 million again in 2014 and combine with our investments in the last few years are the primary drivers of the increase in depreciation expense which we expect will begin to flatten out beyond 2014.

We expect second quarter 2014 net revenue in our spending clinical resource management segment to increase 2.1% to 5.95% from net revenue of $105.3 million in the second quarter of 2013. In our revenue single management segment, we expect first quarter revenue to be down 3.1 to up 3.0% when compared to second quarter 2013 revenue of $65.4 million. Consolidated net revenue is expected to be up 0.7% to 4.2% from the $170.7 million reported in the second quarter of 2013.

Performance related fees were also expected to be approximately $1 million to $3 million versus $2 million in last year's second quarter. We expect second quarter total adjusted EBITDA margin to be in the 28.8% to 31.2% range. This will be down sequentially from Q1 as usual due to the expenses from our healthcare business summit held in April and down 200 to up 40 basis points from 2013 second quarter margin of 30.8%.

Expect GAAP earnings to be in the range of $0.07 to $0.11 per share compared with earnings of $0.08 per share a year ago. And our adjusted EPS is expected to be down 10% up 4% from second quarter 2013 adjusted earnings of $0.30 per share.

For the third quarter of 2014, we expect total net revenue to be up 4.3% to 7.9% from the $166.4 million reported in Q3 of 2013 and consolidated the adjusted EBITDA margin to be up 30 to 270 basis points from 2013 third quarter margin of 32.4%.

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

Question-and-Answer Session

Operator

Great. Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from Jamie Stockton from Wells Fargo Securities. Please go ahead.

Jamie Stockton - Wells Fargo Securities

Yeah, good evening. Thanks for taking my question. I guess on Barnabas, my question is big revenue cycle service client is -- are there any shared services for other revenue cycle service client that are at Barnabas right now? If you leverage that platform for other clients as well that you would have to unwind? Or is there anything else that we should be thinking about as that relationship winds down that you're going to have to deal with? Thank you.

John Bardis

No, there's nothing contingent on that particular client. It would affect other business if that's what the question is. Did we get that right? I think…

Jamie Stockton - Wells Fargo Securities

Yeah, you (indiscernible).

John Bardis

Okay. I think the question was and I think Mike answered that on was to the people who do the work there, are they in any way levered to what other clients? And the answer to that is no.

Jamie Stockton - Wells Fargo Securities

Okay.

Operator

And our next question is going to come from Michael Cherny from ISI Group. Please go ahead. Your line is open.

Michael Cherny - ISI Group

Good afternoon guys.

John Bardis

Hey Mike.

Michael Nolte

Hey, Mike.

Michael Cherny - ISI Group

Okay. So I want to follow up a bit on Jamie's question, maybe take it at different direction and look at St. Barnabas and the scheme of your overall revenue cycle business, obviously. I appreciate the color on St. Barnabas. I remember what you first announced this and all the color you gave back then, which is helpful as well. But if you think about this, it seems like you're trading off, let's say, fairly little margin contract relative to also a pretty strong bookings and contracted backlog or -- especially if you kind of add back or normalize for St. Barnabas.

If you think about the incremental backlog, potential backlog will be added. Qualitatively, it's a similar types of contracts. There were types of margin profiles to St. Barnabas, or is this something that could overtime, especially from mix perspective and potential margin expansion?

John Bardis

Yeah, thanks for that.

From bookings perspective, I would say the trend is generally we're improving the margin of the business that we're booking. And so, I don't know exactly where the lines cross but it certainly has the potential to be a different book of business than Barnabas have been historically or those types of deals which are the more fallout versus CBO kinds of deals are, which are -- as we said in the discussion tend to be lower to mid-single digit EBITDA margin kind of business.

Whether or not that continues over the long haul, that's hard to say. But I think that's certainly our objective in terms of where we have commercial teams focused and how we've ascended our teams as we think about the kinds of business that we're interested in booking from a margin perspective.

Operator

And our next question is going to come from Eric Coldwell from Robert W. Baird. Please go ahead. Your line is open.

