R1 RCM, Inc. (NASDAQ:RCM) Q1 2019 Earnings Conference Call May 9, 2019 8:00 AM ET
Atif Rahim – Head of Investor Relations
Joe Flanagan – President and Chief Executive Officer
Chris Ricaurte – Chief Financial Officer and Treasurer
Conference Call Participants
Charles Rhyee – Cowen
Matthew Gillmor – Robert Baird
Stephanie Demko – Citi
Donald Hooker – KeyBanc
Steve Halper – Cantor Fitzgerald
Good morning. My name is Carol, and I will be your operator today. At this time I would like to welcome everyone to the R1 RCM First Quarter 2019 Earnings Call. [Operator Instructions] At this time I would like to turn the call over to Atif Rahim, Head of Investor Relations. Mr. Rahim, please go ahead.
Thank you, Operator. Good morning, everyone, and welcome to the call. We’ll start with prepared remarks by Joe Flanagan, President and CEO. And Chris Ricaurte CFO and Treasurer. We’ll then turn you over to Q&A.
Today’s conference call is being recorded. And as a reminder, certain statements made during this call may be considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our forecast for 2019 and 2020, our ability to successfully implement new technologies and platforms, expected uses of cash, expected benefits from the Intermedix acquisition, expected timing of new business deployment and expected new business wins or forward-looking statements.
These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would, and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future we have no current intention of doing so except to the extent required by applicable law.
Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors including but not limited to the factors discussed under the heading Risk Factors in our annual report on our latest Form 10-K. Now I’d like to turn the call over to Joe.
Thanks, Atif. Good morning everyone, and thank you for joining us. I’m pleased to report a strong quarter as we continue to deliver on our commitments. Revenue for the first quarter was $275.9 million, up 87% year-over-year. Adjusted EBITDA was $33.4 million, up from essentially break even last year. The results were driven by strong broad-based execution with a particular emphasis on the effectiveness of our deployment model. The team continues to perform exceptionally well in attaining our goals and, most importantly, delivering high quality results for our customers. Overall, I’m very pleased with the pace of execution across the business.
On our last call I discussed our four major priorities for 2019: first, growth via new business wins; second, execution on our contract to book of business; third, launch of our physician group solution for IDNs; and fourth, the comprehensive digital transformation of our operations. I’d like to provide an update on these four initiatives starting with growth.
Yesterday we announced a new end-to-end partnership with Quorum Health Corporation. We’re delighted to serve Quorum Health via our operating partner model which results in us delivering our most comprehensive value proposition and allows Quorum to focus on patient care, their core competency. Like many health systems across the country Quorum faces increased financial pressure, growing revenue cycle complexity, scarcity of capital to invest in the latest technologies and evolving demands from patients and physicians.
Our tech-enabled service platform is built for purpose to address these needs. Quorum selected us from a field of competitors based on the holistic strength of our platform, our technology, human capital, process knowledge and global delivery infrastructure. We’re very pleased with this win and look forward to delivering meaningful benefits to quorum over the term of the contract which is seven years with a five-year renewal option. We expect to start onboarding Quorum in the fourth quarter and expect a financial benefit from this contract to be in line with the operating partner contract economics we have provided in the past.
The successful outcome of this competitive process gives us increased confidence in our competitive position and ability to deliver value as an operating partner. Looking at the market more broadly, we continue to be very encouraged by market demand for all three of our go-to-market models. The volume of discussions with IDNs for end-to-end partnerships continues to grow. In many of our conversations IDNs are increasingly seeing the value of us as a strategic partner that allows them to focus their core efforts on patient care.
We continue to invest heavily in our platform for this exact reason. We strongly believe that our infrastructure, which is comprehensive and integrated, is better-positioned to deliver scale benefits versus the patchwork of in-house resources and point solution vendors predominantly in use today. As we continue to invest in our platform and drive innovation we expect this viewpoint to gain traction in the industry.
Next I’d like to discuss our deployment activities. We continue to be very encouraged by the execution of our deployment function across our customer base. Our disciplined deployment approach has delivered successful outcomes for us as well as our customers. And we’ve seen the strong execution manifest itself in our financial benefits.
