HMS Holdings (HMSY) Q3 2017 Results - Earnings Call Transcript

HMS Holdings Corp. (NASDAQ:HMSY) Q3 2017 Earnings Call November 3, 2017 8:30 AM ET

Executives

Dennis Oakes - HMS Holdings Corp.

William C. Lucia - HMS Holdings Corp.

Jeffrey S. Sherman - HMS Holdings Corp.

Analysts

Nicholas M. Jansen - Raymond James & Associates, Inc.

Jamie Stockton - Wells Fargo Securities LLC

Sean Dodge - Jefferies LLC

Ryan S. Daniels - William Blair & Co. LLC

Mohan Naidu - Oppenheimer & Co., Inc.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Matthew D. Gillmor - Robert W. Baird & Co., Inc.

Frank Sparacino - First Analysis Securities Corp.

Steven Halper - Cantor Fitzgerald Securities

Operator

Good day, ladies and gentlemen, and welcome to the HMS Q3 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference, Mr. Dennis Oakes, for HMS Investor Relations. Please go ahead.

Dennis Oakes - HMS Holdings Corp.

Good morning, and welcome to the HMS third quarter 2017 earnings conference call. Joining me are Bill Lucia, our Chairman and Chief Executive Officer; and Jeff Sherman, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of our company website at hms.com. Today's earnings release as well as an investor slide presentation containing supplemental information are also available on our IR website.

In a few moments, Bill and Jeff will provide their perspective on our third quarter financial results as well as an update on our full-year outlook for 2017. Following the remarks, we will open the line for questions.

Before we get started, I would like to remind you that some of the statements we are making today are forward-looking statements, and are based on our current expectations and our view of business as we see it today. Such statements, including those regarding our revised full year financial outlook and future performance, are subject to risks and uncertainties that may cause actual results to differ materially and should be considered in conjunction with the cautionary statements in today's earnings release, and risk factors described in the company's most recent SEC filings including our 2016 Form 10-K. The financial results in today's earnings release reflect preliminary results, which are not final until our third quarter Form 10-Q is filed.

Finally, we may refer to certain non-GAAP measures this morning. A reconciliation of those measures to GAAP is included in both our earnings release and our investor presentation.

We're now ready to begin. Bill?

William C. Lucia - HMS Holdings Corp.

Thank you, Dennis, and good morning, everyone. We have taken steps, number of steps throughout 2017, designed to achieve the annual growth we've projected when the year began. Those include investments in our big data platform and the use of technology to streamline operations, internal yield enhancement activities focused on payment integrity and COB, our ink-to-green initiative with an emphasis on both increasing the number of implantations and reducing the time for completing each project, and our ongoing sales activity, which is focused on expanding the existing relationships and signing new logos.

Despite those efforts, our third quarter financial performance was below expectations, due principally to three factors; we did not get the lift we expected from payment integrity implementations and yield advancements, run rate Eliza revenue was flat sequentially, and we experienced an unexpected drop in COB revenue from the second quarter. Though, our year-to-date COB revenue is up quite nicely. We expected the investments we have made this year in people, technology, process improvements, innovation and new product offerings, would spur revenue growth both immediately and over time, but simply did not see the anticipated short-term payback in the third quarter.

Importantly, our customers are pleased with the results we deliver every day, as evidenced by robust sales of our heritage COB and PI solutions. Those sales included two new commercial customers with about 700 lives added in the third quarter. We also recently won a new seven-year contract with the Commonwealth of Massachusetts, and the State of Connecticut extended our existing contract for three years. Both states included an expanded scope of service. So, our state government business continues to be a source of future growth.

Additionally, April acquisition of Eliza significantly expanded the solution set we can now offer. I have personally been on a number of Eliza's sales calls with existing HMS customers and we are receiving a very positive reaction. In fact, we have already closed two cross sales which should generate revenue before year-end and contribute to what we expect will be a solid fourth quarter finish for Eliza.

I also want to point out that Eliza implementations typically happen much more rapidly than PI or COB. The usual cycle from sale to revenue is only 30 days to 60 days and we utilize a separate implementations team. As Eliza revenue grows, this revenue diversification will be a significant plus.

Year-to-date sales have created an implementation backlog which bodes well for future revenue growth, but also highlights the ongoing need to improve the operations associated with converting sold business to expected revenue. We do understand what needs to be done to boost revenue growth next quarter and have plans in place to do so.

The revenue shortfall this quarter will prevent us from meeting some key full-year 2017 objectives. We are confident, however, that the strategy and tactics we have been pursuing in recent quarters to both grow our payment integrity and coordination of benefits and to capitalize on an expanded addressable market with a move into health management and member engagement positions us well for the growth we are expecting. We are working diligently to improve financial results by year end.

Jeff will now provide a more detailed review of our third quarter performance and revised full-year outlook for revenue and margin. Jeff?

Jeffrey S. Sherman - HMS Holdings Corp.

