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RR

R1 RCM Inc. /DE (RCM)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 delivered steady topline and strong profitability: revenue $575.1M (+7.8% y/y) and adjusted EBITDA $167.7M (+33.5% y/y; ~29% margin), while GAAP net income was $1.4M and diluted EPS rounded to $0.00 .
  • Mix remained favorable: modular and other revenue grew double‑digits, while net operating fees rose 7% y/y; non‑GAAP cost of services declined y/y on synergy realization and margin maturity .
  • 2024 outlook guides revenue to $2.625B–$2.675B, GAAP operating income $105M–$135M, and adjusted EBITDA $650M–$670M, reflecting Acclara and Providence contributions alongside continued modular growth and Cloudmed synergies .
  • Estimates context: S&P Global Wall Street consensus for Q4 2023 was unavailable via our data connector; result vs estimates cannot be assessed. We will update when SPGI mapping is resolved.

What Went Well and What Went Wrong

What Went Well

  • Adjusted EBITDA acceleration and margin expansion: Q4 adjusted EBITDA reached $167.7M (+33.5% y/y) as cost discipline and Cloudmed integration drove operating leverage; CFO noted ~29% adjusted EBITDA margin in Q4 .
  • Modular momentum and technology leverage: management highlighted double‑digit modular growth and active cross‑sell into a 500+ customer base, with GenAI deployments improving productivity in AR follow‑up and physician coding QA (e.g., LLM summarization rolled out to thousands of AR staff) .
  • Cloudmed synergy delivery ahead of plan: ~$30M realized in 2023, with an additional ~$20M expected in 2024; strong bookings underpin mid‑teens growth in 2024 for legacy Cloudmed solutions .

What Went Wrong

  • Credit allowances elevated: Q4 non‑GAAP SG&A included a $10.5M provision tied to two customers (one end‑to‑end, one modular) amid specific business/macro pressures; guidance assumes improved but still elevated allowances in 2024 (~$10M “new normal”) .
  • Incentive fees sequentially lower from Q3 due to prior one‑offs; Q4 incentive fees were “in line,” contributing less compared to Q3’s accelerated items and contract reclassifications .
  • Near‑term EBITDA headwind from Providence ramp: 2024 outlook includes an estimated ~$45M negative adjusted EBITDA impact from upfront investments to onboard Providence, partially offset by ~$25M adjusted EBITDA from Acclara .

Financial Results

Consolidated Quarterly Comparisons (oldest → newest)

MetricQ2 2023Q3 2023Q4 2023
Revenue ($USD Millions)$560.7 $572.8 $575.1
GAAP Net Income ($USD Millions)$0.3 $1.3 $1.4
Diluted EPS ($USD)$0.00 $0.00 $0.00
Adjusted EBITDA ($USD Millions)$142.9 $161.5 $167.7
Adjusted EBITDA Margin (%)25.5% (142.9/560.7) 28.2% (161.5/572.8) ~29%

Notes: EBITDA margins for Q2 and Q3 are computed from cited values; Q4 margin cited by management .

Segment Revenue Breakdown

Revenue Component ($USD Millions)Q2 2023Q3 2023Q4 2023
Net Operating Fees$357.8 $368.0 $369.1
Incentive Fees$30.8 $30.1 $23.9
Modular and Other$172.1 $174.7 $182.1
Total Net Services Revenue$560.7 $572.8 $575.1

KPI and Balance Sheet Highlights

KPIQ2 2023Q3 2023Q4 2023
Cash and Cash Equivalents ($USD Millions)$123.1 $164.9 $173.6
Net Debt ($USD Millions)$1,652.3 $1,568.1 $1,482.7
Liquidity ($USD Millions)$631.9 $703.7 $772.4
Cash from Operations (FY) ($USD Millions)——$340.1 (FY 2023)
Weighted Diluted Shares454.1M (H1 reference) 456.4M 451.5M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Billions)FY 2024N/A$2.625–$2.675 N/A
GAAP Operating Income ($USD Millions)FY 2024N/A$105–$135 N/A
Adjusted EBITDA ($USD Millions)FY 2024N/A$650–$670 N/A
Capital Expenditures (% of Revenue)FY 2024N/A~5% N/A
Other Expenses ($USD Millions)FY 2024N/A~$105–$125 (incl. Acclara integration) N/A
Interest Expense ($USD Millions)FY 2024N/A$160–$165 (incl. +$575M Term B, +$80M revolver) N/A
Depreciation & Amortization ($USD Millions)FY 2024N/A$330–$350 N/A
Providence ContributionFY 2024N/ANet operating fees ~$45–$50M in H2; adj. EBITDA ~($45M) N/A
Acclara ContributionFY 2024N/ARevenue ~$290–$295M; adj. EBITDA ~$25M N/A

