R1 RCM, Inc. (RCM) CEO Joseph Flanagan on Q3 2019 Results - Earnings Call Transcript

Nov. 05, 2019 1:58 PM ETR1 RCM Inc. (RCM)
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R1 RCM Inc (NASDAQ:RCM) Q3 2019 Earnings Call Conference November 5, 2019 8:00 AM ET

Company Participants

Atif Rahim – Head of Investor Relations

Joseph Flanagan – President, Chief Executive Officer and Director

Vijay Kotte – Executive Vice President and Physician Services

Rick Evans – Senior Vice President, Interim Chief Financial Officer and Chief Accounting Officer

Conference Call Participants

Charles Rhyee – Cowen

Matthew Gillmo – Baird

Donald Hooker – KeyBanc

Steve Halper – Cantor Fitzgerald

Stephanie Demko – Citi


Ladies and gentlemen, thank you for standing by, and welcome to the R1 RCM Third Quarter Earnings Call.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Atif Rahim, Head of Investor Relations. Please go ahead.

Atif Rahim

Good morning, everyone, and welcome to the call. 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 timing of new business deployment and expected new business are 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.

Joseph Flanagan

Thanks, Atif. Good morning, everyone, and thank you for joining us. Our third quarter results were once again driven by continued strong operational performance. Revenue for the quarter was $301.2 million, up 20% year-over-year, and adjusted EBITDA was $48.9 million, up $28.5 million from the third quarter of last year.

Strong performance on A/R-related metrics, technology-driven productivity improvement and the transition of work to our shared service centers have progressed smoothly and ahead of our expectations in 2019.

The combination of these operational drivers has contributed to EBITDA upside this quarter as well as the increase in EBITDA guidance earlier this year. The team overall has done a superb job of delivering on our customer commitments ahead of the plans we had entering 2019. The high-quality results we’ve delivered are being reflected in reference checks performed by potential new customers, and this is translating to a continued increase in activity on the commercial front.

I’m pleased to announce that in the third quarter, we signed a new operating partner agreement with a large physician organization with annual NPR approaching $700 million. The agreement is for a seven-year term and covers our full suite of end-to-end services. Deployment activities began in early October, and we expect the steady state financial contribution from this contract to be better than the operating partner economics we have provided in the past, for an equivalent $700 million managed NPR contract.

This is an important win for us on two dimensions. It demonstrates the value proposition of our operating partner model, where we are seeing increased interest in transitioning full control of operations to our built-for-purpose platform, which delivers a comprehensive suite of technology, global delivery infrastructure and a best-in-class operating system to drive performance.

Secondly, it demonstrates the growth potential and our continued momentum in the physician market. As discussed on our last earnings call, we have developed a comprehensive and differentiated offering for large physician groups, underpinned by our robust technology architecture, a dedicated team within our deployment function and a performance-driven contracting framework. We view the dynamics in the physician market as highly favorable, driven by faster growth relative to the acute care end market and a highly fragmented vendor landscape with limited scale leverage, which represents a great opportunity for us to deliver meaningful value to this end market.

We continue to invest in building out our capabilities and market presence in this area. And last week, we announced the appointment of Vijay Kotte as Executive Vice President of Physician Services. Vijay joins us from DaVita Medical Group, where most recently, he was the Chief Value Officer responsible for strategy, M&A, contracting and performance and operations. Prior to that, he was the CFO of DaVita Medical Group, Vijay brings over 20 years of health care experience to R1, with especially deep expertise in developing and managing value-based payment models for providers and payers.

We’re excited to have Vijay with us on the call, and I’ll turn it over to him for a few words.

Vijay Kotte

Thanks, Joe. I’d like to start by extending my congratulations to the team for signing the physician business Joe just referenced. It’s a great time to join R1, and I’m excited to join this high-performing team, which I’ve known from the outside for a long time. My assessment after just a few weeks on the ground is that a lot has been accomplished since the Intermedix acquisition 18 months ago.

With capabilities across more than 80 specialties and 30 million patient encounters annually, there’s a scaled platform with a very strong set of capabilities to serve the market. I’ve also been encouraged by the strength of client relationships, representing some of the most forward-thinking groups in the space, which span from some of the largest medical groups in the country to small groups. It’s early for me to provide views on any changes to our future plans, strategy, et cetera, but given current market dynamics and the opportunity ahead of us, we are well positioned to support our clients and the market at large with our current technology, expertise and infrastructure.