Thank you, Bill, and good morning. I want to provide as much color as possible on the reasons our projections did not play out as expected in the third quarter, our current view of the fourth quarter and what we are doing to achieve year end and future revenue growth.

Let me begin by reviewing the factors which impacted our third quarter performance. Though we've made steady progress over the past several quarters in our effort to increase our capacity to implement sold business and accelerate revenue generation, much more remains to be done. We have not gotten ahead of the curve, because sales in recent quarters have outpaced our improved implementation capacity. We have been intensely focused throughout this year on further improving the ink-to-green process and removing any roadblocks to executing against our internal plan, particularly with respect to payment integrity revenue.

One area of current focus is the multiple IC platforms and applications we have in place, which complicate already complex integrations with customers and can present challenges as we seek to implement new sales. Our 2018 budget will include incremental investments in our IT infrastructure in order to enhance our speed-to-market and lower per unit cost, which should drive revenue and margin growth. Going into the fourth quarter, we have realigned resources to focus on the implementations we expect will have the greatest short-term revenue impact for both our customers and HMS.

Looking ahead to next year, we plan to add resources in order to significantly increase our implementation throughput. Payment integrity revenues, despite our best efforts, declined from the third quarter of last year and the prior quarter. Compared to the prior-year quarter, the declines were across several accounts and for a variety of reasons. For example, we conducted short-stay audits for two large national account customers in the year-ago quarter, which generated more than $1.5 million and neither did similar audits this quarter.

As we mentioned on our last earnings call, the first dollars of PI revenue are not typically produced for 90 days to 120 days, even after successful implementation and the go live launch. That process can be further elongated based on customer internal considerations, including concerns about the impact on their provider networks. Audits delayed at the request of customers for example, negatively impacted planned third quarter revenue, though we expect some will resume in the fourth quarter.

We are in the early stages of applying technology and machine learning to the entire payment integrity process in order to increase our capacity, to identify potential errors with enhanced accuracy, stratify those with the most potential for the highest recovery dollars, and significantly step up the number of medical record reviews that nurses and coders can complete.

We have achieved a number of internal measures of progress in recent months, including significantly increasing the number of records reviewed per day, and recording a large jump in the number of medical records requested for review in September. Though such increases are only early indicators of potential revenue enhancement in PI, we expect their impact will be evident beginning in the fourth quarter.

Eliza revenue was flat with the prior-quarter run rate, which was several million dollars below our internal projection and inconsistent with the historical pattern of higher second half revenue as customers focused on identifying and closing gaps in care. We are working through the typical integration challenges of any acquisition and we accomplished a great deal in the quarter in terms of internal reorganization of the Eliza sales operation, but doing so impacted our ability to generate the incremental revenue we expected.

In addition to combining the Eliza's sales force with HMS sales team, we setup an account management function for the first time. This bifurcation of sales and account management is similar to what we've historically had in place at HMS for our commercial business and is an example of investments we are making to ensure excellence in customer service in order to drive sustained growth over the long-term.

Just six months post the Eliza acquisition, we see customer interest building, which we anticipate will lead to cross sales of the Eliza member engagement solution into the HMS customer base, particularly with the mid-size and larger regional Medicaid managed care plans and Medicare Advantage plans where our work to improve HEDIS scores and star ratings has tangible top-line impact for customers. We prioritized more than 60 existing HMS customers for the first wave of these cross sales and initial client meetings began in the third quarter.

COB revenue in the quarter of approximately $90 million, was up over 4% compared to the year-ago quarter and year-to-date COB revenue is up 7%. It was down over $8 million sequentially; however, though the second quarter was our highest COB quarter ever, so a difficult comp. It is certainly not unusual for some revenue to be pushed into future quarters, but we ordinarily have roughly offsetting unplanned revenue, which was not the case this quarter.

COB is our core offering, consistently generating in excess of 70% of annual revenue. So, it is important to note that we anticipate most of the COB revenue we planned for this quarter, will be realized in future quarters, and we expect continued growth in our COB business via new sales and yield enhancements. None of the issues, which arose in the third quarter, appear to be systemic or permanent changes.

Operating cash flow was strong at $34 million compared to about $9 million in the prior quarter, and adjusted EBITDA was $34 million compared to $26 million in the year-ago quarter. Cash at quarter end was close to $80 million, as we continue to rebuild liquidity following the April purchase of Eliza.

As we announced this morning, our board has authorized a new $50 million share buyback program. We view share repurchases as an important component of prudent capital allocation and consistent with our overall commitment to building shareholder value. Our strong cash flow gives us the ability to both invest in the business, including future acquisitions and return cash to shareholders via share repurchases.

Based on the third quarter results and current expectations, we are updating our revenue and margin outlook for the fourth quarter and full-year 2017 as follows. We expect fourth quarter revenue of approximately $135 million to $140 million, which translates to full year total revenue of approximately $508 million to $513 million, and we do not expect to achieve the full-year margin expansion we projected, even excluding the impact of Eliza, as it was largely dependent upon the revenue growth we anticipated. The inherent leveragability in our model, however, should support operating margin improvement next year and beyond.

