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MedAssets, Inc. (NASDAQ:MDAS)

F1Q08 Earnings Call

May 14, 2008 5:00 pm ET

Executives

Robert Borchert - Vice President of Investor Relations

John Bardis - Chairman, President and Chief Executive Officer

Neil Hunn - Chief Financial Officer

Analysts

Larry Marsh - Lehman Brothers

Corey Tobin - William Blair

Len Podolsky - Piper Jaffray

Ross Muken - Deutsche Bank Securities

David Veal - Morgan Stanley

Operator

Good afternoon. My name is Cara and I will be you conference operator today. At this time, I would like to welcome everyone to the MedAssets first quarter 2008 financial results conference call. (Operator Instructions) I would now like to introduce Mr. Robert Borchert, Vice President of Investor Relations. Mr. Borchert, you may begin your conference.

Robert Borchert

Thank you, Cara. Good afternoon and welcome to the MedAssets conference call to discuss our first 2008 financial and operating results. With me today are John Bardis, our Chairman, President and CEO and Neil Hunn, our Chief Financial Officer.

Before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements regarding our Company's expected financial and operating performance for 2008 and 2009. We would like to caution you that these forward-looking statements maybe affected by important risk factors that are described in MedAssets' filings with the Securities and Exchange Commission and in our earnings release issued today.

Consequently, actual results may differ materially from our forward-looking statements discussed today or in the future. Our Company assumes no obligation to update publicly any forward-looking statements, whether a result of new information, future events, or otherwise.

To the extent that any non-GAAP financial measure is discussed in today's call, you can find a reconciliation of that measure to the most directly comparable GAAP financial measure in today's earnings release, which is now posted in the Investor Relations section of our corporate website medassets.com.

As Cara mentioned today's call is being recorded and a webcast replay will be available within the Events and Presentations tab of the Investor Relations section of our corporate website. Now I would like to turn the call over to our CEO, John Bardis. John?

John Bardis

Thank you, Robert and good afternoon everyone. It's a pleasure to be speaking with you today about our first quarter results and recent market successes, our Accuro acquisition announcement and the fundamental strength of our core business. MedAssets delivered very strong results in our first quarter of 2008 and our total net revenue, adjusted EBITDA and adjusted earnings per share were above consensuses estimates. We generated total net revenue of approximately $59 million, adjusted EBITDA of approximately $16 million and adjusted EPS of $0.11 in the quarter. Neil will walk us through the details of our financial performance and out outlook in a few minutes.

Yesterday we announced that Grady Health System which includes a 953 bed facility located in downtown Atlanta. We will be implementing MedAssets complete suite of spend management solutions including our group purchasing services, medical device cost management, supply chain data management and customized contract catalogue for managing purchases, as well as our analytical software for controlling supplies and pharmaceutical expenses.

Grady is looking for bottom-line results in cash flow improvements and MedAssets customized solutions set and our proven track record for delivering on our financial commitments was the foundation for the Grady decision toward business to MedAssets. I might add that this followed a very through and opened as well as objective RFP process.

In addition earlier this week, we announced that Hawaii Health Systems Corporation, the country's fourth largest public health system has extended its relationship with MedAssets for group purchasing and supply chain management services to 2012. We will continue to serve as the primary GPO in all areas including medical surgical supplies, capital equipment, pharmacy, laboratory and imaging services.

Also as we discussed last quarter we signed a number of sizable new customer relationships and highlight how MedAssets is beginning the benefit from the emerging trend of hospital searching for a single strategic partner to help manage the broad aspects of the revenue cycle or supply chain.

These multi-million dollar transformational opportunities are structured as long-term partnerships that integrate our technology, consulting and service solutions to transform the customer strategic supply chain sourcing or revenue cycle management processes to drive significant and long-term cash flow improvement for our customers.