Our teams on the ground, at customer locations, at our shared service centers in IT and in product development have done a fantastic job of staying focused on three core value drivers. First, in moving work to centralized locations we followed a methodical approach to ensure minimal disruption for our customers. Across our customer base we’ve transitioned 84% of work that can be performed out of centralized locations and we are at our targeted levels for customers onboarding more than 18 months ago.
Second, we’ve rationalized 76% of third-party vendor spend. Given our learnings from our earlier deployments we now have an exhaustive approach to identify and prioritize vendors to be displaced by our proprietary technology or preferred vendors. And we’ve rationalized third-party vendors at an increasingly faster rate, adding more customers. Third, we’ve implemented our R1 technology stack at 74% of customer sites. In addition to retaining the margin that was previously earned by third party vendors, implementation of our tech stack is also important in monitoring performance against customer sites and generating incentive fees from the KPIs we are measured against.
As we look across our operating partner customer base we see significant runway to achieve our target run rate profitability levels, especially when you consider the margin flow through from the incentive fees. Of particular note and as I have emphasized in the past, we expect to see continued margin expansion from our contracted book of business beyond 2020. The stats I just provided do not include Quorum. And when Quorum is included, we expect to have close to $8 billion in NPR in the margin ramp phase as we exit 2020.
More important however are the sustained benefits we have delivered to our customers. We’re committed to becoming the leading RCM platform from health care providers through our continued focus on customer success and our disciplined deployment approach.
Now turning to our physician group IDN solution. This is the most significant product advancement since our acquisition of Intermedix, combining the best capabilities from Intermedix, along with R1’s historical capabilities for IDN-employed physicians. We view IDN-affiliated and IDN-owned physician groups as a particularly underserved segment of the market with irrationally high pricing, relatively weak capabilities and lacking aligned performance-based contract structures. This solution is partially deployed at Ascension Medical Group and we’ve seen compelling results just six months into deployment. With meaningful improvement in net cash collections and a double-digit percentage decline in aged account receivables.
Given the early success with the results we’ve demonstrated at Ascension Medical Group we’re excited to launch this solution to the market in the third quarter. We believe our end-to-end approach across the acute and ambulatory settings allows us to deliver a differentiated product to the market versus the current approach in the industry and unlock significant value for our customers.
Lastly, let me provide an update on our digital transformation office. As a reminder, the DTO program was established with the goal of systematically automating our transactional environment on an end-to-end basis. We are focused on three digitization levers we see as having a high degree of applicability to our business. The first is digitization of the patient and physician interface within the revenue cycle encompassed in what we are doing with our patient experience platform. The second is automation of manual tasks using robotic process automation or RPE technology. And the third is using advanced analytics to improve complex revenue cycle processes such as denials via machine learning and predictive modeling.
DTO is a great win-win for us and our customers. From an R1 standpoint, digitization increases our competitive differentiation, accelerates our scaling efficiency and has the potential to rerate our steady-state margins higher. From a customer standpoint, it’s a great example of how providers can leverage our investments in innovation technology to drive better outcomes for their organization as well as the patients they serve.
For example, the Net promoter Score at locations where our patient experience platform is installed is 70% compared to 30% at legacy patient check-in environments.
The PX platform is now live at 35 locations. And we continue to roll it out across our customer base. An important point worth highlighting here is that this is not just a technology install, it is also an operational transformation going from a cumbersome legacy model for patient check-in and onboarding to a digital self-service model. What we mean by this is that as operators we have an intimate understanding of each step of the patient access process, the variations that can exist and how to standardize them.
By contrast, most solutions that have attempted to digitize patient access focus on a single use case or a small subset of tasks. Patients in turn may still have to wait in a waiting room or speak to an associate to complete other tasks. This results in poor utilization and at worst the solutions can end up simply collecting dust while patients bypass them altogether.
With our deep knowledge of how to standardize each step of the process, whether it be validating demographic information, collecting a copay or any of the myriad of tasks associated with the process, we’re able to create a unique and truly complete self-service solution. As has taken place in other industries, the effect is that each task or capability that we add has an accretive impact on patient’s adoption and satisfaction with the platform. In fact, the total platform utilization is greater than the sum of users who would otherwise use its individual parts.