We have a number of action plans in place to achieve the projected sequentially quarterly revenue growth in the fourth quarter. They include priority COB and PI implementations and several special projects with customers, as well as various yield improvement initiatives. Year-end state projects and a push by our helpline customers to meet full-year revenue targets typically make the final quarter of the year our biggest revenue quarter. It is an ongoing challenge to forecast revenue with quarterly precision as our third quarter results demonstrated, while we believe we are well positioned to achieve our revised fourth quarter objectives.

Bill will now have brief closing remarks and then, we'll be ready for your questions. Bill?

William C. Lucia - HMS Holdings Corp.

Thank you, Jeff. I certainly recognize the results this quarter are disappointing for our investors, my colleagues at HMS, and all of those who have a stake in our success. But, I do want to assure everyone, however, that the executive team and our board of directors are enthusiastic about the company's growth prospects and fully committed to producing the financial results we know the company is capable of. We offer very attractive and truly differentiated solutions for risk-bearing entities that are seeking to contain costs and improve clinical outcomes by effectively engaging with their members.

To illustrate that point, I want to briefly mention how Eliza mobilize resources to help health plan members impacted by the recent hurricanes. One client identified several hundred thousand individuals who they anticipated might run out of life-sustaining drugs, including insulin and seizure medications during the impending storms. Within 24 hours, Eliza put in place an electronic communication plan to let those members know they were pre-approved for early refills, so they could pick up their medications before the storms hit or they had to evacuate.

We assisted another client with outreach to about 250,000 of their members providing health-related tips on hurricane preparedness. We received extremely positive feedback from our customers for those activities, because their members reacted very favorably to the unexpected outreach. Insightful industry observers like Gartner have identified the consumer experience as a key driver of success for health plans, and health plan executives echoed that sentiment at a recent forum we hosted for thought leaders. The sophistication of what Eliza can do to engage health plan members, puts HMS at the forefront of the move by payers to be more consumer-centric in their thinking and their actions.

In addition to the acquisition of the health management and member engagement vertical, we have made numerous investments in our growth over the past year. For a variety of reasons, we have experienced growing pains, which impacted our third quarter performance. We believe the substantial leverage inherent in our business model will be more evident in coming quarters and we will continue to work as diligently as we can to ensure that progress is manifested in our financial results as quickly as possible.

We are now ready for the first question.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Nicholas Jansen from Raymond James. Your line is now open.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Hey, guys. Thanks for the color. I just want to dig a little bit into the organic growth of the business and how we should be thinking about this outlook in the future. I think in the third quarter, excluding kind of Medicare RAC, you had modestly negative organic growth. I think the implied guidance for 4Q would suggest kind of flattish or so. So, just trying to get a sense of how we should be thinking about the growth profile of the business. I certainly understand the moving parts, but can this business be a stronger organic growth store relative to what we're seeing right now? Thanks.

Jeffrey S. Sherman - HMS Holdings Corp.

Hi, Nick. This is Jeff. Yeah, I do think we certainly feel confident that the organic component of our business, excluding Eliza, has the ability to grow and that we can get leverage off of that. I mean, we have a scalable business model with core infrastructure in place. So, from a from a leverage standpoint, incremental revenues coming in, we believe will come in at higher than company margins, incremental company margins. So, from a growth perspective, both in COB and payment integrity side, we've done a lot of work this year to position ourselves for growth. We simply haven't seen it in this quarter.

And then, on the Eliza side, we think the Eliza book of business can grow double-digits as we move into the next year. And we'll certainly give more color on that when we do our guidance in February.

William C. Lucia - HMS Holdings Corp.

And look, let me make a couple other points, because I think it's important. And, I'm sure other people say this, but the truth is, in this case, one quarter, a trend does not make. And in reality, our COB business and I've been at COB almost 20 years now. Every quarter, there's puts and calls. There is a whole list of activities we're expecting third-party payers to complete. There's a whole list of audits we're expecting our clients to approve. And in this quarter, some of those things didn't happen.

Now, typically, in COB, what that means is, they're pushed to the next quarter or the following quarter, but we don't lose them. So, it's not a business where the money just goes away. In this case, we settle – we completed settlement with the third-party payer; in the next quarter, we get an increase of cash receipts that we didn't have from those payers in this past quarter. So, that's part of the lumpiness in the COB business. It's just that this quarter, we had that and our yield enhancements didn't hit what we expected. So, we do expect to see them in Q4 and Q1.

So, our bullishness about the business and its growth potential, and particularly the residence of our clients, when we go out and talk to our clients and them understanding the connection between our heritage businesses and Eliza, is very, very promising.

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. And I would say, the largest variance to our expectations in the quarter related to COB revenue, Q2 was our highest COB revenue quarter ever, and we experienced an unusual drop in the third quarter. As we discussed in our – on our prepared remarks, most of the variance related to timing delays and we expect our revenue to flow through over the next couple of quarters.