Eric Coldwell - Robert W. Baird & Company

Unfortunately, I'll be sticking with the same topic. I just want to make sure I'm understanding this correctly in terms of the outlook for 2015 conclusion on this that we take all those constant takeouts, $28 million of revenue and -- if I'm doing the math right, maybe a ten-year of earnings with adjusted EBITDA margin goes up 100 to 125 bits to do that. Is that where we should be thinking about this?

Charles Garne

Yes. So Eric, this is Chuck. Let me try to kind of connect all the dots. So, yes, the approximately impact in '14 extension (indiscernible) would be about $28 million of revenue. These types of contracts where we don't get specific profitability that your individual client accounts at revenues of services, business lining in general tends to be lower margin, and that's where the outsourcing is. As Mike said, (indiscernible) fully allocated cost basis.

I think the question is, yes, there are certainly some level of overhead or some level of infrastructure that benefit from that revenue base. But certainly, our goal and expectations is to replace any gap as a result of the same (indiscernible) revenue wind down at year end with other revenue that could be similar revenues, similar outsourcing revenue. It could be a different mix of revenue and with different mix. It would likely have a higher margin profile. And so that's another way. You could either perhaps replace with $28 million. The market can be higher if you replace the margin impact with less than $28 million and not have any shortfall as we look into '15. And certainly as Mike and John alluded to earlier, that's where our commercial teams continue to focus on growth in the areas not solely assuming we're going to replace this in the business going forward.

Eric Coldwell - Robert W. Baird & Company

Got it. Okay. Sorry to beat the dead horse there, but that was really my only question. Thanks a lot.

Charles Garne

Okay. Thanks Eric.

Operator

And our next question is going to come from Steve Halper from FBR. Please go ahead. Your line is open.

Steve Halper - FBR

Hi. Going back to the St. Barnabas loss again, can you characterize the decision and the discussions that you had with the client in order to shed some light as to -- the rationale because if -- can they do it. What are advantages basically for them to bring it in-house? And if you can again characterize some of the discussions you had with them about this decision would be helpful.

John Bardis

Yes. This is John, and I'll turn it to Mike because has been shepherding the process with the St. Barnabas leadership.

Number one, St. Barnabas has done a great job with their financial and operating leadership over the course of the last three to four years in managing their cash flow and their operations. And I think that's been reflected in their bond ratings and their -- whether debt has gone. And so they've done an awfully good job.

And it was always on the table for them that's why this agreement actually had in its contemplation from the beginning at this time in this specific timeframe. The transition option that when St. Barnabas was ready to take that on and we had dealt with the primary issues together. That would enable them to then integrate, particularly on patient access for them in coordinating all of their sites to get patient revenue through the patient access program properly identified. And of course, the backend what we're doing there on the collections that they would take it back.

And so I think maybe if you look at their financial performance. They've clearly put themselves in a position to take it back. And so this is a very amicable transition and one that is really based on excellent performance by both our team. And Mike has been responsible for leading this, but I don't know if I characterized that right. It's going well.

Yeah, I mean I think the performance right now is I think the best in the history of the relationship just in terms of the economics of what we're delivering for Barnabas. I think the growth of their organization as a health system really has given them, I think, the scale to manage this themselves differently than they would have in 2009 when their relationship started.

And I think they've began to look at owning this internally as more strategic than I think they look at it before. And so, for all those reasons, as we thought about the transition together, it made sense to look away the transition to services back to them.

The good news is I think we -- in the midst of that because we've built a great relationship and because we've delivered for them, we've been able to continue to deliver other services around the CBO. As we mentioned, we signed a brand new agreement with them in conjunction with some of the things we do more on the day 95 and they continue to be a great client on the supply chain side as well.

Operator

And our next question is going to come from the Richard Close from Avondale Partners. Please go ahead. Your line is open.

Richard Close - Avondale Partners

Yeah. To move on from Barnabas, I wonder if you can tell us whether there's any other contracts out there similar to this that potentially could maybe go away or just leave us on some of those fears possibly.

John Bardis

No, there's not anything in the pipe or in the contractual timeline. And Rand Ballard is here as well. But there wasn't anything in time and horizon that had similar characteristics.

Richard Close - Avondale Partners

Just to be clear, (indiscernible) thinking to go away until January 1st of 2015, correct?