Changing gears, two weeks ago we signed a definitive purchase agreement to acquire Accuro Healthcare solutions. Accuro is a perfect strategic fit with MedAssets based upon the combine scope of our best of breed revenue cycle management capabilities. We submitted our Hart-Scott-Rodino filing on Monday and expect the transaction will close within 45 to 75 days. Accuro will accelerate our growth strategy and position MedAssets to become the ASP technology leader in the hospital based revenue cycle industry with what we believe is the most comprehensive suite of revenue cycle solutions in the hospital markets today.

Accuro brings a number of important market leading products that address challenges hospital phase in managing the complexities of their revenue cycle. Together we will offer products and services that are ranked at or near the top by customers according to class in claims management, peer contract management, charge capture and charge master maintenance as well as business intelligence, data management and decision support.

Our combined revenue cycle installed base will number more than 2000 hospital customers up approximately 1000 on a stand alone basis prior to the announcement of the acquisition. In addition, including MedAssets spend management segment, our customer foot print will expand to more than 3300 hospitals up from about 2500 hospitals prior to this acquisition.

Our market coverage will also expand by leveraging our national sales force which combined with Accuro, will be approaching 150 sales professionals; to focus on cross selling our broad set of capabilities and winning a greater share of a multi billion dollar revenue cycle management industry that is growing 8% to 10% annually.

The combination of our leading solution, our large customer base and scaled and knowledgeable sales force creates a tremendous opportunity for us to continue to win new business through both up-selling existing relationships and winning new accounts. To this end with the addition of Accuro’s products, customers and sales team, we view our opportunity to sell solutions to existing clients to be between two and three times the opportunity that was on a standalone basis prior to the announcement of the acquisition.

With the anticipated closing of the Accuro acquisition just around the corner the MedAssets managements team is 100% focused on winning new business, driving appellation excellence and planning for the integration of the Accuro business. Overall, our spend management and revenue cycle sales pipeline remains robust, so we are confident that we can continue to execute on our growth strategy and stay focused on our primary mission, which is to improve the cash loan, profit margins of these important community healthcare providers.

With a comprehensive solutions set, predictable financial model, very strong cash flow and a solid balance sheet we have the foundation in place and the resources available to foster innovation, drive customer satisfaction and continue to produce value for our customers, employees and shareholders. With that I will turn the call over to Neil Hunn our Chief Financial Officer. Neil?

Neil Hunn

Thank you John and good afternoon everyone. As we noted two weeks ago MedAssets delivered total net revenue, adjusted EBITDA and adjusted diluted earnings per share for the first quarter ended March 31, 2008 that exceeded Consensus Analyst Expectation. The major of my comments will compare our Q1 ’08 performance to our Q1 ’07 pro forma results, which assumes at our MD-X and XactiMed acquisitions completed in May and July of 2007 respectively, were part of our operations beginning on January 1, 2007. In addition and for clarity all results and forward-looking statements exclude any impact of our pending acquisition of Accuro.

Total net revenues in the quarter, was $58.8 million and a 11.2% increase from pro forma net revenue of $52.8 million in the first quarter last year. Our GAAP based net revenue growth was approximately 39% in 2008 versus the first quarter 2007, which represents the combination of revenue from both organic and acquisition sources.

On a segment basis, our Revenue Cycle Management Businesses generated net revenue of $25.1 million, up approximately 3% from pro forma net revenue or $24.4 million in the first quarter of 2007. As we have noted previously, we expect our decision support business to show flat to slightly positive net revenue growth in 2008 due to a schedule step down in the annual maintenance payments from a large customer and a slowing and a decision support sales in anticipation are the release have been upgraded software capability.

The delays we have experienced in our core decision support product are not acceptable and as April we made a leadership change within this business to address the challenges. The long-term outlook for our decision support business remained very sold as the implementation of our largest customer contract continues to progress well.

As previously discussed the revenue from this client will not be recognized until 2009 and 2010 based on contractual deliverables. Separately, in the third and fourth quarters of last year, we experienced the closing of a couple of hospital customers in the Northeast that resulted in softening in our continuously based service revenue. These clients continue to generate revenue for us in the third and fourth quarters, but as schedule the revenue turned it off in the first quarter of this year.