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2023)Previous Mentions (Q3 2023)Current Period (Q4 2023)Trend
AI/Generative AI initiativesIntroduced LLM plans; automation in prior auth and work prioritization; Azure OpenAI integration roadmap Announced Microsoft Azure OpenAI collaboration; deployed LLM in physician coding QA; AR summarization pilots Expanded GenAI in denials, AR next‑action prediction, coding automation; LLM summaries live for thousands of staff Strengthening deployment velocity
Cloudmed growth & synergies20% y/y growth target; integration savings ahead; cross‑sell into base Strong bookings; ~$30M synergies in 2023; continued cost takeout and offshoring ~Mid‑teens growth assumed for 2024; +$20M incremental synergies in 2024 Durable growth with incremental synergies
Payer timelines & ARStabilizing but still elevated vs historical; AR improvements; added labor to reduce aged AR Mostly stable sequentially; modest improvement; incentive fees benefited Assumes continued stability; modest improvement; incentive fees “in line” Gradual normalization
Customer health & credit allowancesReserve for APP physician customer (+$11.6M); wind‑down impact discussed Additional allowance ($7.5M); monitoring customer pressures Q4 provision $10.5M; 2024 “new normal” ~$10M allowances Improving from 2023 peak, remains elevated
Sutter Phase IIPlanning in late 2023; impact expected in 2024 Phase I progressing well; timing of Phase II TBD; no assumed 2023 impact Continued dialogue; no contribution in 2024 outlook; update each quarter Timing remains a watch item
Providence onboarding——H2 2024 revenue ramp ($45–$50M NOF); upfront EBITDA headwind (~$45M) Near‑term headwind; 2025 margin uplift expected
Offshoring (Philippines center)Announced expansion tied to Ascension renewal ~1,500 staff; expected growth; customer service/front-end expansion >2,000 staff; diversifying beyond front‑end Expanding capacity and scope

Management Commentary

  • “We delivered $2.25 billion in revenue, strong adjusted EBITDA of approximately $614 million with adjusted EBITDA margins of 27%.” (CEO) .
  • “Our modular and other revenue posted another strong quarter… Double‑digit revenue growth year-over-year was primarily driven by cross‑selling solutions to our existing customers.” (CFO) .
  • “We delivered approximately $30 million in synergies from the Cloudmed integration… anticipate an additional $20 million from Cloudmed synergies in 2024.” (CEO) .
  • “For 2024, we expect revenue of $2.625 billion to $2.675 billion… adjusted EBITDA of $650 million to $670 million.” (CFO) .
  • “We believe Gen AI … will power our incremental automation throughout many parts of our business and the provider revenue cycle.” (CEO) .

Q&A Highlights

  • Cloudmed outlook: Strong bookings support mid‑teens growth; ~$20M 2024 synergies driven by automation, analytics, and global transitions (CFO detail on shifting resource mix) .
  • Strategy shift to flexible managed services/modular: Greater focus on higher‑margin modular offerings and selective end‑to‑end engagements; leveraging Cloudmed data and AI to improve yield and lower cost .
  • Credit allowances: Q4 specific $10.5M charge tied to two customers; 2024 guidance assumes improved but elevated allowances (~$10M) .
  • Providence phasing: H2 2024 net operating fees ~$45–$50M; upfront investment begins in Q1; negative ~$45M adjusted EBITDA impact in 2024 with margin uplift expected in 2025 .
  • Free cash flow conversion: Core R1 mid‑30% of EBITDA; 2024 ~20%+ due to Providence ramp and Acclara integration; long‑term 50%+ target remains intact .

Estimates Context

  • SPGI consensus estimates for Q4 2023 could not be retrieved due to missing mapping for RCM in our connector. As a result, we cannot provide revenue/EPS/EBITDA consensus or assess beats/misses. We will refresh when SPGI mapping is updated.
  • Management’s preliminary Q4 preview (Jan 8): revenue ~$563–$567M, adjusted EBITDA ~$163–$166M, GAAP operating income $36–$39M, GAAP net loss $8–$10M; final reported Q4 results modestly exceeded these preliminary ranges (actual revenue $575.1M, adjusted EBITDA $167.7M, GAAP net income $1.4M) .

Key Takeaways for Investors

  • Q4 confirms resilient topline and notable profitability expansion, with modular/Cloudmed mix and synergies driving operating leverage; margin trajectory remains favorable into 2025 as Providence matures .
  • Near‑term headwinds from Providence ramp (negative ~$45M adjusted EBITDA in 2024) are strategic investments likely to unlock mid‑term margin improvement and revenue scale from H2 2024 onward .
  • AI/GenAI is moving from pilot to production across denials, AR workflows, and coding; productivity gains should support ongoing cost reductions and yield improvement, a potential multi‑year catalyst for margin expansion .
  • Credit allowances remain a watch item; 2024 “new normal” still above historical, but improved vs 2023—monitor customer health and receivables trends alongside incentive fee stability .
  • Liquidity strengthened (cash $173.6M; net debt $1.48B; liquidity ~$772M), with operating cash flow of $340.1M in FY’23; supports integration, technology investments, and flexibility on capital allocation .
  • With SPGI consensus unavailable, trading reactions to Q4 may hinge more on narrative (Cloudmed/bookings, Providence phasing, AI execution) and 2024 guide quality; revisit beat/miss context once SPGI mapping is restored.

Appendix: Additional Data Points and References

  • Q4 Revenue composition: Net operating fees $369.1M; incentive fees $23.9M; modular/other $182.1M .
  • Q4 operating line items: GAAP cost of services $441.6M; SG&A $55.7M; other expenses $28.7M; operating income $49.1M .
  • Non‑GAAP reconciliations: Q4 non‑GAAP cost of services $357.8M; non‑GAAP SG&A $49.6M; adjusted EBITDA $167.7M .
  • 2024 guidance reconciliation: GAAP operating income $105–$135 + D&A $330–$350 + SBC $80–$90 + strategic/severance/other $105–$125 ⇒ adjusted EBITDA $650–$670 .