John Bardis

That's right, Richard.

Richard Close - Avondale Partners

Excellent. Thank you

John Bardis

We'll start the transition earlier than that. But from an economic standpoint or revenue standpoint, that's correct.

Richard Close - Avondale Partners

Okay. Great. Thanks.

Operator

And our next question is going to come from Donald Hooker from KeyBanc. Please go ahead. Your line is open.

Donald Hooker - KeyBanc Capital Markets Inc.

Great. Thank you.

So looking at this revenue cycle services line, if you backed out St. Barnabas, what does that sort of -- what's the normal growth rate we should assume for that revenue online kind of going forward that you would expect over a long term?

Charles Garner

Well, this is Chuck. We haven't provided updated long-term guidance for various segments. But I think as an indication, Mike has provided in the last couple of quarters some additional commentary around our bookings and pipeline as well as when you're looking at our contracted revenue even in this quarter and see that we've been achieving pretty solid growth in that area of the business.

One thing to keep in mind, it depends a little bit on the mix of the business. They can be smaller for a couple of hundred thousand dollar more services arrangements or it can be multimillion dollar outsource arrangement. So depending on the mix at any given quarter, any given year could also meaningfully affect (indiscernible) to grow up of the growth rate. But I'll maybe ask Mike for additional color (indiscernible) around expectation.

Michael Nolte

Yeah. Two things to point it to, one is that greater than 600% growth year-over-year and the revenue cycle services bookings number. And then the second is despite taking as we said about $7 million of contracted revenue out because we knew the full year starts to hit in to the first quarter of 2015.

We still grew contracted revenue both year-over-year and sequentially so. That should give you some idea what that looks like.

Operator

And our next question is going to from Sean Wieland from Piper Jaffray. Please go ahead. Your line is open.

Sean Wieland - Piper Jaffray

Hi. Thanks.

So just to go back to St. Barnabas again, the revenue cycle services business that you do similar to St. Barnabas, that's about three quarters of the total RCM revenue. Is that about right?

John Bardis

Revenue cycle management is -- as you know, it's $250 million business, so I'm not sure that -- are you talking about Revenue Cycle Services?

Sean Wieland - Piper Jaffray

Services.

John Bardis

Yeah. I mean what's the…

Charles Garner

Yeah, Sean, that's about right. It's roughly about a third of that sub-segment of our revenue (indiscernible). We tend about a third of our revenue cycle management. I'm sorry, I thought you said third. We tend to have about 30% or so of our overall revenue cycle segment that is revenue single segment that is revenue-filled services. And then go back to approximately between a third to a half is related to Barnabas and outsourcing.

Sean Wieland - Piper Jaffray

Okay. Can you give us a number?

Charles Garner

So we don't break out. I think we only break out if you look at -- let me pull the slide here. The breakout we provide is on a little bit (indiscernible). Services in the first quarter were 29% out of a total of $62.3 million in the first quarter. So of that, approximately roughly $7 million is related to Barnabas Health.

Sean Wieland - Piper Jaffray

All right. Okay. So that's just a follow up on the Barnabas. What about the workforce reduction that you did last quarter? I see the add-back. What's composite? What are the ingredients of the add-back and then what's the quarterly impact of that workforce reduction to OpEx going forward?

Michael Nolte

Yes. So the impact we saw, one, was a small reduction force we did in the first quarter of this 2014. We have estimated it would be around $2 million. It actually came a little bit less than that about $1.7 million. And so that's the restructuring you see if you try to see here. And it's not (indiscernible) it's about $1 million to $2 million on the going forward basis.

Sean Wieland - Piper Jaffray

Okay. Thanks a lot.

Operator

And our next question is going to come from Gavin Weiss from JP Morgan. Please go ahead. Your line is open.

Gavin Weiss - JP Morgan Chase

Hi. So in looking at the rest of the year, obviously, revenues and earnings are going to accelerate in the back half of the year. I just wonder if you could maybe talk about the biggest benefactors to driving the accelerated top line growth. Is that going to come from improving utilization or -- I know you have a couple of hours RCM contract in the back half of the year. Can you give us some more color there?