On the PI side of our business, we have made tangible progress in both the number of medical records requested and reviewed, particularly seeing that increase in September and October, which should lead to increased PI revenue as those claims are worked. And we are continuing to refine the implementation process, which will have an impact both on PI and COB.

And then, finally with Eliza, we are making, we believe, the necessary investments and organizational changes to position the business for long-term success.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Thanks for all that color. And then, just my follow-up would just be on margins. They were actually pretty strong in the quarter even though the revenue was a little bit light, so maybe just walk me through this kind of sustainable versus maybe some incentive comp being pushed out? Thanks.

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. So, obviously, with results coming in lower than expected, we did have some adjustments in our expected bonus payments that favorably impacted comp expense in the quarter, but we did have some increased stock comp expense as well. And really from that standpoint, we had a number of executives that are approaching age 60 that have significant stock holdings. And based upon our long-term incentive plan, we had to start accelerating investing on some of the equity. So, that hit us in the quarter for several million dollars as well.

I think inherently, as we think about the business though, I think we've done a good job of managing costs with our revenue profile. And with our core cost infrastructure in place, adding incremental revenue for all of our product lines should generate incremental margins above the company's average margins. And so, we do see the ability to expand margins over time with revenue growth.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Thanks. I'll hop back in queue.

Operator

Thank you. Our next question comes from Jamie Stockton from Wells Fargo. Your line is open.

Jamie Stockton - Wells Fargo Securities LLC

Hey, good morning. I guess, maybe first on the program integrity business. How much of this, if you can try to quantify for us, is getting contracts live, which you guys have talked about being an issue for a number of quarters, and I think that it's hard I think for a lot of people to understand, like why that would continue to be an issue for such a long period of time versus health plans just not wanting to put the screws to providers with more aggressive audits in what might be an environment where utilization is weak and mix is shifting, and providers' fundamentals don't look very good. So, can you help us understand how those two things are impacting the ramp of that business relative to each other?

William C. Lucia - HMS Holdings Corp.

Yeah. Thanks for that question, Jamie. It's Bill. I'll start. Let me address ink-to-green, because I know this is a frustration for our investors and clearly a frustration for ourselves as well. This year we did work hard to have faster implementations and to significantly increase our quarterly capacity, but we just didn't make as much progress as we had planned. So, we have done a top-to-bottom double-down on review of every operational step from the time we sell a piece of business through to the time we actually generate our first dollar of recoveries or revenue, and a complete review of our data, ingestion engines, our proprietary systems, our analytics, all of that has been done. We now have a roadmap to move forward on a more accelerated basis and are making the necessary investments in the specific spots in the implementation process that we have to make, and some of that is putting some more sales engineering efforts upfront. So, we are lockstep with the clients instead of experiencing some of the client delays we have.

On the other part about the payers not wanting to irritate the providers and being concerned about that, look, we live with that all the time. I don't know if it's at a heightened state at this point, I think it's always been an issue and it ebbs and flows for a lot of reasons. If a payer is very concerned about provider Net Promoter Scores, if there are specific providers that they exclude from audits because they're negotiating with them, there might be a Medicaid agency that doesn't want us to audit a children's hospital in a specific quarter, those happen all the time. Interestingly, even though you talk a little bit about depressed utilization, for our company year-over-year, if you just look at gross claim dollars coming through our ingestion engines, they're up pretty significantly. So, that to me is a leading indicator that the growth profile, organic growth profile of our business is continuing and will continue to be strong, will rebound from this quarter.

I'll let Jeff give a little more color on PI, because we have been digging deep into it. At the beginning of the year, we put Doug Williams over it and he has done a complete top-to-bottom review, reorganized the function to accelerate that product line. But Jeff, do you want to give a little more color on it?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. I think a couple of points. I would say to one of Bill's key points, we haven't seen any diminished demand from our customers on doing the PI work that we do. We did have some specific instances where I noted in my prepared remarks, short-stay audits, we did some large ones last year and those weren't repeated this year. So, there is a individual specific area that we've had ebbs and flows in, but we also have other customers signing on short-stay audits, which continue to be good audits for us. But, the PI products are just much more complex to implement than COB contracts and they just take longer before they're revenue producing. Factors include client collaboration, availability of IT, and other customer resources that are critical factors in the process.

But, as Bill mentioned, we've reengineered our entire PI implementation process, including the development of new PI edits, getting customer approval to implement the edits, assisting with provider notifications in order to minimize network abrasion. And I think, finally, for us, just with the amount of work that needs to be done, we've really dissected the whole implementation process kind of by buckets of time and have groups of individuals working to reduce each of those buckets from pre-contract signing, to getting data, to working with the data, developing edits, and getting our work done on the back side once we get the data.

So, I think we have done a comprehensive review. As I said in my remarks, we have seen both the number of claims being reviewed go up quite a bit and the number of medical records we have requested increase quite a bit over the last several months. So, I think we're seeing that, but we also had this 90-day to 120-day lag, as we do work for it to start producing revenue.

