Jennifer Williams: Yeah. As far as the phasing, from a revenue perspective, we do expect that revenue will ramp second half of the year, $45 million to $50 million of net operating fees in the second half. And as far as the investments that we’re making, we’re starting to make investments right out of the gate. We’re starting to ramp resources so that we can deploy and be ready for the transitions that we expect to happen mid-year. So those investments will start in Q1. As far as Acclara, obviously, that revenue will begin to be recognized at the time of close. That’s an existing business. So, the $290 million to $295 million of revenue will begin mid-January. And we’ve adjusted for the timing of close in that $290 million to $295 million estimate for the year. And there’s not a ton of seasonality there, so you can phase that across the year.
Daniel Grosslight: Got it. Can you remind us — sorry, go ahead.
Jennifer Williams: I was just going to say, as far as pediatrics and the transition, our guidance assumes a mid-year transition. The reality is there may be some things that transition earlier in the year, but go a little longer. So, I don’t think it’s going to be everything transitioned at the end of Q2. I think there will be some things that will begin to transition in Q2, but will go into the second half of the year as well.
Daniel Grosslight: Okay, got it. Okay. Can you remind us how many employees you have now in the Philippines and how much more juice there is left to squeeze out a margin by further shifting folks to the Philippines in ’24?
Lee Rivas: Yeah. So, look, this is an area that we don’t get to talk about that much, Daniel, so I’m glad you brought up the question, but this is a very valuable global center for us that helps diversify outside of India. We have just over 2,000 people in the facility. Historically, mostly focused on customer service, front-end patient registration and so on. We’ve actually had some really good successes with some of our large customers deploying technology, leveraging that facility. So, this is for sure an area we will continue to expand and will deliver opportunities for a lot of value to our customers that deploy not just front-end, but also customer service. And we’re also diversifying outside of other areas. So, we are realizing the value of that facility as it matures, just like India did 10-plus years ago. As it matures, that facility is able to take on more and diversified parts of customer workflow. So overall, I feel really good about the strategy there.
Daniel Grosslight: Got it. Thank you.
Operator: Our next question comes from Sean Dodge from RBC Capital Markets. Your line is now open.
Sean Dodge: Yeah, thanks. So, your earlier comments on EBITDA growth, if we bridge that into cash flow, Jennifer, you mentioned stronger performance in 2023, and then, through ’24, you’ve laid out the EBITDA guidance and gave much more detail on CapEx and other items. I guess if we bake all of this in, how should we be thinking about free cash flow trajectory both into this year? And then, any updates to how we should expect that to unfold over the next couple of years? And maybe what the big drivers of that should be?
Jennifer Williams: On the cash flow front, we said last year that we expect cash flow for the core R1 business before Providence and Acclara to be in the mid-30% from a cash flow conversion as a percentage of the EBITDA, and that’s still the expectation. We had very strong cash flow the second half of this year. So, we feel very confident in that. There are some investments, as we indicated, on the Providence new business, that will bring down that cash flow conversion in 2024 for Providence as we invest early on in that revenue contract. And then Acclara with the integration, we expect that it will be a drag on free cash flow in 2024, as we have transaction costs in the first half of the year, we have higher interest expense associated with the debt, and we’re going to be integrating the business and realizing costs associated with synergies as we begin to execute on that.
So, the cash flow in 2024 is in the 20%-plus range for 2024. But as we move into 2025 and beyond, we would expect that we continue to improve on what we would look at as that core free cash flow conversion of the mid-30% to continue to increase that. And we’ve said that that cash flow conversion target is in the 50%-plus range. So, we still don’t think that there’s any reason why we wouldn’t be able to get to those cash flow conversion rates.
Sean Dodge: Okay. Great. And then, for this year’s guidance, 2024 guidance, can you share what you’ve assumed or baked in there in terms of credit allowances? There’s a lot of noise there in 2023. Should 2024 be more normal? And then, what does normal look like now you think going forward?