Importantly based on the strength of our RCM sales pipeline and recently signed new accounts, we decided to retain the majority of the staff used on these projects in order to quickly drive client results and MedAssets revenue as new business is secured. As anticipated these tow factors resulted in lower net revenue growth and adjusted EBITDA margins for the first quarter in our revenue cycle management segment.

Importantly we view both of these factors as short-term in nature and not indicative of the long-term outlook for RCM business. Our spend management segment reported net revenue of $33.7 million, an 18.3% increase over the $28.5 million reported in the first quarter of 2007. As we mentioned previously Q1 ’08 included about $2.9 million in net revenue related to our annual customer and vendor meeting.

Excluding this meeting related revenue our Spend Management segment net revenue increased 8.1% over the first quarter of 2007 as we continue to experience solid GPO growth as well as strength in our supply chain technology and consulting businesses. The growth in our Spend Management segment was somewhat muted by the abnormally high administrative fee revenue in the first quarter of 2007, due to the timing of vendor reporting received. As we have discussed the timing of vendor reporting is the trigger for our group purchasing businesses revenue recognition.

Turning to our adjusted EBITDA results, our consolidated adjusted EBITDA in the first quarter of 2008 was $16.0 million or a 27.3% margin versus consolidated pro forma adjusted EBITDA in the first quarter 2007 of $19.2 million or a 36.4% margin. Adjusted EBITDA in our revenue cycle management segment was $4.2 million or a 16.9% margin versus pro forma adjusted EBITDA of $7.6 million or a 31.0% margin in the first quarter a year ago. The decline in first quarter adjusted EBITDA margin in the RCM segment was driven by the factors previously discussed regarding segment revenue.

One point to reiterate however is that we continue to invest in our operating cost structure and our decision support and services businesses to support new customer implementations and anticipated revenue growth. In looking at the core growth of our RCM segment excluding the impact of a number of abnormal events, our growth was approximately 14%, as compared to the first quarter of 2007.

Adjusted EBITDA in the Spend Management segment was $16.0 million or a 47.6% margin versus $14.5 million or a 50.9% margin in the first quarter of 2007. The margin decline was due primarily to $3.2 million of costs related to the $2.9 million in revenue from our annual customer and vendor meeting, which occurred in the first quarter of this year versus the second quarter of last year.

Our corporate operations impacted total adjusted EBITDA by $4.2 million in the first quarter of 2008, a $1.4 million increase for the same quarter of 2007, due primarily to the added cost of being a publicly traded company, the addition of certain senior staff functions and a one-time non-cash charitable net donation.

Net income in the first quarter of 2008 was $2.7 million or $0.06 per diluted share versus a pro forma net loss attributable to common stockholders of $1.7 million or a $0.16 loss per diluted share in the first quarter a year ago. Adjusted diluted EPS in the first quarter of 2008 was $0.11 per diluted share which excluded non-cash acquisition related intangible amortization on a tax adjusted basis.

We recognized share based compensation expense of $1.7 million in the first quarter of 2008, which impacted EPS by $0.02 on an after-tax basis. Our share based compensation expense of $1.7 million was lower than anticipated given -- principally by a positive mark-to-market adjustment on certain common shares that required variable accounting.

Our net interest expense for the quarter of $3.4 million was slightly higher than anticipated due to the quarterly lock and timing of our base LIBOR rate and a less interest income generated of our cash balances. Our effective income tax rate for Q1 ’08 was 39.3%, which was lower than we anticipated.

The primary reason for this low effective income tax rate was our ability to reduce the limitation on the deductibility of our meals and entertainment expenses associated with our customer and vendor meetings. By properly communicating the meals and entertainment portion of reimbursement, we have shifted this limitation to those parties providing reimbursement.