As the market transitions to value-based reimbursement models, we want to be in a position to deliver a robust, highly differentiated solution to providers regardless of their size or where they are in their VBR journey. Many of the capabilities required to support VBR are in place at R1.

Given my background in developing and managing value-based payment models for providers and payers, this is where I can add the most value. I look forward to contributing to R1’s growth and updating you in the future.

Joseph Flanagan

Thank you, Vijay. To emphasize Vijay’s comment about the transition to value-based reimbursement, many of our customers already have some form of VBR contracts in place. We predominantly see one-sided risk contracts, which involve incentive payments for preventative care or for reporting on quality metrics. However, value-based contracts can be configured in several ways, each with unique, administrative or revenue cycle needs. Regardless of the payment model, we want to be positioned to deliver a solution architecture that is agile and can respond to the evolving payment landscape and deliver superior outcomes for our customers.

In addition to the momentum we are seeing on the physician front, our pipeline of end-to-end and modular deals with large health systems also continues to grow. Over the past quarter, we’ve added several new opportunities to our qualified pipeline, and we’ve been working intimately with several systems as they conduct deep diligence to understand the breadth of our capabilities and the value we can create for them. We’re very encouraged by the momentum that has been created and continue to see multiple pathways to fulfilling our full year expectations.

Next, let me turn to our digital transformation effort. On the heels of a successful set of initial proof points and a thoughtful analysis of the opportunity set, a year ago, we made the decision to invest in the creation of a digital transformation office or DTO. The goal of this investment was to comprehensively digitize and automate our operations, which would result in the next wave of performance improvement for our customers and their patients. With this investment decision, we established a dedicated internal team comprised of handpicked experts within our organization, complemented by best-in-class strategic partners.

This team has applied a systematic approach to prioritize the opportunity set, with a goal of sequencing our activities to maximize financial outcomes and patient satisfaction for our customers while ensuring that the automation routines we’ve built are scalable across our operations today and support our future growth trajectory.

We believe our built-in capability is distinctly different relative to other automation capabilities on the market, which largely rely on a piecemeal approach. Operational control over revenue cycle processes, along with deep domain expertise and in-house developed software, creates a rapid feedback loop with a continuous improvement approach. We believe this, in conjunction with our scaled delivery infrastructure, creates a sustainable competitive advantage for us.

2019 has been a heavy year of lifting from an automation standpoint. In Q1, we developed a pipeline of executable opportunities across our 13 core revenue cycle processes. These were distilled down to 30 process level routines prioritized across three dimensions: financial return, speed and ease of deployment and value to us and our customers.

For context, one example of a process level routine is the end-to-end automation of cash posting. This includes multiple complex components, such as the importation, balancing and posting of detailed digital remittance files and baked statements between payers, financial institutions, R1 and our customers. Automating this complex process in its entirety is an example of one of the process level routines referenced.

Over the course of the first three quarters of 2019, we brought 20 of these 30 routines into development or production, increasing our automated task volume to over 15 million annually. In aggregate, the results we’ve seen to date meet or exceed our expectation. In addition to automation, the second prong of our DTO effort involves digitization of patient registration and scheduling processes encompassed in our PX platform. We currently have close to 70 locations live on this solution and expect to have more than 100 live by the end of the year.

The receptivity and uptake of this solution has been very encouraging. In August, we crossed the 50,000 mark for the number of patients per month successfully using our self-service digital platform to complete all of their registration, financial clearance activities, obtaining patient liability estimates and check-in for their scheduled deployment. Patient wait times have decreased 58% from pre-implementation baselines and the Net Promoter Score has improved from approximately 30 to 75, significantly above health care industry comparables.

The PX team continues to innovate around additional use cases where patient and provider focus groups have indicated this solution could further improve customer revenue and the patient experience. The authorization process is a key example of an additional use case. This is a major pain point for our customers, given a myriad of complicated payer requirements regarding the need for prior authorization of clinical procedures often resulting in delayed or denied payment.

We believe we are uniquely positioned to address this problem by combining our deep revenue cycle expertise with automation and the scheduling functionality in our PX platform. This digital integration of clinical orders with a comprehensive authorization rules library and our market-leading automation capabilities enables us to automate the majority of authorization requests on behalf of our providers accurately and well in advance of the date of service. This stands to reduce both the administrative burden on our customers, clinicians staff and the potential for revenue leakage.

