MedAssets' (MDAS) CEO John Bardis on Q2 2014 Results - Earnings Call Transcript

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 |  About: MedAssets, Inc. (MDAS)
by: SA Transcripts

Operator

Welcome to the MedAssets Second Quarter Conference Call. My name is Bekeba [ph] 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. Robert Borchert, you may begin.

Robert P. Borchert

Well, thank you, Bekeba [ph] , and good afternoon, everyone. With me today are John Bardis, our Chairman, President and CEO; Mike Nolte, our Chief Operating Officer; Rand Ballard, our Chief Customer Officer; and Chuck Garner, our Chief Financial Officer. A presentation that accompanies our formal comments and webcast is posted in the Investor Relations section of medassets.com under Events & Presentations.

We will make forward-looking statements on today's conference call regarding our expected financial and operating performance, which may be affected by risk factors that are described in detail in our periodic filings with the Securities and Exchange Commission. There are also risk factors not presently known to us, and which we consider to be immaterial that may adversely impact our performance, so actual results may differ materially from our forward-looking statements discussed today or in the future. MedAssets assumes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

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

[Operator Instructions] Thank you. Now I'd like to hand the call over to John Bardis. John?

John A. Bardis

Thank you, Robert, and good afternoon, everyone. Our second quarter financial results showed positive year-over-year growth, although at a slightly different revenue mix by segment than we previously had expected. Total net revenue was up 2.7% year-over-year to $175.4 million, as the strength in our Revenue Cycle Management segment offset our GPO net administrative fee performance, which was below expectation. Adjusted EBITDA in the period rose 3.4% to $54.3 million, and adjusted earnings of $0.30 per share was near the high end of our expected range. Separately, during the second quarter, we repurchased an additional 1.1 million shares of our common stock for a total of 1.8 million shares year-to-date.

We are updating our 2014 financial guidance to reset the segment revenue contributions based on our year-to-date results. We continue to expect to see higher total net revenue growth in the second half of this year, given the solid performance in our Revenue Cycle Management segment. This is also supported by the positive new business bookings over the last 3 quarters and the 1.8% year-over-year growth of our total contracted revenue estimate ended June 30.

Mike will provide additional details on the factors that weighed in on our GPO performance, but we believe the weak hospital utilization in the first quarter, due partly to harsh winter weather, was a drag on our second quarter GPO admin fees. Our vendors typically report administrative fees to us 3 to 4 months after supplies have been purchased by our hospital clients. We noted a number of hospital organizations recently reporting improved second quarter patient census[ph], and there is early evidence that the expanded access to insurance driven by the Affordable Care Act and Medicaid are increasing hospital utilization. Therefore, we'll continue to closely monitor how this could impact our third quarter and second half GPO performance.

Demand for our data and technology-enabled enterprise services continues to grow as health care organizations take a broader, holistic approach to the performance improvement strategies. I'd like to highlight a couple of recent client agreements as examples of our success. In early July, we announced an expanded relationship with Illinois-based Centegra Health Systems that now includes our comprehensive portfolio of revenue performance improvement solutions. As Centegra builds its accountable care organization, it made sense to them to extend the relationship with MedAssets across the continuum of care, and beyond the use of our spend in clinical resource management solutions. Our Revenue Cycle Technology and services will be utilized to produce 3 primary benefits: One, to gain efficiency in the financial clearance process through our patient access solutions; two, to prepare for reimbursement changes with our claims and billing solutions; and three, to improve cash collections and reduce A/R days through our full business office outsourcing and expert consulting services.

In addition, 2 weeks ago, we announced that Baylor Scott & White Health renewed and expanded our relationship to advance the MERS [ph] health system's Revenue Cycle and supply chain management processes to drive operational efficiency and performance improvement. With 43 hospitals and a broad, integrated health delivery network, Baylor Scott and White is the largest not-for-profit health system in Texas and, I believe, seventh largest health system in the United States. They will now use a comprehensive suite of solutions including our charge, pricing, compliance, claims and billings solutions to normalize charge data for more accurate and defensible pricing. This is significant given that the Baylor system uses both Epic and Allscripts as their core clinical and financial systems. Baylor will also continue to leverage our strategic sourcing, procure-to-pay and cost and operational analytic solutions. This will help reduce costs through improved supply pricing, procurement automation and business intelligence.

Health care organizations are making a significant transition to operate in both a fee-for-service and risk-based fee-for-value or shared-savings environment. They are intensely focused on a systematic approach to reduce cost, improve care quality and operational efficiency, as well as capture the last dollar of revenue for services rendered. Deploying health delivery and resource utilization strategies in a way that is consistent with the Affordable Care Act, and the increasing role of the consumer, will continue to be an imperative. One initiative will be to gain strategic insight that takes into account the efficient and most convenient location for consumers to receive care. It will also require health delivery systems to interface with a broad and diverse network of clinical locations and capabilities, whose resource consumption can be measured and accounted for in a way that rationalizes the volume they are receiving.

MedAssets' tools range from revenue, Spend and Clinical Resource management to the measurement of physician performance in episodes of bundles. They also have been created on a SaaS platform to quickly respond to this diverse environment, with a seamless interface of technology-enabled and data-rich solutions that differentiate and empower our professional services centered execution. So as providers shift to a more aligned accountable care delivery model, MedAssets' comprehensive set of data analytics and service expertise can make a dramatic difference. We can help reengineer operational and financial processes, and achieve the best practice in the supply chain. Not only that, we continue to focus our efforts on best practice in clinical resource and labor utilization, specifically in order for health care organizations to become stronger providers of health care and ultimately healthier communities.

Now let me ask Mike to provide an operational update.