With this comes additional strategic benefits as our platform migrates from encounter-based patient contact to contact across the care continuum, offering what the patient wants, when the patient wants it via the patient’s stated communication method of choice.
Our PX platform starts to become a CRM platform for health where over time we envision ourselves allowing providers to execute on a truly digital front-door strategy by successfully engaging patients with the right tools at the right time at scale. The first iteration of our PX platform was developed for scheduled procedures. We’re highly encouraged by the positive receptivity and operational results that we’re now expanding the solution to serve emergency department patients and walk-ins.
Automated registration in the ED can greatly enhance the patient experience by allowing patients to complete their registration information on their own timeline. At the same time, the PX platform ensures a digital trail for regulatory compliance purposes. While patients have been very satisfied with using the PX platform for scheduled procedures, we believe the improvement in user experience in the ED and walk-in environments can be even higher.
Our next major undertaking from a DTO standpoint is the comprehensive scaling of RPA technology. As discussed on the last call, we completed a detailed review of our 13 core revenue cycle processes and identified an executable pipeline of more than 30 comprehensive routines. Of the six routines we had in the development phase last quarter, two are in scale production. Early results from these two routines which account for 600,000 transactions annually show a productivity increase of five times versus our best manual operators with almost no performance variability.
Additionally, we’re on track to complete the initial build and begin the testing of six more routines with an expectation of going live with scale production in the third quarter. So as we exit Q2 we expect to have 12 of the 30 routines in various stages, ranging from development to scale production. The remainder will follow this production lifecycle over the coming quarters, replacing eight to ten manual touches across our footprint annually.
In closing, I am very encouraged by how our 17,000-plus employees are driving improved performance for our customers and delivering on their commitments. End-market dynamics remain robust, and we see continued progression of new deals within our pipeline. We’re off to a strong start with Q1 results and look forward to updating you on our progress in the future.
Now, I’d like to turn the call over to Chris to review our financial results in more detail.
A - Chris Ricaurte
Thank you, Joe, and thank you all for joining us. I’d like to remind everyone that we will be referencing non-GAAP metrics on today’s call. The adjusted cost of services and adjusted SG&A numbers exclude stock-based compensation and D&A expense. Adjusted EBITDA excludes stock-based compensation, transaction-related costs, a portion of DTO-related expenses and certain other cost. A reconciliation of GAAP to non-GAAP financials is available in today’s earnings press release.
Now turning to Q1 results. Revenue for the quarter was $275.9 million, up $128.6 million or 87% year-over-year, driven by new business onboarded over the course of 2018 and contribution from Intermedix. Relative to Q4 2018, revenue was up $13 million, driven primarily by contribution from Presence and AMITA Health.
From a cost standpoint, adjusted cost of services in Q1 was $223.5 million compared with $211.3 million in Q4 2018, and $132.8 million in Q1 2018. This sequential increase was driven by the onboarding of Presence and AMITA Health.
Adjusted SG&A expenses in Q1 were $19 million, down $5.5 million sequentially, primarily due to a reallocation of certain Intermedix-related expenses that were previously included in SG&A to cost of services to better-align the classification with R1’s classification methodology. On a year-over-year basis SG&A expenses increased $4.9 million, primarily due to SG&A associated with Intermedix and expansion of our commercial efforts.
Adjusted EBITDA for the first quarter was $33.4 million, compared to $27.1 million in the fourth quarter, and up $33.1 million from $0.3 million a year ago. The sequential and year-over-year increases were driven by increased profitability from new customers onboarded over the past couple years and the contribution from Intermedix offset by cost associated with onboarding new customers.
Lastly, we incurred $8.8 million in other costs in Q1, primarily related to severance expenses, acquisition-related integration cost in our Digital Transformation Office. These costs are not reflected in adjusted EBITDA but are included in other expenses lines on our GAAP income statement.
Turning to the balance sheet. Net debt at the end of March, inclusive of restricted cash, was $260.2 million, compared to a net debt of $313.6 million at the end of December. This change was driven by cash generated from operations of $71.1 million, offset by CapEx of $14.8 million related to purchases of software licenses and computer equipment as well as capitalized software.
