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R1 RCM Inc. /DE (RCM)·Q2 2024 Earnings Summary

Executive Summary

  • Revenue rose 12.0% YoY to $627.9M; adjusted EBITDA was $156.1M, reflecting resilient operations despite vendor/customer outages; GAAP diluted EPS was ($0.02) .
  • Management withdrew 2024 guidance due to the announced take‑private; TowerBrook/CD&R agreed to acquire R1 at $14.30 per share in cash, with closing targeted by year-end pending approvals .
  • Operational updates signal near‑term headwinds from the Ascension cyberattack: full‑year revenue impact expected at $75–$95M with $10–$15M incremental H2 expenses, largely timing shifts into 1H25; liquidity remained strong at ~$682M (cash plus revolver capacity) at quarter‑end .
  • Growth drivers included Acclara contribution and strong Modular & Other revenue (+35% YoY), while incentive fees were pressured by outages; onboarding of the largest new end‑to‑end customer is on track, with 1,900 associates onboarded and revenue ramp expected in 2H24 .

What Went Well and What Went Wrong

What Went Well

  • “Underlying business trends are positive,” with $628M revenue and $156M adjusted EBITDA; management emphasized scale (serving over 90 of top 100 health systems, 500+ customers) and progress on GenAI initiatives .
  • Strong Modular & Other growth: $231.6M (+35% YoY), driven by Acclara and cross‑sell expansions (e.g., charge capture, underpayment solutions adding several million in annual revenue) .
  • Onboarding execution: successfully onboarded ~1,900 associates for the largest new end‑to‑end customer, supporting 2H24 revenue ramp; Acclara integration ahead of timeline with synergy confidence .

What Went Wrong

  • Incentive fees ($21.7M) below expectations due to outages (approx. $4M impact); outages also increased non‑GAAP cost of services by ~$4M in Q2 .
  • GAAP net loss widened to ($7.6M) vs. ($1.0M) YoY, with Other expenses of $34.3M including $14M integration/severance, $6.3M vendor termination fees, and ~$8M advisory fees tied to the strategic review .
  • Ascension cyberattack created near‑term revenue/expense headwinds and operational backlog; management expects most revenue impact to be timing shifts into 2025 and incremental H2 labor/tech costs of $10–$15M .

Financial Results

Income Statement and Margins

MetricQ2 2023Q1 2024Q2 2024
Revenue ($USD Millions)$560.7 $603.9 $627.9
GAAP Diluted EPS ($)$— ($0.08) ($0.02)
GAAP Operating Income ($USD Millions)$23.9 $8.0 $29.1
GAAP Operating Margin (%)4.26% (23.9/560.7) 1.33% (8.0/603.9) 4.64% (29.1/627.9)
Adjusted EBITDA ($USD Millions)$142.9 $152.2 $156.1
Adjusted EBITDA Margin (%)25.48% (142.9/560.7) 25.18% (152.2/603.9) 24.86% (156.1/627.9)
GAAP Net Income (Loss) ($USD Millions)($1.0) ($35.1) ($7.6)
Net Income Margin (%)(0.18)% ((-1.0)/560.7) (5.81)% ((-35.1)/603.9) (1.21)% ((-7.6)/627.9)
Vs. S&P Global EstimatesN/A – consensus unavailable via S&P Global due to mapping limitations

Note: S&P Global consensus estimates were unavailable for RCM due to a CIQ mapping issue, so estimate comparisons cannot be provided.

Revenue Mix

Revenue Component ($USD Millions)Q2 2023Q1 2024Q2 2024
Net operating fees$357.8 $381.5 $374.6
Incentive fees$30.8 $15.6 $21.7
Modular and other$172.1 $206.8 $231.6
Total net services revenue$560.7 $603.9 $627.9

KPIs and Cost Structure

KPI ($USD Millions unless noted)Q2 2023Q1 2024Q2 2024
Non‑GAAP Cost of Services$364.5 $401.1 $421.0
Non‑GAAP SG&A$53.3 $50.6 $50.8
Other expenses (GAAP)$28.3 $33.9 $34.3
Cash & cash equivalents—$178.0 $163.0
Net debt—$2,133.3 $2,130.0
Liquidity (cash + revolver capacity)—~$697.0 ~$682.0

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2024$2.60B–$2.64B Not providing guidance Withdrawn
GAAP Operating IncomeFY 2024$85M–$105M Not providing guidance Withdrawn
Adjusted EBITDAFY 2024$625M–$650M Not providing guidance Withdrawn
Ascension outage impact (color)FY 2024—Revenue impact $75–$95M; incremental H2 costs $10–$15M; timing shift to 1H25 New disclosure