Michael Patrick Nolte

Thank you, John. Our second quarter revenue grew slightly as our Revenue Cycle Management segment performance offset lower growth in our spend in clinical resource management segment. As we will discuss in the segment detail, we believe that the primary drivers of our performance this quarter were improving service and delivery consistency in our RCM business, and some challenging environmental factors within SCM.

Our SCM segment revenue growth was below our expectations due primarily to what we believe to be short-term pressure on GPO-related administrative fees. Our net administrative fees declined 0.6% year-over-year, which was partially offset by certain onetime items. Three main factors influenced this performance. First is the macro trend of weak hospital utilization. Second, in the first quarter, volumes were impacted in part by bad weather, which had a lagging adverse impact on our second quarter GPO administrative fees. More specifically, purchasing volume in certain broad product categories more sensitive to patient census, such as pharmacy and medical surgical products, were flat to down while we continued to see strength in purchased services and construction. Third, we continue to experience some pressure on our revenue share obligation to clients due to new wins and renewals. In addition, a lower revenue mix from secondary and non-acute clients, where procedures tend to be more elective, had an adverse impact on yield this quarter, since they typically receive a low or no revenue share obligation.

Against a tough comparison to a strong second quarter last year, our other SCM service fees increased 4.5%, excluding performance-related fees from both periods as we continue to see growth from our advisory, consulting and other service and spend analytics capabilities. However, this quarter's revenue was still lower than forecasted due to the timing of certain consulting projects. While we experienced some quarter-to-quarter variability, we will continue to make great progress building a repeatable relationship-based advisory business.

While our first half bookings results were closer to our expectations, second quarter bookings in the SCM segment decreased 60% year-over-year due to the timing of a couple of larger deals expected to be signed. It also follows a very strong Q1 booking quarter, as well as strong bookings in Q2 of 2013. While we cannot predict precisely the timing of larger renewals and new GPO and Advisory Solutions deals, overall, our SCM pipeline remained strong, as we continue to experience increasing interest in Total Performance Management offerings.

Contracted revenue this quarter increased 1.4% year-over-year, but declined 2.6% sequentially from the first quarter of 2014, as the current administrative fee trends and recent bookings are factored into the estimate. We believe the increases in insurance coverage and expected impact on patient utilization and medical acuity will be positive growth drivers over the long term. However, our contracted revenue did not factor in a potential rebound from current hospital utilization trends. While pressure on volumes through last year and the beginning of 2014 are impacting administrative fee growth, we are confident in our long-term strategy to expand GPO contract coverage, and drive contract compliance by assisting our clients.

As we look forward to the third quarter and rest of the year, we continue to be focused on 3 areas to drive SCM segment growth. First, we have deployed and developed more capable analytical tools to our client management teams to quickly identify and act on cost savings opportunities within better-priced national or local contracts. The deployment of these tools in 2014 is already yielding a positive impact on our contract compliance, and our clients' financial performance, but it's relatively early.

Second, we've had early success driving contract conversion through the placement of clinical analysis resources within our implementation and client management teams. This approach has been well received by clients, and is already targeted at several multimillion-dollar opportunities to support client value that should drive administrative fee growth throughout the back half of 2014. This includes, for example, working with clinical administrative staff in health systems to move local agreements to national contracts, in order to gain better financial results for our clients.

Finally, our approach on Total Performance Management leads to better alignment with clients, and the opportunity to focus on high-value opportunities within our client base. Group purchasing is a critical lever in achieving client savings objectives. And the effectiveness and profitability of our contracting and purchasing approach is enhanced by the success of our high ROI advisory and Software-as-a-Service analytics capabilities. The foundation of our business and our ability to create meaningful financial impact for our clients remains strong. At the same time, we will continue to take the actions necessary to grow our SCM segment despite fluctuations in the underlying business environment.

Our Revenue Cycle Management segment delivered 6.2% increase in net revenue in the second quarter versus Q2 of 2013. Our Software-as-a-Service based Revenue Cycle Technology tools grew 4.9% versus a year ago, as we continue to see consistent growth from our claims management, contract management and charge capture audit solutions. Our Revenue Cycle Services business delivered a 9.2% revenue increase year-over-year due to recent new client implementations as well as certain onetime items, totaling approximately $1.5 million in revenue that were forecasted to occur in the third quarter this year.

Our Revenue Cycle Technology bookings continued to show a positive trend, with second quarter bookings up 14% over last year. Revenue Cycle Services bookings were down 20% in the second quarter versus last year, but up 93% year-to-date after a huge Q1, as we have continued to win clients and gain incremental market share.

Contracted revenue for the RCM segment increased 2.4% year-over-year and was flat sequentially. Revenue Cycle Technology continued to show steady incremental growth, and Revenue Cycle Services continued on a positive trajectory from recent wins. Adjusted for approximately $7 million coming out each quarter due to the Barnabas outsourcing agreement concluding at year-end 2014, our RCM segment contracted revenue increased 9.4% year-over-year. And importantly, Barnabas remains a significant client as we drive performance improvement through our spend in clinical resource management, and through our Revenue Cycle Services and technology tools.

Much of the work within our Revenue Cycle segment over the last 18 to 24 months has been to support a robust technology infrastructure to provide a more scalable set of solutions for our clients. We are now beginning to see the benefit from this investment in more consistent performance. Our improved client service models have resulted in across-the-board improvement in customer perception of our Software-as-a-Service solutions. This has been validated by class and our own internal surveys. While we will always remain focused on continuous improvement, we are encouraged by the trajectory. In fact, we continue to maintain market-leading positions in a number of our products. And every one of our class rated products has improved survey ratings for service and support since the beginning of the year.

Finally, our development and quality efforts are leading to market differentiation as we continue to invest in Revenue Cycle analytics and our other software solutions that can enable our clients to maximize their revenue cycle effectiveness, both today and tomorrow.

We remain focused on delivering client success and profitable market growth for our shareholders. And we will speak more specifically about our long-term growth strategies at our Investor day on August 13, in New York City, and how that aligns with key industry trends.