Now turning to a few comments on our cash flows and balance sheet; our scheduled revenues or obligation payments to our customers primarily occurred twice a year in the first and third quarters, which is the primary contributor to the decline in both our cash balance and accrued revenue share obligation liability in the first quarter of 2008, as a result our net cash used in operating activities was $4.5 million in the quarter.

Capital expenditures in the quarter were $3.9 million and we ended March 2008 with cash and cash equivalents of approximately $128 million and total bank debt of approximately $198 million. You may also note on our balance sheet our accounts receivables increased by about $8.6 million of which approximately $5.2 million was related to advance billing of software and implementation fees related to a specific customer on the last day of the quarter.

Excluding the impact of this advanced billing our DSO’s for the quarter remained consistent with prior periods and with management expectations. In terms of our financial outlook today we’re reaffirming our financial guidance for 2008 on a standalone basis. Once we complete our pending acquisition of Accuro, we will update for the Accuro acquisition our full-year 2008 guidance and our high-level general outlook for 2009.

We expect total net revenue for 2008, to be in the range of $230 million to $236 million. Our RCM segment is expected to generate revenue between a $109 million and a $113 million and our Spend Management segment is expected to deliver net revenue between a $120 million and $124 million.

Our contracted revenue metric provides strong support for the revenue outlook of our business and give an 85% to 90% of our revenues are recurring, it is management’s best estimate of future revenues from existing customer contracts. As of March 31, 2008, our rolling 12 month contracted revenue was estimated at $206.9 million or approximately growth of 4.3% over the rolling 12 month total at the end of 2007.

Our rolling 12-month contracted revenue consist that $92.5 million from the Revenue Cycle Management segment and a $114.4 million from the Spend Management segment. Of note given the timing of our 2009 annual customer and vendor meeting is in the second quarter of next year. Our 331 ’08 rolling 12-month contracted revenue excludes the approximate $2.9 million of revenue to be generated from this meeting.

Our total adjusted EBITDA for 2008 is expected to be in the range of $71 million to $75 million with our margin between 31% and 32%. Full year 2008 GAAP diluted EPS is expected to be in the range of $0.28 to$0.36. Adjusted diluted EPS excluding non-cash acquisition related intangible amortization is expected to be $0.48 to $0.56.

In addition we estimate our non-cash share-based compensation expense will impact EPS by approximately a $0.11 per diluted share in 2008. For the reconciling items between adjusted EBITDA and net income for 2008 guidance please refer to our earnings press release. Although, we are not providing specific quarterly guidance, I do want to provide some insights into the business trends for the remainder of 2008.

Specifically first, the majority of the positive variants in Spend Management revenue in the first quarter was a result of timing of revenue recognized that was originally planned to occur in the remaining quarters of the year. Second, we expect RCM segment revenue to grow between 3% and 5% sequentially in the second quarter.

Third, our fourth quarter revenue for both the spend management and revenue cycle management segment is expected to be very strong given the timing of revenue recognition associated with current signed customer contracts that are in various stages of implementation and finally from an EBITDA margin prospective we would anticipate second quarter margins to improve by approximately 150 basis points as compared to first quarter of 2008.

For the remaining quarters, we would expect EBITDA margins to continue to increase based on increased revenues and a relatively fixed cost structure. Our 2009 outlook continues to be very positive and remains consistent with our prior call’s guidance. This outlook in confidence is based on the underlying strength of our customer contract and implementation trends.

We have signed a number of sizeable new customer agreements in late 2007 and early here in 2008. That will have a substantial impact on 2009 financial results not 2008 due to the timing of contract signings, implementation and associated revenue recognition. It is important to point out that our business will enter 2009 with tremendous strength based on our outlook for the second half and in particular fourth quarter of this year.

In summary, we believe we have an extremely stable business profile for a young growth company and an incredibly strong free cash flow conversion. Our Spend Management business segment generates positive working capital as it grows given its revenue recognition closely correlates with cash collection and does not hold inventory.