John Bardis

Yeah, yeah. I think a couple of things. One is continued growth in our advisory business. You can keep contracting revenue from the bookings data. There's good momentum there and we expect that to drive a portion of the growth in the back half of the year.

Second is our revenue cycle technology business. We've gotten into a place where from a bookings momentum and a sales perspective, we believe that the growth rate for that business will drive both back half growth as well as 2015 growth. And then we want to make sure we're obviously doing the right thing from a sales growth perspective in the core of our business in the group purchasing organization.

And so I talked through a number of the efforts that we have underway. But the focus is still intensely on ensuring that we're doing the right thing in driving the client value in the biggest book of business that we have in MedAsset, which is really making sure that we're delivering both new customer in same store growth within the GPO part of the business.

Gavin Weiss - JP Morgan Chase

Okay. Thank you very much.

John Bardis

Thank you.

Operator

And our next question is going to come from David Larsen from Leerink Partners. Please go ahead. Your line is open.

David Larsen - Leerink Partners

Hi. Can you give a little more color around the RCM services bookings growth like -- just a sense for what sort of kinds of engagements those are. Thanks.

John Bardis

Yeah. I mean it's balanced. There's a mix across of the whole booking business. Some of it is more advisory-related bookings that are associated with trying to drive revenue cycle performance in the process. Some of it is partial business outsourcing where we're taking on some book of business within a customer in delivering revenue cycle performance with smaller than, for example, a full CBO deal. But some portion of the revenue cycle process is within a customer. And then there's a substantial part of it, which is the more high value piece associated with things like Silent PPO (indiscernible) and some of the areas that we work on on a more contingent basis for customers.

David Larsen - Leerink Partners

Great. Thanks a lot.

Robert Borchert

Thank you.

Operator

Our next question is going to come from Sean Dodge from Jefferies. Please go ahead. Your line is open.

Sean Dodge - Jefferies

Yeah, good evening. Thanks for the question. So maybe drilling down on Gavin's question a little further. On the last call, you guys mentioned GPO net admin fee grow 2.5% to 4.5% this year. With 1Q being well below that, we knew it come from last year, you're going to be laughing. So I'm curious if 1Q sends this trend with in-line with the plan and then maybe how you're thinking about the stiffness of the ramp then for admin fee growth for the remainder of the year.

Is that largely dependent on improving utilization or is there something else within the admin fees that you're expecting to drive from?

John Bardis

Thanks, Sean.

Two things. One, as a general course of business everyday, we have people both with boots on the ground and all of our large clients who are working with our clients on contract compliance and utilization because today on average, hospitals are utilizing about 60% of what they could be using on group purchasing and consolidated contracts. In other words, there's 40% out there that is currently floating on non-contract and non-group purchasing volume. So there's just an on-going exercise in capturing leaking expenditures that can be captured by GPO. So that's an on-going operating exercise that we have been doing everyday with people of fulfilled organization who does that.

The second side of that is we are constantly evolving our contract portfolio at the national level through our national procurement center as well as our contracting team under (indiscernible). So a great example of compliance is tenant. Tenant today through our national procurement center and our group purchasing organization alliance with them, I have a 92% available spend contract compliance. And it's one of the reasons why year-over-year, the last three years, they've been able to actually drive on a real economic basis pricing down on products. So those growth activities that we're talking about are not a wholly dependent upon census recovery, although in the long term census is very important to this business, but is not fully responsible for its outside opportunity, and so the things that we can control were very focused on.

Operator

And our next question is going to come from Ryan Daniels from William Blair & Company. Please go ahead. Your line is open.

Ryan Daniels - William Blair & Company

Yeah, thanks for taking the question. John, I want to continue with your train of thought there. You talked about the 40% leakage. I wonder, number one, if you have the data kind of facility by facility and maybe it's improved with your partnership with a reason to show hospitals where all that leakages. And then number two, just given everything that's going on that you talked about out of the HBS with pricing pressure continued weak utilization, ECOs maybe not panning out to be beneficial and therefore needs to cut cost. Are your clients becoming more receptive to push physicians or push the teams to really focus on that contract compliance more to reduce their supply cost?