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

Charles O. Garner

Thank you, Mike. This afternoon, I'll highlight key results and variances in our financial performance and guidance. We encourage you to review the accompanying slides and today's press release for additional details.

On a consolidated basis, our second quarter results showed positive year-over-year growth, and were generally in line with our expectations, although at a slightly different revenue mix by segment. In our Spend and Clinical Resource Management segment, net revenue increased 0.6% over the second quarter of 2013, as our GPO net administrative fees were impacted by the factors Mike discussed earlier. The 84 basis point decline in adjusted EBITDA year-over-year was due to lower performance related fees and lower GPO-related administrative fees.

In our Revenue Cycle Management segment, our SaaS-based Revenue Cycle Technology tools comprise approximately 68% of second quarter RCM segment revenue, and grew 4.9% year-over-year. Revenue Cycle Services revenue increased approximately 9.2%. It was driven primarily by higher performance-related fees, as well as certain onetime items that were previously forecast to occur in Q3 of this year. Second quarter adjusted EBITDA margin in our Revenue Cycle Management segment was 28.2%, or a 220 basis point improvement from Q2 of 2013 due to both performance-related fees and onetime items.

For your review, Slides 14, 15 and 16 provide our year-to-date comparative financial results. I would note that our consolidated and SCM segment adjusted EBITDA margin is lower in 2014, due primarily to the significant onetime performance-related fees in the first quarter of 2013.

Slide 17 shows that our first half operating and free cash flow are both lower than the comparable period in 2013. This was due to higher cash tax payments, investments and working capital versus a year ago. We continue to expect free cash flow to increase in the second half of 2014.

Our June 30 balance sheet shows $780.8 million in total bank and bond debt net of cash, and net debt outstanding was approximately 3.6x our trailing 12-month adjusted EBITDA. We drew on our revolving credit facility during the second quarter, and repurchased an additional 1.1 million shares of common stock. We expect our debt leverage ratio to be at approximately 3.0x by year end, and we'll continue to take a balanced approach between share repurchases, debt prepayment and potential M&A opportunities. In addition, we are closely monitoring the credit markets for additional opportunities to reduce our interest expense.

Turning now to our financial outlook. We updated our 2014 guidance, as summarized on Slide 19 of our presentation. We raised the midpoint of our RCM segment revenue guidance by $4 million and lowered the midpoint of our SCM segment revenue guidance by $7 million. Given this revenue mix is now moving slightly away from the higher-margin GPO business, we lowered the midpoint of our adjusted EBITDA by $2 million to $235 million, and adjusted EPS guidance by $0.02 to $1.36 per share.

Other assumptions for our full year guidance are listed on Slide 20, with only minor adjustments to our expected cash taxes, interest expense, depreciation expense and share count. We continue to expect to generate free cash flow of between $90 million and $100 million this year, while investing in product innovation and our technology infrastructure to support and scale for future growth. As we've noted the last 2 quarters, our increased level of investments over the last few years has resulted in higher growth in our depreciation expense.

We expect third quarter 2014 net revenue in our Spend and Clinical Resource Management segment to be down 1.7% to up 2.2% from net revenue of $103.2 million in Q3 of 2013. In our Revenue Cycle Management segment, we expect third quarter revenue to increase 4.5% to 10.8%, when compared to third quarter of 2013 revenue of $63.1 million. Performance-related fees are also expected to be approximately $1.0 million to $3.0 million versus $3.7 million in last year's third quarter. We expect third quarter total adjusted EBITDA margin to be in the 30.9% to 33.2% range. And this is likely to be up sequentially from Q2, as usual, due to the expenses from our Healthcare Business Summit held in April, and down 150 to up 80 basis points from 2013's third quarter margin of 32.4%.

We expect GAAP earnings to be in the range of $0.09 to $0.13 per share, compared with earnings of $0.11 per share in the third quarter a year ago. And our adjusted EPS is expected to be down 10.0% to up 3.0% from third quarter 2013 adjusted earnings of $0.31 per share.

For the fourth quarter of 2014, we expect total net revenue to be up 7.5% to 11%, from the $170.5 million reported in Q4 of last year. Consolidated adjusted EBITDA margin is expected to increase 500 to 720 basis points from 2013's fourth quarter margin of 30.9% as we expect to recognize $5.5 million to $7.5 million in performance-related fees versus $4 million in last year's fourth quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is going to come Charles Rhyee out of Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

Mike or Chuck, on the guidance here on SCM, I understand what you're saying, it drove sort of the weaker-than-expected performance. But can you talk about when you gave the guidance for the segment, particularly for the quarter here, given that we knew that well, volumes were weak? You already had a sort of a month going in April. What sort of changed then between when you kind of gave the quarter's guidance and in the next couple of months here? And then, so how should we think about then, as we think about the rest of the year? And then maybe after that, how much can we expect in this contract compliance maybe to help us realize better revenue as we move forward?

John A. Bardis

Hey Charles, this is John. Let me then lateral -- I'll make a few comments and please lateral to Chuck and Mike. First, the way the SCM business, particularly administrative fee revenue, works, is that we don't know precisely what purchases occur until really, 120 days or so after they've occurred. So while it was clear that there was an economic impact, particularly in the first quarter of weather, it was hard to note to what extent it would affect not only our business, but say for example, the broader economy. The broader economy was down 2% in Q1. Economic data just came out today, and the second quarter was up 4%. In talking to our local Federal Reserve folks, they pointed out that neither number is valuable, because they're not real. What we're seeing early, and we don't know whether that's a bolus that pushes forward from the first quarter, to the second quarter in terms of utilization, is in particular, the for-profit hospital systems in the country, are reporting better census and meaningful increases in census. However, it's hard to know whether or not those are going to hold, right? So again, what census improvements occurred in these -- or did occur in the second quarter, that are likely to show up in the third quarter are hard to predict, and hard to know. Until we get actual data, real data that we can tie to an invoice. It's very difficult to make projections, or guesses for that matter.