As a direct result of the systematic, comprehensive and disciplined approach we have taken, as we sit today, we expect adjusted EBITDA contribution margin for our operating partner contracts at steady state to increase by 4 percentage points from 26% to 30%, when the PX platform and all 30 automation routines in our original pipeline are at their full run rate in the 2021 time frame. This translates to a 15% to 20% improvement to our steady-state adjusted EBITDA margin profile.

In 2020, we expect $15 million to $20 million contribution to adjusted EBITDA from the automation efforts currently underway. While we expect to complete the implementation of the original pipeline by the end of Q1 2020, we continue to uncover opportunities for both net new automations and to extend existing automations to capture incremental value. We continue to have a robust pipeline heading into 2020 and expect to continue to scale our automation center of excellence to respond to this demand.

Now let me turn to our deployment efforts. At Quorum Health, we started the transition of work to our shared service centers on October 1. All major functions, including billing, follow-up, cash posting and customer service have now been successfully transitioned. We plan to onboard patient-facing services, along with our R1 Hub technology suite over the remainder of the fourth quarter.

We’ll also start deploying our PX platform in early 2020, which should deliver further efficiencies and improvement in patient satisfaction for Quorum. Overall, activities at Quorum were off to a strong start, and the team on the ground is starting to shift its focus to vendor rationalization and standardization of on-site processes.

At our other customers, including Ascension, Intermountain and Presence AMITA, our teams on the ground continue to do a fantastic job driving operational performance, which has in turn driven our EBITDA outperformance this year. On a consolidated basis across these customers, we have transitioned 95% of work that can be performed out of centralized locations, rationalized 84% of targeted third-party spend and implemented our R1 technology stack at 89% of customer sites.

These are encouraging stats when you consider they also include Presence and AMITA where the majority of employee transitions began in early 2019. Our disciplined deployment approach and ongoing focus on execution are the critical drivers here, and we believe the results we are generating are delivering meaningful, sustainable benefits for our customers. In closing, as we wrap up the year and look to 2020, we continue to remain very optimistic about the business. We’re seeing meaningful traction and engagement with our end markets for our end-to-end partnership models as well as for our modular offerings.

We have significant scale advantage, which is translating to strong operational execution and benefiting our customer base. With our DTO effort well underway, we are pleased to be in a position to quantify the expected financial benefit to our margin profile. And lastly, as we’ve commented before, our contracted book of business presents additional EBITDA growth beyond 2020 as we ramp up profitability to steady-state margins on our contracted book of business. With the new business we’ve signed, we expect to have just over $13 billion of NPR in the margin ramp phase exiting 2020. Now I’d like to turn the call over to Rick to review our financial results in more detail.

Rick Evans

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 expense, strategic initiatives, a portion of DTO-related expenses, severance and certain other costs.

A reconciliation of GAAP to non-GAAP financials is available in today’s earnings press release. Now turning to our Q3 results. Revenue for the quarter was $301.2 million, up $50.8 million or 20% year-over-year, driven by a $30.1 million increase in net operating fees as a result of new customers on-boarded in the last 12 months as well as organic growth across our customer base. Relative to Q2 2019, revenue was up $6.2 million driven primarily by organic growth at our customers.

From a cost standpoint, adjusted cost of services in Q3 was $227.7 million compared to $232.5 million last quarter and $206.5 million a year ago. The sequential decrease was primarily driven by productivity improvements in the delivery of our services.

Relative to Q3 of 2018, cost of services increased due to an increase in costs associated with new customers on-boarded in the last 12 months, partially offset by productivity improvements in our steady-state portfolio. Adjusted SG&A expenses in Q3 were $24.6 million, up $2.7 million sequentially, partly due to investments in corporate IT and human resources infrastructure to support our growing footprint.

On a year-over-year basis, SG&A expenses increased $1.2 million, also primarily due to investments in corporate IT and human resources infrastructure as well as sales and marketing expenses related to increased efforts to pursue new business. Adjusted EBITDA for the third quarter was $48.9 million compared to $40.6 million in the second quarter and up $28.5 million from $20.4 million a year ago. The sequential and year-over-year increases were driven by continued progression of our operating partner customers along the profitability curve, offset partly by on-boarding costs for new customers. Lastly, we incurred $7.4 million in other costs in Q3, primarily related to strategic initiatives and our digital transformation office.