Cash from operations was stronger than normal in Q1 due to the timing of reimbursable payments to customers and the timing of incentive compensation payments, both of which will be paid in the second quarter. On a normalized basis, cash flow from operations in Q1 was in the $25 million to $30 million range. And we expect it to be negative in Q2 and turning positive again in the second half.
Net interest expense in the first quarter was $10.2 million, down slightly from the fourth quarter due to the favorability from lower LIBOR rates. We once again elected to pay interest on the subordinated notes in cash. As discussed early in the year we expect to refinance our debt this year. We believe the most cost effective source of financing is bank debt. We are engaged in conversations with a number of banks and anticipating providing more color on refinancing before our next earnings call. In addition to refinancing, we also continue to expect to start paying down debt using cash generated from operations in the second half of the year.
Now turning to our outlook for 2019. Earlier this year we provided our financial outlook for 2019 and 2020. We are reaffirming this outlook, which calls for revenue of $1.15 billion to $1.25 billion and adjusted EBITDA of $145 million to $165 million for 2019. As we start onboarding Quorum Health in the second half of this year, we expect to incur upfront cost in line with the assumptions we have provided for an operating partner customer.
For the second quarter we expect revenue to ramp higher, driven by a full quarter of revenue for Presence and AMITA. We also expect adjusted EBITDA to ramp slightly higher, driven by continued progression along the profitability curve that customers onboarded in 2016 to early 2019 timeframe.
In closing, I’m very proud of the team. There has been steady focus on execution and customer success which continues to drive our financial results. With a strong start to 2019 we are on very stable footing to deliver on the goals we have outlined and to capitalize on the market opportunity ahead. Now I’ll turn the call over to the operator for Q&A. Operator?
[Operator Instruction] Our first question this morning comes from Charles Rhyee from Cowen. Please go ahead.
Hey guys, thanks for the questions and congrats on the quarter here and on Quorum. Maybe if I could just follow up on Quorum here, Joe. Obviously a great win. Was this a competitive displacement? Or was this something where Quorum was doing it in-house at the start?
Let me comment, maybe two ways, Charles. The process was a competitive process. And so it had all of the characteristics that come with that design, so to speak. And then from a current state management of the rev cycle by Quorum, as many of our systems, it’s a myriad of different in-house as well as external vendors, both on the services front but also on the technology front that come into play on how that’s run today. And so as we think about that it was – it’s a pretty traditional situation. There’s some uniqueness in some areas, but by and large it’s a pretty traditional current state that we will be applying our deployment approach against.
Okay. So that’s helpful. And when you talked about the – I know in past conversations around calls you talked about the pipeline. I think going into the year you kind of tend to describe it as sort of a $2 billion to $3 billion NPR opportunity. And I think initially people thought of it sort of as a – like one potential client. And I think earlier this year you tended to frame in more as maybe a number of clients that are in sort of late stage, maybe slightly smaller NPR total with this deal. I mean, can you talk about the state of the rest of the pipeline? Should we still expect maybe another couple deals this year, or is this sort of what you would largely expect for the year?
Yes, no. First thing I would say is we’re delighted and proud, four months into the year to have more than half of our target NPR as it relates to growth in the end-to-end offering. And I want to stress that because we have two other channels to market. And those channels, we don’t tend to talk as much about because from a size standpoint these end-to-end opportunities and ultimately as we see with the announcement of Quorum, contract signings are so significant, and they add so much to our contracted backlog. But we have good activity on all three of those offerings. And we’re very encouraged again four months into the year to announce Quorum and have more than half of that target NPR in the end-to-end construct contracted.
As I said on the last call, the pipeline is very, very healthy for these offerings. And what we are seeing is in the $2 billion to $5 billion or $1 billion to $5 billion NPR range that is where most of our activity is right now. And we think that’s a healthy segment of the market because it’s big enough to support the scale that we can really create value off of. And it’s got an organizational mindset that we see that’s very committed to driving a competitive advantage for those systems. And so the combination of those two things really creates what we think are some very, very healthy dynamics and some very encouraging discussions.