Michael Patrick Nolte

Yes, let me just try to answer the second half of your question around the work we're doing with clients, specifically. We're obviously intensely focused on the things that are within our control within a specific client relationship. That includes the things that I outlined around working with -- using clinical resources and analytics to make sure that we're delivering value for clients and ultimately, driving gross administrative fee growth as a result. But that's under the weight of the macroenvironment to some extent. And so we continue to focus on the growth that we see in front of us, and that's what's reflected in the revised guidance that you see.

Operator

And then our next question is going to come from Michael Cherny from the ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So I just want to dig in a bit on the bookings number. Last quarter, you had a very strong bookings result. You had some strength still in RCM. SCM bookings, I think were a little below what you had hoped for, at least from a quarter basis, although obviously you were only up on a first half basis. Mike, I think you mentioned something about a couple of large deals that may or may not have been in that bookings that you're hoping for. When you think about those large deals and what goes into the bookings numbers, I know reporting bookings is still something that -- is still fairly new, in terms of at least coming to the street. I guess what were the drivers of what will get a deal to close from a specific bookings perspective in a quarter? And I guess how many deals can lead to the slippage of a number that ends up being down 60% versus a number that may look down a more reasonable amount? I'm just trying to get a better understanding of what drives the magnitude of that number.

Michael Patrick Nolte

Yes, I mean, it's obviously partly timing, right? We set quarterly goals for bookings and we certainly budget to close those deals within a specific quarter. But for a variety of reasons with customers, sometimes the timing of when a booking ultimately closes slips past the quarter end, and ends up translating to a follow-on quarter. And if that deal's sizable, whether it's a renewal or a new deal, it can fairly significantly impact a specific quarter. We -- with the SCM segment in particular, we dramatically overperformed in first quarter from a bookings perspective. And a couple of those were pulling stuff into a quarter and getting ahead of the year. And you see, occasionally you see the opposite, and we had a little bit of that in second quarter. We're obviously seeing part of the third quarter now, in terms of almost a full month in. And you have a pretty good feel for where we're going to land for the year. And we feel good about the overall bookings targets we've set for the year. Really just amounts to the timing of large deals, how those -- how that goes from a customer perspective. You obviously get into different budget cycles, as well with acute-care hospitals. As you know, many of them have fiscal years that cross a June boundary, where we obviously have a calendar fiscal year. And so you occasionally see behavior where you're pushing that conversation into a third quarter, particularly around second quarter bookings.

Operator

And then our next question is going to come from Jamie Stockton out of Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess on the share back, it was up quite a bit this quarter. Could you just give us some color on what is driving that higher? Is this the customer mix within the GPO business is shifting more towards large health systems, and that what's going on? Or is there a broader, same size of hospital is just demanding a higher share back theme that is occurring?

Charles O. Garner

Sure, so it's a couple of points: One, if I think you look back over a series of quarters or a series of years, you'll see we've built momentum and won more deals and taken share and things of that sort, our mix has also been increasing by us large accounts. So you expect typically, the revenue share obligation of those large accounts will be higher on average, so there's some of that. Additionally, as Mike mentioned, whether it's a new win or renewal, there may be some changes to the revenue share obligation related to any sort of new booking or renewal. And I think the third piece, which ties a little bit, I think to Charles's question earlier as well, a little bit around what kind of what didn't you see related when you were setting your guidance for the year and for the second quarter? One piece where there was softness of volume, there was a little bit of a double whammy, was really more on the non-acute care side and on the smaller hospitals health systems side. So some of that we think is probably onetime, maybe some weather-related, maybe some of it's related to non-acute care facilities where the procedures that came tend to be more discretionary. So if you had a bad winter, there's probably more weakness there. People can reschedule, but they can't get to the facility. But those types of accounts, those non-acute care facilities. While they're not a substantial portion of our total revenue, they do have a meaningfully lower revenue share obligation on average. So like for like of $ 1 dollar of volume comes out of a non-acute care facility, it usually has a 1.5x to 2x to 2.5x impact on a net basis, just because of the higher margin on that incremental dollar. So those things kind of in combination really tie together to create the impact we discussed here in the second quarter, and it impacted obviously, your outlook for the rest of the year.

Operator

And then our question is going to come from Ryan Daniels out of William Blair & Company.

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

Mike, maybe a question for you. When you talked about driving growth in the SCM segment, you identified more analytical tools that you'll put out in the market to identify those cost savings for your clients. Is that a work product that you've pretty much done, and you're deploying those now? Or is there is still a lot of our R&D and investments that need to be done to get to analytical tools out there? Just any color on that would be helpful.

Michael Patrick Nolte

Yes, maybe to be clear, the tools we're talking about are internally focused tools that assist client management teams in identifying opportunities. And so there's a bit of development effort. It's mostly use of a different set of analytics to do some peer-to-peer analysis of where we expect to find opportunity. They're not commercial tools in the sense of tools that we would sell directly to a customer for their own use, at least today. They're being deployed now in terms of their use. And we continue to invest in refining the analytics and ensuring that the tools are effective. But from a deployment standpoint, it's not a 4- or 6- or 12-month process to get them out into the hands of those client managers.

Operator

Our next question is going to come from Gavin Weiss out of JPMorgan.

Gavin Weiss - JP Morgan Chase & Co, Research Division

So I understand that it's hard to predict utilization trends for the SCM segment. And I think Mike, you said you're not including an increase in census in your expectation for the back half of the year. Can you just give us some, more clarity on what factors would drive revenue to the top end of that range that you gave?