Turning to the balance sheet. Net debt at the end of September, inclusive of restricted cash, was $340.8 million compared to net debt of $304.4 million at the end of June. We repaid $14 million of debt in the third quarter, including a $4 million mandatory repayment of our term loan A. Net interest expense in the third quarter was $5 million, down from $9.9 million in Q2, driven by favorable borrowing rates following the completion of our refinancing in late June.

Cash generated from operations was flat in the third quarter, with improved operating performance, offset by the timing of customer payments. CapEx in the quarter was $10.8 million related to capitalized software and purchases of software licenses and computer equipment. Turning to our outlook for the remainder of 2019, we are reaffirming our revenue guidance of $1.175 billion to $1.2 billion. We expect revenue to ramp up in the fourth quarter, driven by the on-boarding of the Quorum contract in early Q4.

We are also reaffirming our adjusted EBITDA guidance of $155 million to $170 million, which takes into account on-boarding costs for Quorum and the new physician customer signed in the third quarter. Looking out to 2020, our current adjusted EBITDA guidance does not include the $15 million to $20 million contribution from DTO that Joe referenced. We anticipate providing updated guidance in early 2020 to reflect this contribution from the DTO as well as any other moving parts as we complete our budget process.

In closing, I’m proud of our team’s steady focus on execution and delivering on our customer commitments, which is driving our financial results. With three quarters of the year behind us, we remain confident in our ability to deliver on our performance and growth goals for 2019 and look forward to another strong year in 2020. Now I’ll turn the call over to the operator for Q& A. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question this morning comes from Charles Rhyee from Cowen. Please go ahead.

Charles Rhyee

Congrats on the quarter here. Joe, maybe just talk about, obviously, a great win here kind of getting towards the target of $3 billion, and obviously, we’ve got two months left here, you talked about multiple ways you see to get there. Maybe can you kind of characterize sort of the – what’s in the pipeline right now? Give us a little bit more sense on the stage of some of these clients are at? And maybe sort of, you’d say, the mix between more traditional kind of hospital clients and some of these more physician – large physician groups?

Joseph Flanagan

Thanks, Charles. Just some comments. I mean the first thing I would say that underpins our continued view that we’ve got line of sight to hit some of our 2019 new signings targets is just a very, very healthy progression of deals in our pipeline. And what I would emphasize there is, we have several of those deals or opportunities that are deep into diligence by customers on us.

And as I’ve said before, those are some of the markers that form our view of forecast ability on these operating partnerships. So we’re very, very encouraged along those lines to see that progression and the intensity of activities on some of those specific opportunities increasing. The second thing I would say is, in terms of mix of the pipeline, I would still characterize the mix as more skewed towards IDNs or large health systems, again, with the predominance of opportunities in our operating partnership pipeline in that $1 billion to $5 billion range, and that’s been consistent the past couple of quarters.

Now with Vijay joining and with some of the efforts we’ve been putting, we are seeing an increase in activity in a positive way from the physician end markets, and we’re seeing the size of those opportunities increase, and that’s partially driven by where we want to focus our commercial efforts with Gary and the team and partially driven by the value prop and what our value prop lends itself to in terms of size. So that’s kind of what forms our view on the year, and then contextually, that’s what forms some of our characterization of continued encouragement that we’re seeing within these end markets.

Charles Rhyee

And these large physician organizations, is the implementation times faster relative to a traditional IDN? Or is it – given their size at that point, they kind of onboard at a similar rate?

Joseph Flanagan

No. I would say the implementation time frames and the underlying complexity of deployment is similar to our IDNs. And what really drives some of the complexity, you’ve got a much greater number of stakeholders. When you think about that physician footprint and the distributed nature of that physician footprint. And then you’ve got a technology dependency, where – which plays to our strengths. We have a very sophisticated technology deployment organization where we are connecting into a number of different external systems.

And the final driver that I would say is, many of these physician organizations continue to be quite acquisitive. And so we’re a valued partner with our deployment capabilities, both in the initial deployment of their footprint, but in the ongoing support of their strategic efforts as it relates to M&A, to be able to manage that complexity. So it’s, in many ways, a different scale, but very similar drivers of complexity. And so I would characterize deployment time frames as generally similar to what we see on the IDN side.