On the Revenue Cycle Management side as we grow, our only working capital need is generated from our need of finance our accounts receivable growth. Combining our two segments our working capital needs as we grow are essentially neutral. With that I would like to thank you for your time this afternoon and at this point I would like to open the call up to questions. Cara?

Question and Answer

Operator

(Operator Instructions) Your first question comes from the line of Larry Marsh with Lehman Brothers.

Larry Marsh – Lehman Brothers

Thanks and yeah good afternoon everyone. I just wanted to maybe drilldown on the revenue cycle business in a minute. I know where you are and what we talked a little but about the delay of the decision support and the communicated today change in management and also step down in maintenance fee is your largest customer, how do we think -- and as you think your timing of the rollout of the new decisions support system is consistent with what you had been sending and how do we think of that product category, oppose to the Accuro acquisition?

John Bardis

Well, Larry I think there is good news for us and that we will be releasing the fuller version this year. We feel solid about that and what we said all along. The product itself is the only full enterprise software solution that we have. The rest of those -- of the tools that we have both with Accuro and currently our ASP based point solution software, our products that address very specific behaviors in the revenue cycle. One of the things that we liked very much about the decision support tool is that the data that tends to be produced in the point solution revenue cycle software that we have and Accuro has can then be manipulated and managed by the decision support software of Avega and creating screenshots graphs direction, budgeting and analysis for the performance and operation of both the revenue cycle and the cost infrastructure of the hospital. So, we continue to believe that decision support linked to the data coming from these ASP revenue cycle tools and our spend management data set is a critical piece to consolidating and managing that information of the client level.

Larry Marsh – Lehman Brothers

So, John so just to be clear you are still targeting a second half rollout of that this product and is there anyway to allow a little bit more the management you made?

John Bardis

Yes, the answer to the first question Larry is yes we will roll this product out in the second half and as far as the management change is concerned what we did is we changed specific leadership of that division and brought in a General Manager who’s got experience in leading people and we have already made a lot of progress in working with the development team on what we call V4 or Version 4.0 and have gotten very specific timelines established and really quite frankly have freed them up to just execute. I think there was -- tend to be in our part a little bit of paralysis associated with the process that we needed to get going by simply releasing the people to do their work. So, we feel very good; in fact I feel better about were our vague is today that in any time and as we’re in the process right now with Vagua implementing the very largest customer they have ever gotten and that’s going very, very well; in fact we have received a substantial amount of cash that we’re yet able to recognize for that contract but that business is going well.

Neil Hunn

And well Larry and just -- this is Neil just track on to what’s John is saying there from a financial perspective, all of these factors we mentioned around the scheduled step-down of maintenance, we know about that for several years and have tried to communicate that in prior calls. The financial impact of all of this is in all of our guidance and has been for sometime.

Larry Marsh – Lehman Brothers

Okay and second then just how much more detail you can give us in terms of update around Accuro? Obviously you have communicated a timeline of just by the closing when you announced the acquisition here and the value for any highlighted Chuck Lauer and his team of sort of integrating -- when we talked that integration process is there any update that you can share with us in terms of customer and supplier feedback at this point?

John Bardis

Well our client’s feedback Larry has been very, very positive I would say unanimously positive. We have already received quite a bit of feedback specifically from our own clients and Accuro Senior management has received similar feedback themselves from their -- I would point out that the average between Accuro and MedAssets are both clients that we have in common and clients that we have separate of one another average of something like 2.5 products per client. With the potential for 25 products that we have together in our combined revenue cycle businesses, so what many of our customers are realizing is that while we are previously separate independent branded products that are either acquired or build by Accuro or by MedAssets were actually available from one resource today and that they find in dealing with one vendor that can provide those resources that that’s a positively set -- the feedback we are getting today. I will say you credit to John Carlyle the current CEO of Accuro and Brent McCarty their COO and Scott Mackesy who with the founding Investor of and Welsh Carson; they have built an absolutely outstanding company. In fact their software management and creation process actually is created for them tremendous amount of demand for their product, so they build essentially $75 million or $80 million business with only 15 sales people and that’s pretty impressive, but what they do is they build very, very good software.