Jennifer Williams: It will be improved. Our guidance assumes that will be improved off of 2023, but I do think it will still be a bit elevated from a historical number. What new normal looks like is probably in the range of $10 million a year in that range, and that’s what’s assumed in the 2024 guidance. So, some improvement coming off of 2024, but still higher than historical — or 2023, but higher than historical.
Sean Dodge: Great. Thank you, Jen.
Operator: Question comes from Evercore Partner. Your line is now open.
Elizabeth Anderson: Hi, it’s Elizabeth Anderson. So, thanks for the question, guys. One question I had, can you talk, Lee, maybe, about that customer approach change you referenced in your other question? It’d be helpful to hear a little bit more details about that.
Lee Rivas: Yes, Elizabeth, it’s simple. One is just, from a go-to-market standpoint, being a lot more flexible on how we meet the needs for customers. Two is continuing to leverage the Cloudmed customer position, market position to expand into managed services, expand into end-to-end. Three is flexible contracting. So, Elizabeth, this is kind of think about Providence, right? Could we have pushed harder on the front-end? Could we have pushed harder on some expansion opportunities? For sure, but it’s being flexible on what the customer wanted to do and not phasing anything, and just leaving some of the expansion opportunities for later. The thing I specifically mentioned is, look, as the business has scaled from an operations standpoint, really thinking about how we scale to the next phase of NPR, you could imagine our business over time being a lot more than $70 billion of NPR, right, with just natural tailwinds at the market level, so how do we continue to scale what has historically been a centralized operation, and at what level can we be more customer specific on the operational side.
On the customer-facing side, we’ve also scaled. So, this means we have to be more aggressive about hiring talent that is customer-facing, be a lot more customer centric in our approach, be more systemic or systematic on how we engage with customers, the level of executive that engages. And this is about expanding our talent pool, really. And the other thing I would highlight, Elizabeth, as I didn’t mention, is deploying a more data and analytic approach and highlighting to customers this macro dynamic that’s happening around payer mix, and how that factor is somewhat in our control with some of the payer escalation processes we have. But to some extent is a macro dynamic, we can help arm our customers to address and paint a picture for them that R1 is best equipped to help them through these.
But there are for sure macro dynamics that are maybe less in our control So, I could go deeper in that, Elizabeth. But that’s at the high level, what I’m talking about.
Elizabeth Anderson: Got it. That’s super helpful. And I was wondering if there’s any more detail that you can provide in terms of how you feel about the pipeline for incremental new deals as we think about 2024 and potential timing on that. Appreciate the additional color on the 4Q win.
Lee Rivas: Yeah, just the interest of time, Elizabeth, very good. So, good across all fronts, end-to-end, modular. We’ve learned a lot of lessons from that last year about not projecting a deal, but a couple of color — pieces of color, the land of large, large deals, $10-plus billion is less and less with some of those choose end-to-end partners. I do think the next phase of deal is something in the $2 billion, up to $5 billion range. But we have a healthy pipeline on both the end-to-end side, and I expect another strong year of bookings on the Cloudmed and R1 modular side.
Elizabeth Anderson: Thank you.
Operator: Our next question comes from Vikram Kesava from Baird. Your line is now open.
Vikram Kesavabhotla: Great. Thank you for taking the questions. I wanted to ask about the incentive fees. It looks like those stepped down sequentially in the fourth quarter. I was curious if you could talk about the drivers there. I know you called out some one-time factors on the previous conference call, but just wondering if we can get some color on how that ultimately played out relative to your expectations, and what the guidance assumes for incentive fees in 2024. And then, on a related topic, just wondering if you could talk about just what you’re observing more broadly in terms of payer reimbursement timelines. I think in the past you’ve suggested that you’re starting to see signs of stabilization. Just curious if that’s still the case or if you’re seeing any signs of it getting particularly better or worse. And I’ll leave it there. Thanks.