Charles Rhyee

Great. And maybe, Rick, a question for you here. Obviously, strong EBITDA performance. When I look at the cash flows, it’s been a little bit lumpy, kind of big cash flow in the first quarter, down second quarter and more flattish here in the third. What are you kind of – what should we think about for full year as we get toward the end of the year? I know we had the big data center launch in Salt Lake City earlier in the year? And how should we think about it relative to our 2020 numbers? Thanks.

Joseph Flanagan

Yes. I think from a cash flow perspective, I think we had a couple of timing issues here in the quarter that resolved themselves really from an operating cash flow standpoint. I think a lot of our CapEx spend for the year is, I would expect some of that to kind of decrease here in Q4. I think some of the A/ R that we had with some invoicing mechanics where we’ve gone through and we’ve collected that accounts receivable here in the fourth quarter, so I’m expecting positive cash flow here in Q4 and that will lead us into the 2020 time frame.

Charles Rhyee

Okay, great.

Joseph Flanagan

Thanks Charles.


Our next question comes from Matthew Gillmo from Baird. Please go ahead.

Matthew Gillmo

Maybe a couple of follow-ups here to Charles. For the new physician group operating partner you announced, I was hoping to get a couple more details on that relationship. Would you mind giving us a sense for sort of how that came together? Was it a competitive process? And are they focused on any particular specialt y, like emergency room or anesthesiology? And it sounds like they are an acquisitive group, but I was hoping to confirm that as well.

Joseph Flanagan

Sure. I’m not going to – I want to be a little bit careful, Matt, in the amount of context I provide on them as a profile, just out of respect for their request to allow them to manage some of the sensitive communications they’re working through internally. What I would say, some color on that pursuit. Really, we were able to give them an alternative to they’re kind of original plan to in-source on their scale and driving internal infrastructure to manage their revenue cycle. And I think this is a great example of how we intend to differentiate in these large physician – independent physician organizations that are acquisitive.

Historically, they have felt their only option to drive really value – real revenue cycle excellence is to make those investments themselves. Because as I’ve said before, the general market options for them are very fragmented and the pricing constructs are not that sophisticated or said differently, they’re not that aligned to the customers success.

And so as we’ve analyzed this market, we feel strongly there’s an ability for us to put a value prop, very similar to the value prop we have historically offered to our integrated delivery systems, whereby we extend our scale and our infrastructure in an aligned fashion and give them an alternative to building it themselves.

That helps them with speed to value, that helps them with allocation of their mindshare to other strategic priorities, allocation of their capital and where the highest returns are, et cetera, and that is really kind of the characterization of this pursuit. So it wasn’t necessarily competitive to an external vendor. It was really where we were able to step in and demonstrate a true partnership and an aligned approach that they got comfortable with to change their approach to their – to an internal pathway.

Matthew Gillmo

Got it. And then on the pipeline commentary, it sounds like you’ve got good line of sight on some deals through year-end. I was curious if you could sort of help us understand what happens with these deals after they’re doing the diligence on R1? And I know you may not have a big enough history, but have the close rates when you get to this point been pretty high on those types of deals?

Joseph Flanagan

They have. What happens, I would say that these are very complex transactions. When you think about it, I would compare them more to an M&A transaction than a typical contractual relationship in a buy-sell mode of operation. And so there is very deep diligence that’s done because it’s a partnership that’s being consummated, and it’s a transition of control that’s inside of that partnership of a very, very critical process.

So as we progress through diligence, there’s obviously all of the contracting, which I’ve said before, most often includes internal and external adviser spend. And then there’s all the approval dynamics on both sides, the customer side and then on our side. So most often, those approval dynamics include board meetings and board scheduling, et cetera.

And so some of those dependencies are what just drives the lumpiness, if you will or the lack of precision that we can place on an exact date in which these will convert. But we generally have, what I would say is, good markers that every pursuit we have contribute to our thoughtfulness on the forecast ability of these pursuits, and it’s those markers that are informing our encouragement as we look to close out the year and head into 2020.

Matthew Gillmor

And then the last one, I wanted to ask about the DTO and automation initiative. Obviously, pretty meaningful impact to your margins, especially as we think about 2021. I was curious if these initiatives, do they also speed up your ability to ramp margins with new clients as we think about that sort of traditional three-year ramp? And also, could you give us some sense for the – does it actually improve the quality of the product you’re delivering to these health systems?