John Blair

Yeah, that's a great question. The reality of it is I think everyone of our large clients and the prospect of clients that we speak to is acutely aware of the reality of now which is cost have to come down and they have to come down aggressively.

Of the trillion or so that hospitals spend, we all know there's $500 billion associated with labor. And the contract compliance in two areas; one, medical products, pharmaceutical and then the third area, what we call purchase services which represents the Wild West of Greenfield opportunities purchase services today. We believe to be between $100 billion and $120 billion of currently on-tapped opportunity. These are services that hospitals buy locally and utilize at very, very different levels. So as much as you would see payment and reimbursement by case across 5,000 hospitals being very different amongst each other, so is there both pricing and consumption for purchased services.

And the combination of that as well as the 60% on average utilization pattern, on compliance for normal medical type products represents opportunities that, one, they're coming to us with and we're coming back to them with. We use service line analytics in our data analytics forecasting tool to run working scenarios with them all the time to help them identify what the high watermarks of spend reduction opportunities are.

But it doesn't start and end with just pricing. It also goes to utilization. And so utilization is a critical element. So for example, in a cardiac CAT lab, which historically has been in our view, fee-for-service driven environment but now has 30% risk-based contract, we're finding that in some cases, 6%, 7% are being used for case. Whereas another cases where clinical outcomes are identical, it's not even better of $0.02 to $0.03 are being used. So we're not talking just about the capture of non-capture expense but contract utilization as it relates to the historical incentives.

Operator

And our next question is going to come from Greg Bolan from Sterne A.G.E.E. Please go ahead. Your line is open.

Greg Bolan - Sterne A.G.E.E.

Hi. Thanks for taking the question. So just on revenue cycle services, is the margin profile for that sub-segment similar to what you just called out for St. Barnabas? And then number two, this obviously is a lower margin business and I guess -- I shouldn't ask my first question. But I'm assuming, obviously, much lower incremental margin and revenue cycle technology.

And then obviously it has been somewhat of a volatile sub-segment within this segment. Has there been any kind of thought around what the future holds for this certain sub-segment and that it services, whether it'd a part of MedAssets or maybe not a part of MedAssets? That'd be all. Thanks.

Charles Garner

Sure. This is Chuck. Let me take the first part around the margin. So I just want to be clear that the margin we talked about, and Mike alluded to earlier around (indiscernible) mid-single digit to really average margin for these types of outsource revenue services arrangement.

We don't comment specifically around any individual client contract margin. So the general statement, these things tend to be lower the mid-single digit margins. In terms of other areas of our business, yours is only correct around revenue technology, for example, which is our (indiscernible), business model tends to have a higher margin overall and certainly a higher contribution margin that’s incremental businesses added to that line of business for us so the contribution margin tend to be higher as well just given the nature of firm amount of fix call structure. The outsource obviously has a much more variable cost, labor-based call structure.

And I'll turn the other questions around outlook that you asked about to John.

John Bardis

Yeah. So just one small example, a large integrated delivery network that converts to our spend management solution. In some cases, the group purchasing organization, part of that business relationship alone in a new win is a greater contribution dollar per dollar than this particular relationship, this particular contract that we are transitioning out of this year just to put that in perspective just a single large group purchasing relationship with a single (indiscernible).

As far as the business services are concerned, there are strategic relationships and strategic opportunities that we currently have in the business today. We're providing some portion of services that makes a great deal in connection with a broader performance management relationship that we have of their client. And a really good example of that is a scenario where we can bring to the table our episode of care management product, our contract management tool and our contract analytics which allows the institution of a pre-emptive look on the bifurcated payment that is coming down the pipe so that they can begin to process.

How resources should be allocated against those and (indiscernible) pointed out one analysis that we did recently for a very large IDN that has been very successful in the future of service world but is now moving towards the fee-for-value world. And out of 100 physicians, I think 96 of them in the future service world were profitable under a new fee-for-value contract that was being contemplated through them but a long slide of payer. Only six of those physicians under their current resource consumption were going to be profitable for that institution.

So these are the kinds of dramatic shift in resource management that not only have to be managed from a cost and clinical resource integration approach. But your business office and the tools around your business would have to be well-prepared and integrated to accept that change. I know there's a very dramatic difference. So we will continue to provide service solutions alongside those strategic relationships.