Jamie Stockton - Wells Fargo Securities LLC

Okay. And then, maybe just two quick follow-ups. One, the 2016 bookings from program integrity seem to be really strong. Can you just clarify whether that stuff has gone live at this point? And really, what we're talking about trying to get live is stuff that's been booked in 2017? And then...

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. I would say – I'm sorry, Jeremy. Go ahead.

Jamie Stockton - Wells Fargo Securities LLC

Well, the other one was just if you could actually quantify how much incentive comp was maybe reversed in Q3, just so that we have some sense of how expenses are likely to trend in Q4?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. In terms of reduction, there was about a $2 million-plus reduction in incentive comp in the quarter. And...

Jamie Stockton - Wells Fargo Securities LLC

And then, whether all the PI bookings from 2016 has actually gone live at this point?

Jeffrey S. Sherman - HMS Holdings Corp.

No. No. They haven't all gone live. In fact, I would say on the large sale we announced in mid-2016, that's really now starting, we expect that to be producing revenue on the commercial side in the fourth quarter of this year. So, that was a large national account, it was very complex, we had to work through a lot of provider exclusions and complexity in getting that up.

And so, again, that was, one, we expected would be hitting in both the second and the third quarter. It now will start producing revenue in the fourth quarter. And so, I'd say, our overall implementation queue has actually grown. So, as we have continued to sell, our implementation queue has grown. So, we still have some from 2016 that are flowing through the process, and certainly, the sales in 2017. And so, as we think about going into 2018, the focus is on adding resources and continuing to refine that implementation process to do those quicker, and that will be part of our revenue growth in 2018.

Jamie Stockton - Wells Fargo Securities LLC

Okay. Thank you.

Operator

Thank you. Our next question comes from Sean Dodge from Jefferies. Your line is open.

Sean Dodge - Jefferies LLC

Yeah. And good morning. Thanks. Jeff, on the last comment you made there about the implementation queue growing, your new commercial sales in the quarter, the mix of business you signed inverted. It's usually about two-thirds coordination of benefits and now it's about two-thirds program integrity and analytics. And we also saw a pretty big number of lives involved with over $19 million. Is this signaling some traction you're getting with the newer care management offerings or is it particular strength in PI? It looks like a business you signed during the quarter was pretty encouraging, anything – any color you could add there would be helpful?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. So, of the $19 million we had, we signed some – a good size PI contract with a large national plan to do some new types of audits that we haven't been doing recently. So, that certainly was a driver. But I'd say, the mix between COB and PI can fluctuate from quarter-to-quarter. We've seen more of the growth coming from PI. I think, again going back to that, we haven't seen a diminished demand for PI products. I think, for us, it continues to be about how we execute that and deliver results to customers. And if we can do that successfully, and we certainly believe we can, we'll continue to see growth in that piece of the business.

Sean Dodge - Jefferies LLC

Okay. And then, both, you and Bill mentioned Eliza deviating a bit from historical norms and not getting the step-up in revenue you expected in the quarter. Have you been able to put your finger on specifically what happened there? And is it similar to COB where that's more of just a timing issue you think or is this, in this case, something a little bit more structural or systemic?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. Again, I don't think we've seen a fundamental change in any of the demand characteristics of the market. I think we're going through what we've characterized as just some normal integration work. We did have some of the sales team that have left or that we have asked to leave as we moved into the Eliza operations. And so, we've had to rebuild some of the sales in operation. We did put an HMS executive in-charge of that, as well as some of our other care management sale operation. So, we've got kind of a – one executive kind of leading the charge on the sales of that.

Bill made some remarks in this and from his standpoint, he can certainly add to this. But I would say, based upon our client interaction so far, we're receiving very positive feedback from our existing legacy HMS customers on what the Eliza service offering can provide. And so, I think we're excited as we go into 2018 about the prospects of Eliza and pairing it up with our Essette Care Management platform and also pairing it up with our member health profile risk stratification product we've talked about. We think we have a fairly comprehensive approach that we can go to market with, and we're starting to get traction on that. Bill, I don't know if you want anything to that?

William C. Lucia - HMS Holdings Corp.

Yeah. I mean, look, I think there's macro trends that are clearly in our favor with Eliza. There's just a growing importance of quality measurements across the board in Medicare and Medicaid as financial incentives for health plans. And so, closing gaps and improving outcomes is critical. I think this increased emphasis on care management for the at-risk community, so again, the government programs and commercial at-risk, that many plans are really taking an interest in how do we become more consumer oriented. Remember, the plans traditionally, their employers were their clients, let's say government was viewed as their client or the provider. There's been a big shift and we heard this from industry leaders to consumers being their customers and how do we start focusing on that. And so, Eliza's tools really help them.

And then, I would add that member satisfaction is key to retention. And so, a lot of our retention programs are seen very favorably in the marketplace. And then, lastly, we've been getting a lot of feedback that all of the – as you've probably seen, maybe even your – and your health plan or across the board, there is wellness apps, there is disease management programs, there is incentive programs, there is a ton of different tools that payers are trying to get members to adopt, particularly in the Medicaid space, to be able to improve outcomes. They're starting to see and even these vendors that produce these applications Eliza as the tip of the spear to drive more enrollment for utilization and adoption of these services.