And as you break that down, I think we’re seeing that flow through in the contract signing. So could deals get done at a much larger size? Yes. But equally, there’s plenty of activity that’s less than $3 billion that were active and progressing as we speak. And so as we look out towards the balance of the year, we still feel good about that high level target of $3 billion. It’s impossible for us to predict, does it come in, in one deal that’s nicely packaged right at $3 billion, or does it come in a couple of deals that cross that hurdle. But setting that aside, we’re generally encouraged right now.
And then one last question, Chris, and I guess to the sort of the DTO opportunity here. And Joe, you talked about the opportunity to sort of rerate the steady state for margins higher. When do you think you’d feel comfortable kind of communicating them more I guess directly? And what do…
Yes, Charles, probably in the fourth quarter, I think as Joe has mentioned before, we want to get these deployed and make sure that they’re delivering what we think they can deliver. And we’re currently in different stages in terms of development and putting them into production. But we anticipate in the fourth quarter we’ll be able to provide an update of what that means relative to our projections.
Great, thanks a lot guys.
Our next question comes from Matthew Gillmor from Robert Baird. Please go ahead.
Thanks for the question. Following up on Quorum, congrats on that win. I was hoping to understand how you’re approaching their operation tonight. I guess I think of Quorum as being sort of more nonurban, whereas I think your client base is maybe a little more urban and suburban, although I’m sure you do have some rural facilities that you serve. So is there rural focus or change how you’ll manage that revenue cycle? Or are the differences maybe not that great?
First off, our current installed base has a fair amount of urban footprint. But given the breadth and complexity that we manage today, we have a fair amount of rural footprint as well. And so we come into the Quorum opportunity with, I think, a strong experiential base along those lines. And furthermore, as I mentioned, this was a competitive process. And I want to – I think one of the differentiating factors for us was the ability to demonstrate our deployment sophistication and how it could handle the complexity of some of the geographic footprints within Quorum. And I think that’s a great testament to the investments we’ve been making for the better part of three years now, 2016, 2017 and 2018, building that function to where it is today.
And so we look at this as, I don’t want to say it’s standard and right down the middle, but we look at this very much as something that we’re going to apply our operating system against, and that operating system already has, and the human capital that runs it already have a fair amount of experience managing this type of footprint.
And then also on Quorum, I believe they currently have 27 hospitals with about 1.8 billion of NPR. And I think they’re selling some, so targeting something like 20 hospitals with $1.4 billion of NPR. Will you be deploying to all 27 or just the subset that is sort of the core of their business?
A - Joe Flanagan]
No, no, right now we’ll deploy to all 27. And as you would expect us to do in the contracting process, we have the appropriate commercial mechanisms to situationally make sure that we have the right protections around divestitures and footprint changes. But our going in mindset is that we’ll deploy across all 27. And we will work relentlessly to deliver a competitive advantage to Quorum against their strategic priorities. And again, within our footprints we deal with divestitures and acquisitions on an ongoing basis across all of our customers. And so this is something that whether it be commercially from a contracting standpoint, whether it be from a helping the customer facilitate those things. We feel like we’ve got a lot of experience along those lines. And I think that’s been important for us in the process with Quorum.
Got it. That’s helpful. And then one on guidance. So you reiterated the outlook, I think Chris also mentioned higher degree of confidence in delivering of goals. And then the other thing I had in mind was I’m sure there are some startup costs associated with Quorum, so just want to make sure I was sort of understanding those moving parts correctly. And then sort of more specifically with the Quorum deal, should we think about the EBITDA range more in line with the growth scenario that you’ve outlined? Or you still think you will be within the contracted ranges even with the Quorum cost?
Yes, so couple of things on the guidance. We haven’t changed guidance. So first quarter was encouraging. But at this point in time we’d like to see another quarter or two before we rerated guidance. There will be an impact on Quorum from the upfront investment. Relative to revenue, just because of the timing of when we’ll be onboarding Quorum, there won’t be a significant amount of revenue, probably less than $20 million of revenue. So there will not be a significant amount of revenue in the calendar year for Quorum.