Operator

And our next question is going to come from Bret Jones from Oppenheimer. Please go ahead. Your line is open.

Bret Jones - Oppenheimer & Company

Good evening and thank you for taking the question.

I want to go back to David's question on the decomposition of the revenue cycle services bookings. Obviously, the bookings have been very strong and you guys have touched on ICD-10 and how it's a matter of (indiscernible). But can you give us any sense for how dependent your rev cycle services bookings have been in ICD-10? And any concern now at that push? Ever since that push occurred in post-quarter, any concern at some of these deals might delay?

Thank you.

John Bardis

Yeah. Thanks for the question. On the services side, I don't think we ever anticipated any headwind from ICD-10 from a bookings perspective. It was more related to technology specifically. And I think the votes go out in terms of whether the delay helps on that side. But our perspective is we never anticipated any headwind on the services side of revenue cycle from a booking standpoint caused by ICD-10 and certainly pushing it out in the year doesn't change that profile.

Operator

And our next question is going to come from Leo Carpio from HM Global. Please go ahead. Your line is open.

Leo Carpio - HM Global

Good afternoon. I want to follow up on the ICD-10 since we pretty much (indiscernible) a little by now. In ICD-10 I remember you said clearly, the deadline delay about a year has no material impact in your expectations. It's better to ask a question. It has no impact on your 2014 guidance?

John Bardis

No, Leo, it does not. What I think you'll find in this industry is that the questions around the impact of ICD-10 and the implementation of product-driven conversations will be more felt by those companies whose products are not ICD-10 compliant, which in and of itself is a fairly substantial task to get done.

We, under the leadership of our ops team, Amy and Mike and the rest, fortunately our products are ready to roll and I think we had been -- October would have been -- we are ready now.

Michael Nolte

Yeah. Look, I mean we believe our technology product absolutely are effective from the standpoint of helping out now prior to an ICD-10 transition and certainly afterwards. But in terms of incorporating any expectations around that into a change in our guidance, our guidance is still the same.

Operator

And our next question is going to come from Eric Percher from Barclays. Please go ahead. Your line is open.

Eric Percher - Barclays

Sure. I'll go for the field. One of the prior questions you talked about expense management within the GPO. And you mentioned pharmaceuticals. Can you remind us what your interaction tends to be? Is it focused on brand and generics, especially products get carved out? And do you think any of the recent agreement could lead to a change of relationship or benefit on the generic side?

John Bardis

You've seen pharmaceutical utilization and growth particularly in the consumer market continue to expand generic sales dramatically. We're seeing the same thing at the institutional level. Now, bear in mind that as a class of trade, both branded and generic pricing have a very, very different profile in the hospital class of trade.

But more and more, the hospital is being tasked with following on with that patient to ensure that that utilization of those drugs is being adhered to. And the hospital in many cases is also following on further relationship with that patient beyond the furloughs of the hospital to acquire pharmaceutical product either through them or one other subsidiaries for the purposes of patient monitoring.

So one, we have a very broad side of generics under contract. We also tend to see higher administrative fees for those. That market, we think, will continue to expand, and of course, we know the U.S. drugs spend is right at about $300 billion and hospitals have a very meaningful (indiscernible). We also, to your question, we do have specially drugs that range (indiscernible) to those -- for mental health across. So our portfolio is about as broad as you could imagine of this state.

Operator

And our next question is going to come from Frank Sparacino from First Analysis. Please go ahead. Your line is open. Please go ahead, Frank. Your line is open.

Okay. Our next question is going to come from Robert Willoughby from Bank of America Merrill Lynch. Please go ahead.

Unidentified Analyst

Hi. Good evening. This is [Elizabeth Blake] (ph) in for Bob tonight. You touched on ICD-10 in the prior question. But I realize you're already from the product side for the transition. But just on the client side, some other industry constituents actually core sightings stronger filling activity expected this year related to the delay as clients are kind of ready to take on new products before the switch rather than out there.

I mean is that something that you would echo or something you disagree with? And maybe can you walk us through the (indiscernible)?