Jennifer Williams: Sure. On incentive fees, last quarter, we had some one-time items that increased our incentive fees in the quarter, and so we had reflected that we knew we would have a decrease quarter-over-quarter in incentive fees. Incentive fees landed right in line with our expectations, so there was no surprise there. Those one-time fees were really twofold. One was related to an acceleration of some incentive fees for a contract that ended in Q4, and it accelerated. So, we had extra, if you will, incentive fees in Q3. And then, one was where we had a reclass based on a contractual change, where it’s just a reclass out of incentive fees and into net operating fees. So, it was just a movement, but no change to either total revenue or EBITDA from that perspective.
So that’s the change. As we look to 2024, we do expect that payer reimbursement timelines, first of all, they stabilized in 2023. We saw some very modest improvements, kind of quarter-over-quarter, a little bit of puts and takes across the quarter, but very modest improvement year-over-year. And I would expect the same for 2024. I don’t think there’s going to be significant improvement in payer timelines. I would love to be pleasantly surprised there, but that’s not what we’re assuming. So, we expect that those will remain stable to where they were in 2023. And then, as a result, I expect, given our run rate in Q4 for our existing customer base is kind of at a run rate, I would expect that incentive fees are relatively stable and consistent with what we saw in 2023.
Vikram Kesavabhotla: Okay. Thank you.
Operator: Our next question comes from Bank of America. Your line is now open.
Allen Lutz: Good morning. This is Allen Lutz at BofA. One of your largest customers reported really nice revenue growth in the most recent quarter, and it seems like the utilization environment seems to be improving more broadly. How should we think about your guidance for low single-digit growth of core customers that’s embedded in the guide? How does that compare with 2023?
Lee Rivas: Look, I’d say the short answer, Allen, is kind of what you’re saying, we expect volumes or utilization to be very similar to 2023. Each provider is unique. We have a different base of business than what you might see at a macro level, especially related to some of the public providers. We have projected low single-digit growth in cash collections, which as we said before, blends volume, acuity and mix throughout our customer base. So, low single-digits. Is there upside? We’ll see, but we’re pretty confident in our projections, just as we were in ’23.
Allen Lutz: Great. Thank you. And then, Lee, I guess on strategy, it seems like there’s now a greater focus on managed services and modular. Has that changed the way the salesforce is speaking with prospects in 2024? Thanks.
Lee Rivas: Yeah. Look, it’s changed the way we think about prospective customers and I think the major change is — and I’m glad you asked the question, Allen, I haven’t articulated this is being very thoughtful about what customers we take on. So, being thoughtful, if a customer has highly fragmented technologies, processes, systems, isn’t centralized from a revenue cycle, that we are going to be very thoughtful on how we take those on. It doesn’t mean we can’t handle complexity, but we may project longer onboarding. We may air towards managed services which has essentially let the customer keep control but deploy our AR coding other resources with global scale and technology and probably be more aggressive on deployment of Cloudmed, which drives one very important metric around revenue integrity, and that can help them with one of the bigger problem areas around denials and AR.
Operator: All right. Thank you so much. This closes our question-and-answer session for today. I’d now like to hand back over to Lee to close the session. Thank you.
Lee Rivas: Thank you, everyone. What I want to say in closing is we believe we’ve established a solid foundation for future growth and performance. We remain focused on opportunities ahead of us. As Jennifer articulated, one is delivering value for existing customers. We want to really focus on customer satisfaction, deploying, continuing to expand our base business with our existing customers. Two is expanding our market position with new customers, including Providence and other new modular wins. Three is operational discipline and execution as we continue to expand our global footprint. And fourth, and this is the part that you’ll hear me and Jennifer talk about a lot more, is automation through technology with specific focus on AI. So, we are confident as we execute on these areas, we will deliver for our customers, first and foremost, and deliver sustainable growth, EBITDA and cash flow for our shareholders. Thank you.
Operator: This concludes today’s conference call. You may now all disconnect. Thank you.