Neil Hunn

Larry, this is Neil. Just on the mechanics of the deal, as we filed our HSR earlier this week, there’s really two things that have to happen to close the deal; one is work with the HSR process and the other is to complete the financing. We are filing tomorrow as an attachment to the Q, the amendment to our credit agreement, so the financing has been completed, so we can move pass that. We will give you all the details of what the impact of that will be when we update our guidance, when we close the acquisition, but you will see those details in the Q tomorrow. So, from a mechanics point of view the deal is progressing well, from an integration point of view, Chuck has done a great job leading the team, obviously we are still competitors until the deal closes and so we have sort of a clean team on our side that’s not in operations of the business but certainly planning for the integration from all the aspects.

Larry Marsh – Lehman Brothers

And just one final clarification for you Neil, you had said you had gotten resolution or in the T&E reimbursement during the quarter so should we anticipate a full year tax rate in the high 30’s?

Neil Hunn

So we are -- the audit is still on going, so we have not concluded the audit we have with the IRS on this issue. What we have done is we have changed the methodology in which we submit reimbursements or get reimbursed for the meeting that pushes some of this liability to the vendor of our meeting, so from that prospective we fell pretty good; what we don’t know Larry is what the pro forma impact for the Accuro acquisition is going to be on our tax rate and so that’s why for the time being, we are keeping it 42%, but we will certainly update that here in a month or two when we close the Accuro acquisition.

John Bardis

Larry, this is John and one other comment I would make is that, we are all positively encouraged that Accuro is actually a better company than it is advertised when we were originally introduces to; so they have actually been so far a positive surprises in terms of our interfacing..

Operator

Your next question comes from Corey Tobin with William Blair.

Corey Tobin - William Blair

Good afternoon everyone. Two quick ones, if I may, just picking up on the Accuro deal. Any change to the synergy assumptions as you continue to learn more about the opportunities of the combined businesses.

John Bardis

Well Corey, not really. We have got to get actually on the other side of earning the business, so we can get into a lot more details, so the same assumptions are in play right now.

Corey Tobin - William Blair

Okay, great and then shifting gears just to the second; John, you mentioned in your prepared remarks that you saw the revenue cycle management -- estimated where the revenue cycle management space going at about 8% to 10% per year. Just curious is that an internal number that you guys came up or is that based on an external source and can you provide some color on exactly what is behind that assumption? Thanks.

Neil Hunn

Corey if it’s okay, it’s Neil, I’ll take that one; the way we derive the 8% to 10% is through a multitude of sources, so it is probably a few real sources through HFMA but also in all of our acquisitions in the revenue cycle of XactiMed and at MD-X and at Accuro, we have commissioned proprietary market research around the customers and the size of the market and that’s where I sort of triangulate on that 8% to 10%. It’s important we -- the market that we defined as the ASP bolt on revenue cycle industry so it exclude the installed patient accounting systems for instance in that market, that market we view is going obviously a bit slower, but that’s the source of the 8% to 10%.

Corey Tobin - William Blair

So, your 8 to 10 % estimate is really a recurring revenue stream growth estimate?

Neil Hunn

That’s right.

Corey Tobin - William Blair

The right way to think about it?

Neil Hunn

That’s right for both the software and services and the ASP software and services that we provide it is recurring. That’s right.

Corey Tobin - William Blair

And based on what you’re seeing in the pipeline, but also what obviously your customer are telling you is -- do you see there is an upward bias to that number at this point and do you think that equity captures what you’re going to expect to see in the next few years?