John Bardis

Yeah, I'm sorry. Elizabeth, you broke up at the very end there. Let me ask Rand Ballard to respond to that. Rand, maybe you can…

Rand Ballard

Yeah. Elizabeth, I would say it does create additional opportunity. As Mike alluded to earlier, we're ready from a technology standpoint. And customers that are going to delay the ICD-10 conversions, they're going to have opportunities for more capacity for work. I think also, it will allow us greater technology sales going forward because not everybody had really figured out what their gaps were. And as they continue to do that, I think it will be good for the revenue technology business.

Operator

And our next question is going to come from Charles Rhyee from Cowen and Company. Please go ahead. Your line is open.

Charles Rhyee - Cowen and Company

Yeah, thanks. Hey, question for Chuck. I look at the full-year guidance that you maintained here. Share count you expect to be about 60.7 fully diluted for the full year. As I think about the $15 million in the first quarter, so we expect sort of still more fund-weighted buyback here to get us to the full year number. And then just a clarification on also the guidance here, the $51 million or so in depreciation expense, given what you're running here we're supposed to expect this to kind of ramp up over the course of the year.

Thanks.

Charles Garner

Let me get to the depreciation expense first. So we tweak that a little bit to space on our first quarter actual and how quickly you were deploying from over capital investments. And so free that number a bit. Certainly, as we go throughout the rest of the year, we will likely increase the level of investment which will have to commence through depreciation impact once those investments are put into service.

As far as share repurchase plan, as you said, we purchased these amount of shares in the first quarter. We'll continue to monitor the market to the remainder of the year. But in our guidance for the full year, we had projected about $0.02 per share impact resulting from share repurchase and we will believe that's going to be the impact for the full year.

So we'll continue like everyone to monitor our shares. So we buy at the price that we think is appropriate. But we only bought at these amount of shares in the first quarter and continue to plan and buy some more shares at our limited courses of $75 million from the plan that's been authorized for the next 12 months.

Operator

And our next question is going to come from Garen Sarafian from Citigroup. Please go ahead. Your line is open.

Garen Sarafian - Citigroup

Hi guys. Thanks for taking the questions.

First is more of housekeeping question and forgive me if it's in the prepared remarks. Just on utilization, what's the change was from what you guys are expecting last quarter and just the progression if you guys are now expecting it to be sequentially in a different manner than before?

And second is just with the contract that's (indiscernible) next year, the 28 million GAAP, how is that changing your thinking on M&A? And was that coming down as you're increasing appetite for it? And if so, sort of what area? Thanks.

John Bardis

We're monitoring census very closely if census continues to be weak. But our most recent data is showing that the sequential declines are lessening. It's going to be very interesting. As I mentioned in our opening remarks, to see what five or so million new people, the coverage will bring for utilization. And so we're monitoring that very careful.

Now, there are some places in the country where census continues to be very, very strong. A good example of that is a great health system like North-western and Chicago. They have a very, very strong market position with their clinical capabilities. They are just (indiscernible).

And so, while the census problem or the census challenge has been there, it has been more regional in nature and institutional in nature and monitoring that is something we're doing every quarter.

So let me make sure I got the second question. Yeah, M&A. We always have our eyes open to opportunities that are specific to what we're focused on. We are not heavily focused on big transactions, but we are continuing to look at things that are consistent with the value profit we provide clients to be able to accelerate that. That of which are large.

Operator

And our next question is going to come from Jean Mannheimer from B. Riley. Please go ahead. Your line is open. Please go ahead, Jean. Your line is open.

John Bardis

Next question please.

Operator

Okay. Our next question is going to come from Sandy Draper from Suntrust. Please go ahead. Your line is open.

Unidentified Analyst

Thanks very much. This is actually Dr. Martin Greens signing in for Sandy Draper. And I think the question is for (indiscernible) here. I got in late, so I apologize. And I know (indiscernible) has been a beaten drum. But I'm just curious, John, when you think about going back to St. Barnabas, there's a lot of transformational deals the thoughts there. As you're seeing this experience, when you look at services contracts and the type of services business is, you want a business to be in, does this change anything or is it basically what we've been seeing over the last 12 months already sort of you're changing the way your approach in services and what you want to do for your clients on the services line.