Michael Patrick Nolte

Yes, I mean, the biggest upside is a change in census and utilization. I mean, it's what you said. The -- the macro trend is something we've made a fairly specific strategic decision to not try to predict in our guidance. We've not counted on upside or return of volume as we thought about 2014, at least. And so if there were to be, in Q2 and going into Q3 to some extent, a dramatic change in volume or a rebound in volume that meaningfully impacted hospital census and utilization, that should be reflected in year, in terms of upside to the guidance that we've given.

Gavin Weiss - JP Morgan Chase & Co, Research Division

So what about getting to the high end of your current guidance range?

Michael Patrick Nolte

We believe that -- the guidance we've given to date is largely within the boundaries of the census trends that we've seen, combined with the work that we're doing that we describe to try to drive conversion and gross administrative fee growth within current clients. So yes, it's a combination of our essentially flat to down forecast for the year from a macro perspective with the work we continue to do to drive compliance and utilization within existing clients.

Operator

And our next question is going to come from George Hill out of Deutsche Bank.

George Hill - Deutsche Bank AG, Research Division

I think even where [ph] revenue growth has looked like through the first couple of quarters of the year. I guess, can you talk about what gives you confidence in kind of that steep fourth quarter ramp? Or can you tell us anything that gives us comfort with the visibility kind of the expectations for growth in the fourth quarter, given that it's not a particularly weak comp that we're looking at, either?

Charles O. Garner

Yes. Sure, George. So you're right. I mean if you look at how the guidance for the third quarter and fourth quarter play out, it is a meaningfully and steep fourth quarter ramp. That really comes from a couple of things: One, it certainly assumes that what we believe is some of a temporary weakness here in the first half, related to the utilization and census trends improves. We're not assuming some heroic level of increase in growth from coverage, or utilization to healthcare system, going back to both Mike and John's points earlier. But we have to believe that census gets a bit better in the rest of the year, while we're also driving same-store sales growth compliance, new wins, bookings, implementations happening on time, all those things, kind of traditional things. Additionally, you'll note that there is a meaningful increase, and talked about it at the beginning of the year, we said our performance-related fees would be skewed like bookends in the first quarter and the fourth quarter. You'll see there's a meaningful increase in the fourth quarter, relative to what's been kind of a couple of million dollar typical quarter in the balance of the year, and that's also certainly a big growth versus a year ago. Additionally, Mike talked about some of the bookings softness, relative to our initial expectations and versus a year ago in the second quarter. Some of that was related to some of these performance-related deals. Some of it was related, really, to these advisory solutions or consulting deals not having exactly the time frame we expected. So I think that also gives us some flexibility, because to the extent that those deals close, that they're implemented, that they achieve their recognized revenue on schedule, those are things that happen in a series of weeks, months and a quarter or 2, not a 12- or 18-month implementation time frame. So when you kind of add all those things together, I think we have confidence in the back half of the year, certainly within a range that reflects I think what we've tried to be the candid about is the known risks. And of course, we can't certainly quantify the unknown risks at this point. But we believe we've actually bracketed it and that's why we bought our Spend segment revenue guidance down a bit, but also increased our Revenue Cycle guidance a bit. Because we saw a bit better strength in that side of our business, the first half of the year than we were anticipating when we started the year.

Operator

Our next question is going to come from Greg Bolan from Sterne Agee.

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

So Mike, just -- if you could, could you repeat the Revenue Cycle bookings growth year-to-date, and for the quarter, please?

Michael Patrick Nolte

Yes. So for the quarter, the overall Revenue Cycle Technology bookings were up 14% year-over-year. And for RCS, they were down 20% year-over-year. And then, first half numbers are 15% for RCT, up year-over-year, and 93% up year-over-year for RCS.

Operator

Our next question comes from Eric Coldwell from Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

I actually tried to remove myself. I think Jamie covered my topic on revenue share obligation. But maybe I'll just try to ask it a little different way, and sorry to be repetitive. When I look at revenue share obligation, the percentage has actually gone up in 6 of the last 8 years. And I think we understand that the temporal [ph] items happening, also the contract wins and renewals and also the fact that some of your contracts are 100% revenue share obligation and those things can all change the ultimate mix. But I guess what I'm really driving at is, if you were sitting on our side of the table, how would you be modeling this revenue share obligation percentage over the next 1, 3, 5 years? Because at current trends, you're averaging up about 100 to 150 bps a year over time, and I just want to make sure that we're not missing something and shouldn't be doing the same thing in our long-term models as well.

John A. Bardis

Hey, this is John, just a quick point to make. As you may know, over 10 years ago, we sort of founded the performance fee model in this space. And that performance fee model, in essence, was designed to shift financial risk to performance and administrative fees really off the table. Because we had a lot of confidence that what we could do, with both data and process improvement could supersede an ongoing discount with administrative fees. So when you think about performance fees over the course of a year, or a 24-month period of time, in many respects, they are an offset to administrative fee reductions, which were an upfront contractual obligation that on the back end of it, had performance fees deployed against it. Now that's not 100% of the cases, but it this true in the large IDNs. Large IDNs anymore don't specifically and only negotiate their Spend and Clinical Resource management arrangements based on administrative fees share backs. Although, if you looked at that independently, you would see what you had pointed out, which is a negative trend. But rather, performance-related aspects which -- in which we can get boluses of capital that more than replace the administrative fees, if we perform. So I just incurred -- as we talk about this over time, those offsets are real. When you -- a good example of a great client, who we do the deep dive work with, is Kaiser Permanente, and that is measured on a calendar year basis. And so then, therefore are the performance fees, and how they relate specifically to the offset of administrative fees, and it's a pretty sizable number. So that's just but one example. So it's -- taken independently, the gross administrative fee picture on share back, is not attractive, not awful, but it's not northbound. But when you take it into the entire picture of performance fees, we have a lever in place that assists in managing against that decline.