So – and that's for Eliza. I want to say relatively simple for the rest of the world to do, not so simple; and that's because of our very detailed way to do customer segmentation and understanding the modality of outreach still responsive. So, we're finding new used cases for Eliza as we go to market. We're not happy that it's flat year-over-year, but we are very bullish about the opportunities in the future and those are things that we're diligently working on throughout the organization.

Sean Dodge - Jefferies LLC

That's very helpful. Thank you.

Operator

Thank you. Our next question comes from Ryan Daniels from William Blair. Your line is open.

Ryan S. Daniels - William Blair & Co. LLC

Yeah. Thanks for taking the question. Bill, one for you. I'm curious with the issues you've had with the ink-to-green initiatives, if it's caused any client turnover or competitive issues, meaning that you haven't been able to generate the savings for them as well and recognize your revenue on the time period perhaps you thought, is that causing any consternation in the end market or in your existing client base?

William C. Lucia - HMS Holdings Corp.

Really, no, and let me explain why. So, most – so I would say and I'm going to just throw some numbers out here, but more than a third of our implementations are some delay that's caused by our customer. And that's – they can't get us the right amount of data – the right data, the right format, we're still determining with them, what does this field mean in their system versus every other system we work with. I mean, it's very complex, right.

So, there is a portion where they understand it's a delay on their side and that doesn't – they don't really look at HMS and say, well, HMS you're delayed, they get it. We're working hard at that to make sure that we understand that much earlier in the sales process and are probably going to revise our implementation processes in a way where we're not leaving the client till we get it.

The other is, on the ones where we're delayed, in reality, we've shortened that timeframe. So, we've, in a number of cases, call it 30 days or 60 days off of HMS' process. So, we've made the most impact on shortening our timeframe. So, we've not lost any customers through the process, none have backed down and said, stop the implementation, we're not interested. We always have customers who will put stuff on hold because they have competing priorities, even though we generate revenue for them or recoveries. We always have customers who throw exclusions in, meaning, don't audit this network because we're having a discussion with them or we want to be particularly sensitive to them. Those are unforeseen.

But, we've not lost any business to competitors and net-net, we're still adding to the customer base, which again, I think, bodes very well for the future. Now, we got to get through the backlog in a more even more aggressive manner than we have in the past. And the entire executive team is focused on doing that.

Jeffrey S. Sherman - HMS Holdings Corp.

And the only thing I would add on that is, different companies doing payment integrity work have different levels of areas that they focus on an expertise. So, there's always a range of different types of audits and success you could have, because not everybody is focusing on the same type of audit. So, there's always that driver in the marketplace as well.

Ryan S. Daniels - William Blair & Co. LLC

Okay. And then, I want to ask a follow-up to Jamie Stockton's question, maybe just a little more explicitly. We have seen clearly managed care doing well and healthcare providers not doing well with utilization being lower. So, I'm curious, specifically, if you think given that you saw weakness pretty much everywhere, both COB, program integrity and Eliza, is there just less urgency than normal in your client base to do these audits, because they're already seeing good profits because they might already be at MLR ratios, such that further improvement doesn't benefit them on a one-to-one basis, things of that nature, so that we're going through a little bit of a transitory headwind as well. I know that's hard to predict, but I'm curious of what your thoughts are on that specific topic?

William C. Lucia - HMS Holdings Corp.

So, Ryan, let me start and then I'll let Jeff add some color. As I mentioned, the gross claim dollars and number of claims coming into the company from this time last year to this time this year has increased significantly. Now, part of that is obviously we've added more clients, right, because we're heavy in the Medicaid managed care space, our clients have added new states. But net-net, we're seeing more dollars flowing through our systems.

On COB, I'll remind everybody, it's federal law. So, it's not like a client can say, you know what, don't pursue these third parties, because their audit, the state is audited by the feds, the plans are audited by the state. So, you have I think it's 90 days from the date you identify a third-party that you have to begin pursuit of recoveries.

So, on the COB business compared to payment integrity and this is what I think sets us apart, on the COB business, it is regulatory, it's mandatory and you have to pursue the dollars. And in fact, there is legislation sitting in Congress to put even more teeth into that. So, I don't think you will ever see – again, like I said before, quarterly, there is puts and calls this quarter, we had the same list that we're bullish about the things to happen that just didn't happen. That stuff is going to move into Q4 and Q1. I'm confident about that.