John Bardis

It really depends on what you’re looking at; for example as I mentioned in the previous quarters conference call we’re experiencing our first interface on these transformation opportunities Corey and those are very large transactions, which somewhat skew the data northward from there. You don’t know enough yet to be able to tell if, its actually -- the market growth is actually bigger than that, but a number of these transformation opportunities that have emerged indicate that the market is shifting more rapidly to outsource solutions that include the ASP tools that we have as well as professional services interface to manage the back off of the revenue cycle so as to create a lasting approach that will function more efficiently than what history has shown and those are much larger transactions.

Operator

Your next quarter comes from the line of Len Podolsky with Piper Jaffray.

Len Podolsky – Piper Jaffray

Thank you. So we’re in probably month five or six of this auctioneered securities mass, so what’s the most recent feedback that you guys are getting from customers in this regard?

John Bardis

Len what we have learned is that some have been caught in it and others were not. For those who are it’s a real problem. In another words they are experiencing interest rates that are in some cases two and three times higher than what they had budgeted for and some of those are actually very successful and stable operating integrated delivery networks or hospitals. So, it’s largely dependent upon what instruments hospitals had used for their debt and so there is no consistent answer other than the ones that in fact were cost reduction rate securities in their portfolio -- as debt and securities in their debt portfolio; they have found themselves with unbudgeted expenses that were much higher on interest rate than what they expected and then that’s very real.

Len Podolsky – Piper Jaffray

Great and have they been successfully working through that; the ones that work hard in it?

John Bardis

Yeah, I’ll give you one example, but not the name. They think that they can get themselves extracted from these securities, but it's not something that happens overnight. The liquidity issue has really affected that, but the last I checked we have spoken to this individual CEO about 30 days ago and they were still struggling with it. They felt it would take them at least another 60 days to 90 days to GAAP from under it.

Len Podolsky – Piper Jaffray

Great, thank you for the comments and a couple of quick ones for Neil. Neil what was the second in those four growth drivers that you’ve discussed for the reminder of the year?

Neil Hunn

The second of the fourth.

Len Podolsky – Piper Jaffray

Yeah, sorry.

Neil Hunn

Sorry. On the -- is that the RCM segment growth?

Len Podolsky – Piper Jaffray

Yes.

Neil Hunn

So revenue cycle segment will grow 3% to 5% sequentially the revenue will sequentially over the first quarter.

Len Podolsky – Piper Jaffray

Yes and I think there is one more comment after that?

Neil Hunn

Then and just third and our fourth quarter in case that was it…

Len Podolsky – Piper Jaffray

Okay, got it and then could you clarify when is the earliest that you would expect to see revenue from our Ministry of Health. You said it was ’09 or’10 or 2010?

Neil Hunn

Len there is a possibility of a little less than $1 million of revenue that might come in the fourth quarter of this year or otherwise it's next year and the year after. The majority is certainly next year, the ’09 and 2010.

Operator

Your next question comes from lines Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank Securities

Yes on the sort of other side of the auction rate question, as a positive for the hospitals they had one of their better quarters in quite a while that was flue little helping and general admissions being up and then when you see sort of the general health of some of the hospitals improved, do you typically see more interest on at least the software side of the business or is that the market drivers there are more sort of a replacement cycle and just sort of general uptake of some of the newer products that you are seeing?

John Bardis

We see a fairly broad bandwidth of behaviors; let me be specific. We have seen hospitals that have historically remained ahead of the curve financially. In other words those that do well; continue to look around the corner and see a better revenue cycle software solutions now, but they haven’t changed. Where we have seen the environment to the negative impact to market is some -- two very large transformational of revenue cycle opportunities that have come to us and those are based on what are, what we would consider to be distress circumstances or potentially distressed circumstances. So, we have seen behavior both distressed and continuing positive of point -- though the institution’s total revenue cycle solutions and so the -- in both cases standard point solution revenue cycle software, we are selling point solutions and in the other case where we are doing a transformation or we are using that revenue cycle software to sustain the use of information once we’ve transform the office, the business office, so we are seeing it on both sides Ross.