Operator

And then our next question is going to come from Sean Dodge out of Jefferies.

Sean Dodge - Jefferies LLC, Research Division

Now that we're a few months beyond the ICD-10 delay, have you guys seen any changes since then in the type or size of projects your clients are looking to tackle this year? Has the delay created a bit of a "deer in the headlights" situation, where hospitals have some freed-up resources they weren't expecting to have, and it's causing a little bit of a pause as they try to figure out what to work on now?

John A. Bardis

We haven't really seen anything significant in terms of bookings and sales that we believe is attributed to the ICD-10 -- well, to ICD-10 originally, or to the subsequent delay, to be fair. There may be some cases around the margins. But it's something that I think we talked a bit about at the end of last year, in terms of how that would play out as it affected buying behavior, getting closer to the original deadline later this year. We didn't see early indicators of any softness as a result of that. And we haven't seen any dramatic change in buying behavior one way or the other, as a result of the delay, either.

Operator

And then our next question is going to come from Bret Jones from Oppenheimer.

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

I have 2 interrelated questions. It revolves around Cepheid's announcement tonight that they are not going to renew their contract with Premier. So I wanted to know, first of all, are you seeing more pressure from the supply chain, from the vendors in terms them not willing to pay the administrative fees? And secondarily, it involves -- the second question, really, is around Cepheid's belief that they are not going to lose any revenue because hospitals can order through multiple GPOs. Do you -- most of your hospitals have alternative GPOs? And how do you have confidence that utilization in the first quarter was just weak around because of census trends, as opposed to losing volume to another GPO?

Michael Patrick Nolte

Yes, great question. First of all, we monitor our clients pretty closely. We know who they do businesses with. We understand that process with the LOC or LOD process, Letter of Commitment, Letter of Designation. So we know by contract and product type what they're contracted to use. And while there are numerous cases where there are multiple GPOs, our large clients are exclusive with us, like Baylor Scott & White is a great example. But moreover, while there can be 2 group purchasing organizations in place, Bret, there cannot be 2 groups purchasing organizations in place for the same product. So in other words, we're not going to be sharing administrative fees with another group purchasing organization on a Baxter product that we have the LOD and LOC for. So it is accountable, if you will, in that respect. Synthes is an implantable spine company, spine and neuro science company. That is a very clinical-oriented decision. And I would tell you that the differentiation in our model is very straightforward. When we bring our spend council together, the clinical work has been done over the course of a year to get 40 to 50 integrated delivery networks in the room to determine whether or not a Synthes product or a DePuy product or a Stryker product is the one that they wish to choose, based on price and terms. The clinical work has been done, in order to even the playing surface on commitment. And so therefore, we've been able to retain strong relationships, in large part because we can predict and preserve market share, based on the work that we do, that the vendors can then trust in. So it's a bit of a different animal. If you want to go to Synthes and just sign an agreement and hope hospitals will buy off of it without the clinical commitments that are required to get their attention, it's going to be very hard for them to see or perceive value.

Operator

And then our next question is going to come from Richard Close out of Avondale partners.

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

If you can talk a little bit about, on the Spend Clinical Management side, the Other Services, 2.9% growth I think in the quarter, that's down from I think around 13% in the first quarter, if I'm not mistaken. And just how we should think about that on a go-forward basis as well?

Charles O. Garner

Yes, so certainly, I'll make a couple of comments and if Mike wants to add some color to it. So most of that Other Services revenue typically is consulting or performance Advisory Solutions type work. And as Mike had mentioned, our bookings in the second quarter were a bit weaker than expected. Some of that, certainly was related to some of these consulting services. And so both -- some of the growth in that quarter, as well as we had anticipated, rest of year would be impacted. But the way to think about it, for the rest of the year is, if we close some of those deals that maybe didn't close by the end of June, and the middle of July, late July, early August, there still is, certainly room here in the rest of the year to implement those Consulting Advisory Services, as well as recognize the revenue from it. So we've tried to factor that into our updated guidance for the year. I don't know, Mike, if there's any additional points you would make, just generally about the state of the Other Services revenue.

Michael Patrick Nolte

Yes. I mean, it is -- a significant portion of that's coming from some of the performance improvement work that we do more broadly across the MedAssets set of capabilities, and it can be a bit lumpy in terms of the size of the deal and delivery. The good news is that, from the standpoint of a booking turning into revenue in year, as Chuck suggested, it's -- you've got a much shorter cycle relative to, for example, a technology deal or something related to a new group purchasing organization. So it's -- as we look at our current pipeline and what we know so far through Q3, we believe we've still got a strong growth potential for the remainder of the year around the non-GPO related services within SCM.

Operator

And then our next question is going to come from Sandy Draper out of SunTrust.

Alexander Y. Draper - SunTrust Robinson Humphrey, Inc., Research Division

I wanted to see if you could comment a little bit. I think, Chuck, you alluded to some of the, you're seeing some -- or maybe it's Mike, some of the stronger growth on the SCM side and things like the construction and lighter in some other areas. Are there significant differences in margins that they would be big enough, where strength in one area, weakness in the other, will actually impact the total margin? Or, really, is it not big enough a difference in margin that we should sort of be starting to think about that?

Michael Patrick Nolte

Yes, thanks, Sandy. There are, within particular product categories, there are relative differences, sometimes, in gross administrative fee rates, but not necessarily attributable to those broad categories. So they're -- those categories are relatively consistent in terms of the administrative fee rate, relative to the other parts of the business. An example of where you see slightly different administrative fee rates, just to give you one, would be distributors as one area, where that -- the rates are a bit different than the standard MedSurg business or Capital or Purchase services. And in particular actually, notably on the purchase services side, because of you're -- we're targeting in a lot of cases, relatively brand-new areas of spend, it's also -- it's not a churn of some existing contract or just a revisiting of a particular product category. It tends to be actually pretty accretive to the rest of the business, so it's a little bit different in terms of comparison to MedSurg or pharmacy.