I think PI is a little different. I think some of the factors you brought up may exist in PI, but I got to tell you we've not had any clients come to us and say, you know, our MOR is better, don't do recoveries and we're actually on the state side. There is a number of our Medicaid RAC accounts that are growing. So, I would say that on a PI perspective, we really haven't seen the general pushback. It's the same typical, don't audit this network this quarter or we're going to put it on hold because we're getting some things together with our systems or they're putting in a new measurement system, because they have all – all the vendors work with one what's called a tagging system, so that we go in and tag claims. But Jeff, do you want to give some more color on that?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. I only have a couple other comments to add. So, for both managed Medicaid and Medicare Advantage plans, I mean, they're competing with a fixed capitated amount of premium dollar they're working with. And so, I think they're always going to be looking to try and optimize that. And utilization and claims costs can fluctuate for them as well over time. So, I don't think we've seen that diminish any demand.

And then, on the commercial marketplace, particularly, roughly half of the commercial marketplace is ASO. ASO, self-insured large employers that are utilizing the health plans do this work, and we're just seeing growing interest from some of the channel partners we're working with to go after that business and actually provide more services from the payment integrity side, really benefiting directly the large employers. So, those benefits would be going to the large self-funded employers and there hasn't been as much activity particularly in the payment integrity side for that component of the business, and we do see some growing opportunities there.

Ryan S. Daniels - William Blair & Co. LLC

Okay. Thanks for the color.

Operator

Thank you. Our next question comes from Mohan Naidu from Oppenheimer. Your line is open.

Mohan Naidu - Oppenheimer & Co., Inc.

Thanks for taking my questions. So, Bill, Jeff, I just want to go back on to Eliza a little bit. I understand the sales disruption there. Was there any disruption to the existing contracts that impacted your revenues and was there any dispute or disruption to the day-to-day operations that might have caused any customer attrition in that business?

William C. Lucia - HMS Holdings Corp.

No, Mohan. There really hasn't been, I mean, a sizable chunk of the Eliza business, is a SaaS model, a recurring revenue model component of the business, and we like that aspect of it, it's revenue diversification for us, it tends to be pretty sticky, because it includes comprehensive targeting for customers, as well as comprehensive outreach programs for them. A lot of the transactional work is, we tend to do it each year at the same time for large national customers and regional and smaller clients as well. So, there's really been no operational disruption. And I think other than we'd characterize as kind of the normal challenges of just bringing two companies together and the cultures, and just working through those, I would all characterize that as fairly typical. But no major losses of customers that have impacted results up to this point. And actually, I would say we've had significant outreach to legacy HMS customer base, and really I think seeing good traction to sell the Eliza platform into our existing customer base.

Jeffrey S. Sherman - HMS Holdings Corp.

I think the other thing I would mention is, we did sign a large national Medicaid plan for Eliza. That plan, and in fact, most of our large national Medicaid plans bring the accounts up, whether it's PI, COB or Eliza state-by-state. And it took longer to ink the master services agreement than we had thought. So, we'll now be rolling that out market-by-market for them. We had expected that to come in faster than or get results faster than it had. So, now that we'll be able to roll that out market-by-market, we'll have even better success stories for that client than the first state that was implemented.

Mohan Naidu - Oppenheimer & Co., Inc.

Okay. Got it. And maybe just following up on that one. Does the disruption that you're seeing with Eliza, does it change your view or pace of acquisitions that you might do in this area?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. Again, I wouldn't characterize it as a disruption, I would characterize it as just normal integration work that we're doing. It's the second acquisition that we've done in the last five-plus years. I think we did a lot of due diligence on it, we had a lot of people involved. As Bill said earlier, nothing has changed our excitement about the acquisition based upon our contacts with customers, the products they deliver or the value proposition that they bring to both HMS' product suite into our existing customers. So, I think it's our second one. We're getting better at it. We're building the muscle in the playbook to actually bring in additional acquisitions. So, I don't look at it as anything other than normal challenges that we're working through. And again, as we continue to build liquidity, I think we'll look to deploy that liquidity strategically going forward and M&A is going to remain a top priority to help further complement our existing product suite.

Mohan Naidu - Oppenheimer & Co., Inc.

All right. Thanks a lot for taking my questions.

Operator

Thank you. Our next question comes from Richard Close from Canaccord Genuity. Your line is open.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Great. Appreciate the questions. I was just wondering if you guys can quantify the backlog at all in terms of, I mean what the maybe an estimate of annual revenue contribution is in the backlog and how that's changed?

Jeffrey S. Sherman - HMS Holdings Corp.

I would say, we haven't put in a dollar value on it, Richard, but our backlog as we look at 2016, where we finished 2016 and where we're at today, it has grown 25% to 30%. So, I would say again that we continue to see sales success. And as we add resources and really focus on the things that Bill talked about, we know from our backlog, how many are related – what clients are on hold for client-specific issues, what clients are on hold for any HMS issues and we're really targeting specific action plans to drive faster resolution of those issues to increase the throughput.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Okay.

William C. Lucia - HMS Holdings Corp.