And just adding to Chris’ comments and maybe some color on Quorum. The way you should think about Quorum, it’s a full end-to-end scope. So if you think about what drives the financial profile of that opportunity one thing is the NPR, the other factor is the scope and what’s in scope and out of scope. As a general matter, it is a comprehensive scope of services that we are contracted to provide. And then the second comment I would say is we would expect that opportunity or that contract to follow the previously provided profitability guidelines around that operating model construct. There’s three phases. And Matt, for sure you understand those well. But it’s a pretty down-the-middle signing from that regard.
Thanks very much, appreciate it.
Our next question comes from Stephanie Demko from Citi. Please go ahead.
Hey guys, thanks for taking my question. There’s a question over on the fact that you did get a full end-to-end win on Quorum. How did you get in over the line there which is starting from more a modular approach which is more typical [indiscernible].
Thanks Stephanie. I think a couple of factors that I would emphasize. One is just, as we said before, our ability to demonstrate a meaningful value prop is highest when you were engaged on an end-to-end basis as a partner, okay. And so I would start there, the value prop if you will for Quorum along the dimension of patient satisfaction, along the dimension of physician satisfaction, along the dimension of financial performance without a doubt is higher and we can stand behind that stronger when its comprehensive in nature and we’re an operating partner running their revenue cycle for them.
The second thing I think that I would highlight is just the mindset of being a partner. And I think our team did a tremendous job to demonstrate that commercially, to demonstrate that from a human capital standpoint, a cultural point, et cetera. And then finally, is Quorum assessing our capability. And as I said, it was a competitive process and there was a comprehensive diligence done on our global infrastructure, on our technology, on our current customers et cetera. And so I think it is this combination of the value prop then getting comfortable. And we’re passionate about being partnerial as an organization. And then finally, them going through each of the components in detail that make up our infrastructure. And I think those three things really I would highlight Stephanie.
All right, very helpful. Then you touched on this a little bit in your answer, but just given that it was a competitive process could you talk a bit about what differentiates your offerings versus your peers? And how should we think about the genesis of this win just given it was far outside of the Ascension umbrella compared to others.
Well, I mean some things I would highlight Stephanie, aside from kind of where I commented just now and we have world-class scaled global delivery infrastructure, we have it on shore, we have offshore. Those facilities are 100% our footprint, our people, our management systems, our cultural systems. And they are truly integrated from a process standpoint, meaning workflows against the process onshore and offshore. I think that is a very unique attribute when you compare our capability along those lines to many of the competitors in the market. If you say technology, our workflow technology, our analytics technology our jade[ph] extraction technology is integrated across the process. And so we are able to see leakage at the interface points from our systems.
That gets much harder when you have a hybrid technology approach, when you have a patient access system that’s from one company connected to a billing and follow up denial management system from another company. By nature, getting those two systems to talk what you have to do to see leakage is much harder. And so I think we have an advantage from a technology standpoint. And then going all the way back to Charles’ question, the deployment sophistication that we have and Quorum’s footprint I think were also things that I would highlight.
All right. Understood. Well, congrats on the event, guys.
Our next question comes from Donald Hooker from KeyBanc.
Hi, good morning guys. So just to be clear in terms of the NPR that Quorum will add, it’s about $1.4 billion, $1.5 billion-ish kind of, that’s what we should think? And then, does there – I guess just trying to understand sort of their strategy around some of the new payment models regarding participation in ACOs, I think they’re in a couple ACOs. And maybe more broadly, does that effect your business that they pursue an MA strategy or – at some point or if they launch more ACOs?
Well, two things. The effective number probably to use is $1.6 billion of NPR under management. I don’t want to – and I’m not in a position to frankly to comment on Quorum’s strategy on any dimension. The only thing I would say is that we manage a number of payment models today. Again we have $31 billion of NPR that’s under management in an end-to-end basis today, not including Quorum. And you can imagine there’s every variation of payment model that sits in, in that footprint. And so whatever Quorum strategically does over time along the dimension of payment models, and I think this was a factor as they thought about us, our ability to adapt and build – or bring infrastructure that can to manage those various payment models was important.