Thanks.

John Bardis

Yeah. It's a great question.

So our focus on services on a go-forward basis is really around filling the gaps on key strategic relationships that allow us to connect the dots on total performance management that range from clinical integration to cost management to payment allocation and where we can provide services that enhance the chain of those services and technologies to work more efficiently in what's going to be and clearly a cost intensive environment in a, frankly, revenue challenge environment will continue to be our strategy.

So we're not going to be open-ended about where we offer these solutions. We're going to be careful about where we do offer them because we want them to make sense for an existing relationship. So I think some years ago when we did Cook County and we did St. Barnabas. We had a different level of knowledge and a different level of expectation about how that business would operate.

And when one thinks about the level of effort about one, obtain a client in the space and to execute against it. Our returns for our shareholders are much, much higher in the other areas of business that we have expertise in around both technology and clinical resource management and professional services.

Those are just businesses that we have some leverage in and we are able to deliver substantial earnings growth when we obtain clients. So I think our point of view in that business in terms of what we now know about it is just different because we've been through the process of managing those relationships. And I think we've seen others in the space who overtime at least one public count that has found a longer term challenge and the point being the real margin opportunity and the growth for that type of a product independent of all others.

Operator

And our next question is going to come from Elizabeth Blake. Please go ahead. Your line is open.

Robert Willoughby - Bank of America Merrill Lynch

It's actually Robert Willoughby sitting in for Elizabeth Blake. But Chuck, did you mention a deleveraging effort this year. I was a bit surprised by the share repurchased not offset. But does it detract from what you're looking to pay down in debt over the course of the year?

Charles Garner

No. So consistent with our prior quarter call, our outlook for this year is $200 million of free cash flow. We have authorized up to $75 million share repurchase and we still plan to be at approximately 3.0 time leverage by yearend 2014. So (indiscernible) is inclusive of assuming some portion of shares to repurchase. And obviously we made it down payment on that in the first quarter here. But we will also continue to deliver our balance sheet through the rest of the year to get done to a target of about three times leverage.

Robert Willoughby - Bank of America Merrill Lynch

Thank you.

Charles Garner

Yeah.

Operator

And now our last question is going to come from Jean Mannheimer from B. Riley. Please go ahead. Your line is open.

Jean Mannheimer - B. Riley

Thanks. Can you guys hear me?

John Bardis

Yeah.

Charles Garner

Yeah.

Jean Mannheimer - B. Riley

Good deal. Things are getting back. So I know you called out that (indiscernible) contracted revenue grew in the quarter in light of Barnabas transition. But I mean it's reasonable that there will be growth in the metric even closely on digit growth when we consider the contracted revenue for the full year.

Thanks.

Charles Garner

Yeah. We don't obviously have a projection for contractive revenue for the rest of the year. I think in light of revenue impact in 2014, as Mike mentioned earlier, we anticipate no change in revenue or profitability associated with the Barnabas transition impact on 2014. As we said, it's about $28 million piece of business. Our goal, of course, is to offset that revenue and margin impact with other business.

There are certainly -- we talked about this low to mid-single digit margin. That's certainly if we allocate a margin. That needs to cover things like corporate overhead, segment overhead, technology infrastructure. There are some level of overhead that needs to be absorbed with whatever business we replace them with.

So certainly if we get into 2015, we have a replacement of $20 million of revenue. We'll have a bit a hole to fill in. But our expectation, the efforts is underway or to do just that whether it's through outsource business, technology business, group purchasing, any variety of offerings and I think our indication so far in the first quarter based on contracted revenue growth even in light of about $7 million coming out of contracted revenue growth in the St. Barnabas. We still had solid growth in the mid-single digit growth of contractive revenue.

So we'll update you as we get a couple of more quarters. That is certainly our goal and ambition is to close a gap that would be a result of this or any other events in our business.

John Bardis

On behalf of our management team, we want to say thank you to all of you for your time today and we look forward to communicating throughout the remainder of this quarter. I'm sure there'll be some individual one-on-ones here with Robert and Chuck and the team here throughout this evening.

So again, thank you for your time and we look forward to keeping you updated.

Operator

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

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