Joseph Flanagan

Yes. So in my prepared comments, one of the things that I highlighted, as we assessed and prioritized what we were going to work on and the sequencing of those routines as we’ve characterized them, is the scalability of – or the reusability of that automation or that technology development effort. And so I do anticipate – and I would think about this probably second half of 2020, entering 2021, that we start to see some compression in the speed of us hitting those operating partner milestones for profitability.

So I do think that, that should contribute positively to compressing time to value along those lines. We’ve got to get through the launch of all of these. We’ve got to make sure that we drive the execution as we’ve characterized on this call that we expect to see that contribute financially, but I think that’s absolutely probably something that we will target internally and in due course, communicate externally. I’m most excited about the strengthening of the value prop to customers.

So it’s great the financial leverage that we get off of this, but I think from a competitive differentiation whether that be patient satisfaction, we highlighted some of those numbers that we’re seeing in terms of positive impact on patient satisfaction, which in turn, contributes to the competitive differentiation of our customers, whether that be the acceleration of working capital or the reduction of revenue leakage, these have probably a greater impact on those drivers on a relative basis than they do on our core financials. And I think that’s very, very encouraging because we think it’s early innings in this market, and we think there’s a lot of opportunity for solution architectures that bring meaningful value to customers as it relates to transforming the revenue cycle.

Matthew Gillmor

Okay, thanks very much.


Our next question comes from Donald Hooker from KeyBanc. Please go ahead.

Donald Hooker

Great, thanks for the questions. So I guess you seemed optimistic, I mean, congrats on the physician organization deal, and you commented that there were some other end-to-end opportunities in the pipeline. Is there a chance we could see something before year-end? Or just thinking about sort of what sort of next in your sales pipeline in so far as it might impact your 2020 EBITDA, if you have to bring on something new, it could pressure EBITDA?

Joseph Flanagan

Yes. And two things. I think as we said, we’ve got the right amount of activity that our view is that we could, and we have line of sight to getting additional announcements out before year-end. It’s always, like I said, hard for us to predict with precision, but to the best we can assess the stage of the opportunities and the specificity of the work going on between the two teams, that’s what forms our view. Maybe equally, if not more importantly, the progression of activity in all phases of our pipeline activity as we head into 2020 makes us feel really good about 2020 targets.

And Don, what I would say is that the deployment costs associated with those targets are included in our guidance that we’ve got out on 2020. And as Rick commented, we’ll be updating in January as we normally do. And we’ve also provided pretty specific color on what we expect DTO to contribute incrementally to 2020 on this call. So I think the deployment costs associated with growth are all included in those views on 2020.

Donald Hooker

Okay. Super. And then any update on the Intermountain potential purchase of some DaVita facilities that could be revenue for you?

Joseph Flanagan

I’m not going to comment – I’ve got Vijay here with me. And on the heels of this question, maybe it’s a good opportunity for me to – I’ll turn it over to Vijay in a second. We’re not in a position to comment on Intermountain, and as a general matter, we don’t want to be talking on behalf of our customers. I would only say that the strength of our relationship Intermountain is as good as it’s ever been. We’re excited to serve them, they’re truly a model health care organization, and we’re lucky to have them as an operating partner, and that’s how we operate every day with Intermountain. What I do think may make sense, given Vijay’s background is just for him to provide some context and perspective, not specific to Intermountain and DaVita, but more to the infrastructure opportunity to help customers navigate risk-based arrangements.

Vijay Kotte

Yes. Thanks, Joe. I think as we look at the marketplace, one is large, right, in the physician space and those specifically in the value business, there’s a multitude of groups and opportunities for them to participate, and there’s a huge gap in being able to support those groups as they’re moving through the, I guess, spectrum of fee-for-service to value. Our skill set, and as I’ve joined the team and really gotten deep into it, really stems from optimizing what their current relationships are, so understanding where they’re at and how they can perform better and have greater results. And so that’s the hard work, right? There’s a lot of companies out there who were talking about the analytics and give you the data.

What R1 has been good at is really looking at restructuring workflows and getting into the nitty-gritty to change management, which makes the difference. And so as we progress with those partners and different medical groups around the country, especially with the IDN, we hope to be able to help them, not only optimize their current contracts, but help them in designing what the new relationships could be. And so as we look at our partners in Ascension, Intermountain and others as we can help support that, I think we’re well positioned to do so. And in the coming months and over the coming quarters, you’ll start to learn more about how we’re developing that solution as a more deployable product for others to be able to purchase.