And, Richard, let me, let me just add a comment on that, too. I mean, obviously, we have both the number of implementations, the number of re-implementations, how many our new logos, how many are up-sells, what type of products are embedded in it, and we do have annualized revenue expectations and total contract value tied to it. The challenge is the things I said before, which is why, we don't like to give the actual numbers. By the time we implement, a client could say, don't audit this network or we are – now, we want to limit the scope to X or it will take longer to get this up and running or we now want you to roll this out market-by-market or I need planned Presidents in each one of my states to approve it. And so, it's very hard to give that. If we give you that data, then while we're bullish about it, we know that all of those things can happen. So, I think the basic comment that the queue is 25% to 30% larger, it gives us the reason to be bullish. We have to work through that queue and work through all those individual client idiosyncrasies that we can make sure get done and we're continuing to push them hard to that process.

And I think, we've learned a lot through this. I think what we've learned and are taking the biggest steps on right now are how do we pull more sales engineers and subject matter experts into the sales process as early as possible to lock this up, so that we don't have surprises as we go through implementations. So, that's the reason why we don't talk about the dollar number in backlog.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Okay. So, given that, I mean, do you guys think you need to take a step back and based on a lot of those challenges or new answers with respect to new business and when it comes on, do you need to take a step back and sort of change the way you forecast your business and provide guidance to the Street?

Jeffrey S. Sherman - HMS Holdings Corp.

Yeah. I mean, I think that's fair. I think as we looked at some of the specific issues that happened this quarter, again, we think a lot of it is just timing related, Richard. So, I do think sometimes that's a little bit harder to predict. But, as we go into 2018, we certainly are focusing on what drives our revenue growth and making sure that I think we're prudent in how we forecast and budget that for 2018 and beyond.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Okay. And my final question would be on – just a follow-up on Jamie's, and you talked about $2 million, and in terms of the bonus reversal. Are there any other puts and takes that we should know about, in terms of as we think about the fourth quarter? Obviously, you're not going to get the margin improvement that you targeted year-to-date, but anything else as we update our models for fourth quarter?

Jeffrey S. Sherman - HMS Holdings Corp.

The only thing I would call out is, we expect another higher quarter of stock comp in Q4 for the reasons I talked about in my prepared remarks. But other than that, that's really all I would call out that I would expect a similar higher quarter than typical for stock comp in Q4.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Okay. Thank you.

Operator

Thank you. Our next question comes from Matthew Gillmor from Robert Baird. Your line is open.

Matthew D. Gillmor - Robert W. Baird & Co., Inc.

Hey. Thanks for the question. Jeff had mentioned some stepped up IT investments into integrating some of the PI tools. Are there any additional details you can provide there? Will that just be kind of normal course of spending for the business or something above and beyond that we should be thinking about in terms of modeling?

William C. Lucia - HMS Holdings Corp.

Yeah. We're doing a fair amount of detailed work now, Matt, just looking at the IT investments that we could make and how we can simplify our IT infrastructure. So, nothing – no dollars, I would give specifically now. We're working on that and we'll expect to have more commentary as we give our year-end call. And some of it may be shifting where we're spending some current dollars as well. But, I do think, we believe that simplifying some of the infrastructure can help speed our ink-to-green, also help us reduce costs and actually enhance our yield activity. Now, we've started that process obviously with some of the big data investments we're making, but that's kind of on the front end in managing the overall data assets that we get. I'm talking more on the operational application platforms that we have more work to do on. I think we're going to be methodical when we do that to make sure we're not causing any disruptions to our core operations. So, we could see some increased spend there as we go into 2018, but we'll give more commentary as we give our annual guidance in February.

Matthew D. Gillmor - Robert W. Baird & Co., Inc.

Okay. We'll stay tuned for that. And then, back on the Eliza issue, I was curious if you had any thoughts or comments in terms of how long it would take for the sales force to regain some of the productivity? Should we be thinking about Eliza's revenue sort of flattish for the next quarter and then kind of getting back to where you thought it would be or do you think it'll snap back sooner than that? Thanks.

Jeffrey S. Sherman - HMS Holdings Corp.

I mean, I think we expect it to be growing as we go into 2018. Again, we'll give more specific guidance. But, I do think we're getting traction with the customer base. And so, I do think we'll expect it to be growing as we go into 2018. We'll give more commentary on the degree of that as we give our annual guidance in February.

Matthew D. Gillmor - Robert W. Baird & Co., Inc.

Thank you.

Operator

Thank you. Our next question comes from Frank Sparacino from First Analysis. Your line is open.

Frank Sparacino - First Analysis Securities Corp.

Hi. My questions have been answered. Thanks, guys.

Operator

Thank you. Our next question comes from Steve Halper from Cantor Fitzgerald. Your line is open.

Steven Halper - Cantor Fitzgerald Securities

Yeah. My questions were answered as well. Thank you.

Operator

Thank you. And I am showing no further questions from our phone lines. So, I would now like to turn the conference back over to Bill Lucia for any closing remarks.

William C. Lucia - HMS Holdings Corp.

Well, I want to thank you, all, for attending our call. As I said, we're diligently focused on providing the kind of – generating the kind of financial results we know this company is capable of. We're bullish about our future and the new product offerings that we're pulling together in care management and the member engagement. And we look forward to speaking to you again on our full-year 2017 call in February. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.