Okay, and then maybe on the other fee revenue line, I guess that’s a lot of your modular solutions in there. I mean, it look likes there was a step-up there. Can you kind of – how should we think about that line item or that business line developing over the year? And is that impacted by your pending ambulatory solution launch in the third quarter?
What I would say is, like I said, we’re encouraged with the opportunity in the other revenue or in the modular type offerings. The pipeline is up significantly just from the start of the year, and that’s up from the prior year. Sales cycle is much quicker. And yes, I would say as we start to get more externally focused with the physician offering that I referenced in my prepared remarks, that that takes the shape as more as modular type offerings. And so we do think that that adds to the market – the available market and the nice opportunity to increase traction.
But in general, there’s a fair amount of activity in that segment of the market. And we’re encouraged and we feel like we’re a little bit unique in the fact that if a customer wants to engage on an end-to-end basis, transition of control, long-term strategic partnership, we can do that. Equally important, if a customer is not ready to do that yet, we’re able to engage flexibly with them in a module or in a co-managed where there is not a transition of control. And I think that’s an important factor for us as we look up – look forward in our ability to serve this market. And over time, our ability to build really strategic relationships with health systems that it will manifest themselves in potentially an evolution strategically of those initial engagements.
Okay. And then maybe I’ll ask one kind of follow-up question on the balance sheet I guess with regards to some of the more expensive debt that you’re carrying now. Any update in your thinking in terms of potential refinancing or what conversations are going on there? And how should we think about that over the next few quarters?
Sure. As I mentioned in my commentary, we do intend to refinance with bank debt. We weren’t afforded that when we did the IMX transaction just because of our trailing 12 months EBITDA just wasn’t great enough. But at this point now we can refinance with bank debt. We expect to over the next quarter to finalize that. And as I said, we’ll provide color on that probably at the next earnings call on that refinancing of the debt. It will be a much lower rate than we have today.
There is no prepayment penalty on the senior debt. There is a prepayment penalty on the subordinated debt. That dropped down by 1 percentage point as of yesterday to 2%. So we do expect to refinance this year. Probably within the next quarter or two we’ll be able to finalize that process.
Our next question comes from Steve Halper from Cantor Fitzgerald.
Hi, good morning. So just to qualify with the Quorum announcement. Would you say that you’re halfway there to achieving the growth scenario, the 2020 growth scenario in the financial outlook side?
Yes, that’s correct. Steve, when you say halfway there, the – from a assigning standpoint, for sure, I mean, it’s pretty straightforward. And then as is the case with every one of these types of opportunities, we’re still working on exactly when does employee transition, when does vendor transition, when do some of those things start. And what those things do is drive when revenue comes in. You’ll remember it from some of our discussions on Presence, AMITA. That event, that transition of control is the event that triggers the net revenue for us. And so those things were working through. As Chris said, deployment activities will start in earnest in the second half. Exactly when those happen, we’ve got to sit down and have a number of joint planning sessions with Quorum along those lines. But it’ll be some time in the second half.
Yes. And to be clear, Steve, we had $3 billion in 2019 and $3 billion in 2020. We’re more than halfway there on the 2019. Obviously 2020, we’re not into 2020 yet, but just to be clear on the numbers.
Right. And then last question on Quorum. Is it safe to assume that you’d get to that target margin in 2022?
Yes, we’ll get there – we’re – I would say, I’m thinking out loud a little bit here, but it’ll follow that 3-year profile.
Yes. So as we exit 2022 we should be there.
Great, thank you.
I’ll now turn the call back to Joe Flanagan for closing remarks.
To close the call, I’d like to thank everybody for joining us today. We are pleased with the strong start to the year and we’re excited about the new partnership with Quorum Health. Maybe more importantly, as we look broader, we really like our competitive position and we’re increasingly optimistic about the market opportunity and the roadmaps to invest to further differentiate our capabilities.
And finally, what I would say is, we try to provide a wholesome update on digital transformation. But that is something that continues to be very, very exciting for us. And based on our efforts today, we’re very encouraging – encouraged. And as Chris said, we look forward to updating everybody along those lines in Q4.
So as we close, just a very sincere thank you for joining the call. And with that operator, we can close the call.
Thank you. This concludes today’s conference and you may now disconnect.