Operator

And then our next question is going to come from Robert Willoughby out of Bank of America.

Elizabeth M. Blake

This is actually Elizabeth Blake. Just a quick one, to start. Did you break out that onetime revenue and --

John A. Bardis

Yes, I'm having a hard time hearing you. Could you maybe speak up?

[Technical Difficulty]

Elizabeth M. Blake

This is Elizabeth Blake in for Bob. Did you -- first on the RCM Services side, you mentioned onetime income. Did you break out what that was? Can you quantify that?

John A. Bardis

Yes. It's about $1.5 million. There were some items we had anticipated we were actually going to achieve in the third quarter. So this was about $1.5 million that impacted the second quarter, and we're able to achieve those a little bit ahead of time, ahead of schedule.

Operator

Our next question is going to come from Donald Hooker out of KeyBanc.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

So you mentioned that Purchase Services was a source of strength in the Spend Management segment, and that was an area I was interested in. And I'm wondering, is that an administrative fee event? Is it a national, sort of administrative fee event? Or is that more of a consulting project that's done more locally?

John A. Bardis

Yes, interestingly, it's a little bit of both. Part of what makes purchase services something that, in many cases, health systems are only beginning to tackle is, that there's a lot of complexity there in terms of access to national agreements, combined with some services that have a very geographical kind of footprint. And so it ends up being work that we do with our Advisory business, in some cases to put local or regional contracts in place, combined with some strong national agreements where it makes sense. So if you think about telecommunications as having a national footprint, relative to somebody who's doing lawn maintenance around the grounds of a health system. That sort of just gives you a feel for the kinds of deals that you're talking about, in terms of the contractual agreements that you're working on.

Operator

And our next question is going to come from Donald Hooker out of KeyBanc.

[Technical Difficulty]

Operator

Our next question comes from Garen Sarafian out of Citigroup.

Garen Sarafian - Citigroup Inc, Research Division

The first point of clarification, I thought I heard 2 different answers. For fourth quarter, are you expecting an uptick in macroenvironment? Or is it just to get to the high end of guidance, it's just more compliance, but overall it's still the expectation that the macro trend stays flat? Because I thought I heard 2 different responses, but my question was on leakage, in terms of the GPO side of the business. You mentioned to an earlier question that it doesn't necessarily go to another competitor. But could it go off contract? And is there a lag in the time you see that as well, or is that something that's immediate?

Charles O. Garner

Sure. Let me try to address the first piece of the question around the expectations in the rest of the year, related to the SCM, primarily GPO administrative fees. Certainly, the first quarter, parts of it were weaker than we had anticipated and expected, and hence, the reason for us adjusting our mix for the rest of the year and adjusting our guidance. For the balance in the second half of the year, we expect some of that softness was onetime. Some of that's certainly macro related, just general weakness. We don't think or certainly are not projecting it to get worse in the back half. But also as Mike, and I think, John alluded to, there was likely some weather phenomenon, which whether you call that macro or not, there were, probably, as least some onetime items in the first and second quarter that had an impact. I think what we were trying to differentiate was, we're not expecting some large bolus, or some big upside related to the Affordable Care Act or Medicaid expansion or other areas that would cause some big bump, positive bump in the back half of the year. We certainly expect a certain level of volume and strength in utilization, consistent with what we're generally hearing in the market and what we're seeing with our accounts, plus additional growth through obviously winning new business, implementing the business so we've already won, on-time and on schedule, as well as the initiatives Mike has talked about earlier, related to driving more penetration, same-store sales growth and selling greater value to our clients. So in totality, I guess it's a little bit of both. But that's -- hopefully, that explains better our outlook, and how that ties together for the rest of the year.

Operator

And then our next question is going to come from Eric Percher out of Barclays.

Eric Percher - Barclays Capital, Research Division

Question on seasonality. If we exclude performance fees, I'm curious when you look at the last year, do you think you're seeing any change in seasonality? And maybe this last year is colored by weather. But if you look back over the last year or two, do you think you're seeing any changes to the March quarter or June quarter?

Charles O. Garner

Probably not meaningfully. Maybe on the margin, what we're seeing a little bit is, and it's hard to say. And that's where I think it's price skewed a little bit towards the non-acute care facilities versus the acute-care settings. Certainly if you're probably having a heart attack, you're going to a hospital as quick as possible, right? And so, if you have an elective procedure and maybe you have an entry [ph] deductible, or are still debating whether you do it, or depending what your coverage is, or if you have a high-deductible plan, you may choose to delay or push some of that into the later part of the year. I wouldn't say we're seeing a substantial shift. But look, the first part of the year is -- creates some level of uncertainty and newness, certainly for ourselves and for providers in a number of areas. We hypothesize that, that's one of a number of different factors, but probably not substantial in aggregate for us, given still the majority of our administrative fees and volumes, really occur only in the acute-care setting. But there are certainly lots of moving parts, right? Acute-care providers buying non-acute care providers, mergers taking place, there's lots and lots of moving pieces there, expansion of insurance coverage, what level of utilization that drives. So there's certainly dozens and dozens of factors here. But I wouldn't say there's some substantial shift in seasonality. But as we did highlight, some weather things in the first sort of quarter, a little bit in the second half really, for us. And I think we talked about a year or 2 ago related to the hurricane, Superstorm Sandy in the northeast did have some impact as we know. As an example, that did affect vendor reporting timelines for us. So from time to time, there will be some of these onetime items that have an impact. But we're not seeing a substantial change, I would say, in the seasonality across the year. John or Mike, anything else you would want to add?