Ross Muken - Deutsche Bank Securities

And Larry took most of my good questions on Accuro, but as we sort of look towards the acquisition close and clearly there was a lot of product overlap in terms of things you were developing and things that they are quite strong and should we see any sort of change on the expense side in product development relative to some of the R&D you were working on; I mean did those rationalizations take place now or probably post close?

Neil Hunn

Hi Ross this is Neil, I will take that one; certainly if there are any changes to the R&D cost structures, it will be at post close. What we are looking at sort of individually now we will be able to do more so on a detailed basis once we close the transaction, because we are competitors, so it hard to actually get into a lot of detail on competitive products in this period we are right now. As we will look to see how we can redeploy a lot of our existing R&D staff to develop new products because the list is very long for the things that we can develop and enhance. So I don’t know if you will necessarily see a lot of synergy through the R&D staff in the short run but certainly there are more products being released in the marketplace that will drive revenue.

Operator

(Operator Instructions) Your final question comes from the line of David Veal with Morgan Stanley.

David Veal -Morgan Stanley

With the Spend Management segment obviously we’ve got – there’s only 6% growth in gross admin fees and we have the lowest share back percentage we’ve seen in while, is that just lumpiness or is there any thing to read into the trends there?

John Bardis

David we are comping off a big first quarter, real big first quarter of last year because we had a big reporting quarter as that was sort on the tail end of transitioning into the as reported methodology of revenue recognition for us so a comp off a big quarter. For the revenue share, sort of the way we look at it is its inline with where the third and fourth quarters were last year; kind of conceptually if take sort of the revenue share against the gross fee line sort of in the 30.9%, 31% range in the first quarter, which is we would be sort of consistent with our outlook for both now and for the several next quarters?

David Veal -Morgan Stanley

Okay and one other question can you just remind of the details of the lock up here in a few weeks?

John Bardis

So, the June 9 or June 10 -- June 9, June 10. So, June 10 is when the lock up comes off.

David Veal -Morgan Stanley

And what's the numbers of share that comes unlocked?

John Bardis

Oh, the number of shares it’s -- when we did -- I don’t have the exact number David but when we signed the lock ups at the point of the IPO we had 95% locked up. So, that’s what will sort of technically come into the marketplace; will be available subject to the lock up being removed in the first part of June. Importantly, as you know though we've got several large private equity investors who were able to -- we did in the couple of years before we went public, recapped dividend and got a lot of their basis back to them and so they don’t -- as far as we understand they do not have fund pressures or timing issues to do anything in the near term and so that’s -- we sort of worked hard to control that and manage that.

David Veal -Morgan Stanley

And you had recent conversations with them about that or?

John Bardis

Yes, in last month or two.

Neil Hunn

The three largest would be Galen, Parthenon, Grotech and then the rest would be management. We are not aware of any or afraid of any of those three private investors selling or at possible lockup.

David Veal -Morgan Stanley

Right, okay, so your sense is that they could sense the type in a while?

Neil Hunn

Yes

John Bardis

And certainly David, if there was a lot of selling if you well, we will organize that and do an organized sell within S1 or S4.

Operator

There are no further questions. You may proceed with your presentation or any closing remarks.

John Bardis

Well on behalf of the management team I would like to thank all of you for taking the time to participate in our conference call this afternoon. In particular I would also like to thank our employees for their hard work and the support and helping MedAssets continue to deliver on our commitments to our customers.

I will tell you that this is the best group of people I have ever had the privilege to work with and it's because of their complete and then dying commitment to the US healthcare system in particular our hospitals to help them deliver care through improved financial performance. We are very excited about the opportunities ahead of us and in particular completing our acquisition of Accuro in a timely manner over the next month or two. We have been very impressed by the Accuro people and very impressed by the sprit and the culture of their business and also importantly their commitment to customer service and product excellence and we look forward to sharing our results with you next quarter and I thank you very much, enjoy your evening.

Operator

That concludes today's conference call. You may now disconnect.

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Source: MedAssets Inc Q1 2008 Earnings Call Transcript
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