Joseph Flanagan

Thanks, Vijay.

Donald Hooker

Thank you.


Our next question comes from Steve Halper from Cantor Fitzgerald. Please go ahead.

Steve Halper

Hi, good morning. Just a housekeeping question. Could you walk us through the mechanics around the diluted share count number since it increased in the quarter?

Rick Evans

Yes. Thanks, Steve. What we really have here is a function of the fact that the company is profitable from a GAAP perspective. And so in that situation, then when you go through and you work basically, the – you have to take into account the warrants that now work into the diluted share count, and those warrants have an exercise price of $350 million, the $60 million – excuse me, 60 million warrants, and so those now factor into the diluted share count.

And previously, all of the equity awards that have been anti-dilutive when we were reporting GAAP net losses, those were excluded. Those are now included in there right now. And so that in – those two factors in themselves add to about 50 million to 55 million shares in the share count in the overall diluted calculation. So it’s really a step from loss to net income, and those things now work into the EPS calculation.

Steve Halper

Right. And you use them – you’re using the treasury stock method…

Rick Evans


Steve Halper

To calculate the proceeds? Okay. And then – but just to be – obviously, the convertible preferreds are assuming that they’re not converted yet in that share count?

Rick Evans

That’s correct.

Steve Halper

But the 50 million to 55 million is net of the treasury stock method?

Rick Evans


Steve Halper

Okay. Great, thank you.

Joseph Flanagan

Thanks, Steve.


[Operator Instructions] Our next question comes from the line of Stephanie Demko from Citi. Please go ahead.

Stephanie Demko

Thank you for taking my question. So your team has been really positive on your NPR targets down the road, and what surprised me, if not just for 2019, but 2020. So asking in a more of a forward-looking way, what gives you confidence in your forward 2020 NPR target and being able to meet them?

Joseph Flanagan

I really think what gives us confidence, and I’ve got Gary here as well, Gary Long with us, but obviously, we spent a fair amount of time on this call talking about closing the year in line of sight. What forms line of sight on closing the year, that being 2019 on some of our targets. As we open the aperture of it, to your question, what really gives us very, very encouraging signs is just the amount of activity that we have in all phases of our commercial pursuits. And I would characterize activity as increasing quarter-over-quarter.

And that increase is really coming from some of the larger integrated delivery systems, which plays to our strengths and obviously has a more meaningful contribution potential financially. So as we look to 2020 and even beyond, that’s what forms some of our teams encouragement, excitement, if you will. And it also forms the basis of our characterization that this market is pretty early and still in its formative stages, which I think represents a quite interesting opportunity looking forward.

Stephanie Demko

Understood. And the last time we met, you spoke about putting out a new long-term guidance refresh in the fourth quarter. Just given some of the turnover of the CFO seat, is that still on track or would that be pushed out?

Joseph Flanagan

No. I think our plan all along, Stephanie, and maybe we had some confusion, our plan all along has been to really update long range guidance, most likely in January when we update 2020 guidance. And the logic anchor on that is twofold: one, this is a long-cycle business, and we have, as we’ve always said, a fair amount of visibility on our contracted book of business. And as we head into 2020, the long-range guidance that we’ve had out for the better part of the past three years now will be in your guidance.

And so we would expect nothing related to the CFO transition has changed that. It’s always been our view that we would do that in conjunction with updating 2020. And along those lines, I would just emphasize, as we exit 2020 with the wins we’ve announced to date, we still have $13 billion of managed NPR that’s in its margin optimization phase. It’s not fully optimized. And so we have a fair amount of visibility, and I think in a positive sense, characterizing the long-range potential of that, inclusive of DTO, is what we intend to do in early Q1.

Stephanie Demko

Understood. So that per DTO could make us more of a margin story. Thank you for taking my question.

Joseph Flanagan

Thank you, Stephanie.


We have no one left in queue at this time. I’ll turn the call back to Joe for closing remarks.

Joseph Flanagan

Thanks, Carol. And I’d like to thank everybody for joining us today. As commented, we’re very encouraged by the progress we’ve made to date, whether it’s our DTO effort, underlying operational execution and then continued momentum and traction on the commercial front. So as we close, we’re super excited about these developments, and we look forward to updating everybody on future calls. Operator, thanks for all your help, and we can close the call.


Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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