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23 and Q1’24)Current Period (Q2’24)Trend
AI/technology initiativesEmphasis on GenAI, automation, cloud migration; examples include denials automation and clinical appeal summarization Continued focus on platform modernization; AI assistants, task automation; self‑service; high‑impact use cases reducing appeal time by ~75% Steady execution; expanding scope and adoption
Vendor/cyber disruptionsChange Healthcare outage impact quantified in Q1; mitigations via alternative clearinghouses Ascension outage: manual backlog, reconnection progress; timing impacts to fees and increased H2 expenses Elevated near-term headwinds; recovery expected through 2025
Customer onboardingProvidence ramp and investments discussed; guidance aligned Largest new end‑to‑end customer onboarding ~1,900 associates; revenue ramp expected 2H24 Positive execution; near‑term ramp
Acclara integrationClosed in Jan; harmonization to improve margins in 2025; ~$275–$280M FY’24 revenue expected Integration ahead of timeline; synergies and cross‑sell opportunities noted Progressing ahead of plan
Strategic review / take‑privateStrategic review underway; advisory expenses in Q1 TowerBrook/CD&R to acquire R1 for $14.30 per share in cash; guidance withdrawn Transaction overshadowing near‑term guidance

Management Commentary

  • “We believe our customer‑centric approach and continued innovation around Gen AI will keep R1 at the forefront of the industry and support our continued growth.” — CEO Lee Rivas
  • “Our adjusted EBITDA for the quarter was $156.1 million, which was slightly ahead of our internal expectations even after the impact from the incidents we mentioned.” — CFO Jennifer Williams
  • “We successfully completed the onboarding of over 1,900 associates... on track to begin ramping revenue in the second half of the year.” — CEO Lee Rivas
  • “We expect the full year revenue impact of the Ascension outage to be between $75 million to $95 million... Most of this impact is expected to be a delay... into the first half of 2025.” — CFO Jennifer Williams

Q&A Highlights

  • Change Healthcare and Ascension outage cadence: incentive fees hit Q1 and Q4; base fees timing shift between Q3 and Q4 given collection lags; incremental cost ~$2M per quarter in 2024 (Change) and $10–$15M H2 related to Ascension .
  • Providence onboarding visibility: execution is “materially in line” with guidance; teams and playbook support ramp in 2H24/2025 .
  • Acclara harmonization: pruning non‑profitable lines and aligning contracts; top‑line impact but neutral to EBITDA, positioning margins for 2025 .
  • Pipeline and demand: modular bookings remain strong; elevated denials/AR recovery demand expected post‑outages; end‑to‑end pipeline steady .
  • Q2 call: Pre‑recorded remarks only; no live Q&A due to pending transaction .

Estimates Context

  • S&P Global consensus estimates were attempted but unavailable due to a CIQ mapping limitation for RCM, preventing retrieval of EPS and revenue consensus for Q2 2024. As a result, comparisons vs. Street estimates cannot be provided at this time.
  • Note: We will update estimate comparisons when S&P Global mapping for RCM becomes available.

Key Takeaways for Investors

  • Near‑term fundamentals resilient: double‑digit revenue growth and stable adjusted EBITDA margin (~25%), with operating margin recovering vs. Q1 despite outage headwinds .
  • Outage impacts are largely timing shifts: expect net operating fee revenue volatility between Q3 and Q4; most Ascension‑related revenue recognized in 2025; incremental H2 costs for backlog resolution and security hardening .
  • Growth vectors intact: Acclara integration ahead of plan, strong Modular & Other expansion, and new end‑to‑end onboarding drive 2H24 ramp and 2025 set‑up .
  • Balance sheet/liquidity adequate: $163M cash, ~$682M liquidity, and net debt ~$2.13B; watch interest expense trajectory and integration costs within Other expenses .
  • Transaction supersedes guidance: take‑private at $14.30 provides a valuation anchor; stock reaction likely dominated by deal progress, approvals, and any competing bids or regulatory developments .
  • Tactical: Expect quarter‑to‑quarter revenue mix noise (base vs. incentive fees) and margin variability tied to outage recovery; constructive into 2025 as cash collections normalize .
  • Medium‑term thesis: Scale plus AI‑driven automation in revenue cycle management supports share gains and margin maturation; cross‑sell into large installed base remains a durable earnings driver .