John A. Bardis

Yes, I mean, I think just 2 quick things. One, seasonality in America has typically been most affected by the intensity of the flu season. So if we get a particularly intense flu season, that's when we see a high utilization rate, that is measurable. The other is, is that the Affordable Care Act has begin to reduce the amount of self-pay, and bad debt and therefore, improve revenues for hospitals early in its genesis. Meaning that people who needed care, but previously were uninsured and likely to produce bad debt for hospitals are actually covered now. So their revenues are improving as a result of that. But not necessarily does that translate to census improvement and net utilization change of meaningful magnitude. And I'll explain why, and that's largely because of those hospitals in the past have free -- have free boarded and provided charity care here. So there's just a difference as to whether or not they're getting paid, but not in, or not to our knowledge yet, a full insight to meaningful census improvement. We do -- we have seen a seasonal change from Q1 to Q2 that's interesting. It's probably had a more dramatic effect on hospitals and large prep because the payor mix actually exists, as opposed to charity care. So it's a -- it ultimately has a slightly different effect on our business.

Operator

And then our next question is going to come from Mohan Naidu out of Stephens.

Mohan A. Naidu - Stephens Inc., Research Division

I just want to quickly go back into the revenue share obligation again. So are you guys seeing more pressure on the revenue share obligations, whenever you go for renewals on new contracts? Or is it just that they want to move that percentage, some percentage of this revenue share towards the performance fees, and is that a trend that we should continue to see here?

John A. Bardis

Yes. The answer is yes. The environment has been, for some meaningful period of time now, pressure on administrative fees. But I -- In other words, clients want more administrative fee share back and an algorithm where all things are equal. In other words, if there's no improvement in how you're performing, other than your fundamental responsibility to deliver really good pricing to them, they want more administrative fee share back. In so far as we are able to bring tools to the table that improve total value of our solutions, which in many cases really boils down to tens of millions of dollars of net impact, which is many, many multiples of any amount of share back that we could ever give them, we are able to claw back the value of that share back in the form of performance fees. I just wanted to point out, this is less of an administrative fee issue, independent of all other things, and more of a business value proposition based on performance. And so I would say that the real test for companies like ours, is whether or not we can create value in the area of performance that: One, offsets administrative fee share back changes; and then two, advances the cause beyond that. And that really is a function of your solutions and your capacity to innovate and package those solutions.

Michael Patrick Nolte

Yes, partly the reason we go to market with the total performance approach that we do today is, is because we believe, being in a conversation solely around share back dollars is the wrong conversation to be in with our clients. The value isn't in the marginal dollar paid in revenue share obligation. The value is in our ability to perform across a range of really high ROI technology and service solutions that deliver value for our customers.

Operator

And then our next question is going to come from David Larson from Leerink Partners.

David Larsen - Leerink Swann LLC, Research Division

Can you talk a little bit about the Rev Cycle contracted revenue number? It seems to me to be very resilient, despite the roll-off of your larger RCM client there. And then, can you just touch on the bookings growth in RCM Technology, like 14%? I mean, that's good, especially considering the 15% growth last quarter. Like, I don't know, just -- can you just generally comment on what's driving this, please?

Michael Patrick Nolte

Yes. So I think, essentially to your point, we've -- as a segment, the Revenue Cycle business essentially lapped the impact of the $7 million coming out for the Barnabas contract now, 2 quarters in a row. So if you think about that in terms of ultimately impacting revenue growth in the future, we've covered that $7 million for 2 sequential quarters. And we obviously are continuing to run the business in a way to try to ensure that we're able to do that through the four quarters of impact that, that will have. So we got -- we've been successful through 2 quarters, and we have 2 more to go, to continue to maintain that consistency in contracted revenue. To answer your other question, it really goes back to what I said earlier, which is, we've been, I think talking for 18 months or so, about the work we've been doing to drive consistency from a deployment standpoint on the technology side, from a service standpoint, in terms of how we ensure that we're delivering great service in support of our software solutions and also, really making sure that our Revenue Cycle Technology and Service portfolio is a meaningful part of an overall offering that impacts our clients successfully in combination with the other segment. And the good news there is that the bookings numbers and bookings percentages are a reflection of, we believe, the beginnings of the results of the work that we've done, and an improved -- frankly, an improved customer perspective on that side of the business.

Operator

And our last question is going to come from Nicholas Jansen from Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Just a quick question on the capital deployment priorities. 3.6 levered today, be at 3 by the end of the year. I know you have a refinancing potential in the fourth quarter. How do we think about your free cash flow being deployed in 2014 and 2015? It doesn't look like your share count guidance suggests any meaningful reduction from where you ended this quarter, so any priorities there would be helpful.

John A. Bardis

Yes, well, certainly, we've repurchased, not quite, but close to $50 million of shares already on our $75 million authorized share repurchase plan. So I think we made good progress there. And you can see we've drawn that revolver, and that's where we put a lot of our free cash flow in the first half of the year. I think we'll continue to evaluate opportunities, whether it's around investment for growth, reinvestment in the business. Or I should say investment for growth, either reinvest in the business or through acquisition. And also opportunistically looking at the balance sheet, whether it's prepayment of our term loans or, as you mentioned, we do have an 8% note that's callable at 1 in 4 [ph] in November. So we'll look at each of those items opportunistically. And I think there's a balance of opportunities ahead of us that likely will have probably less impact, and certainly to your question around, we haven't changed meaningfully our guidance for the back half of the year, where we are today. I think anything we would do certainly would have a bigger impact in '15. And we'll certainly talk about what impact there would be in totality when we provide our '15 guidance, probably in February, that's typically when we provide that.

Okay. So I think that was our last question, I want to thank everyone for their time and for joining us this afternoon. And we look forward to speaking with you shortly, and hopefully we'll see many of you at our Investor Day here in about 2 weeks up in New York. Thank you.

Operator

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

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