R1 RCM Inc. (RCM) Q4 2018 Earnings Conference Call Transcript

RCM earnings call for the period ending December 31, 2018.

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R1 RCM Inc.  (NASDAQ:RCM)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 7:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Leandra and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM Q4 and Full Year 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Atif Rahim, Head of Investor Relations, you may begin your conference.

Atif Rahim -- Senior Vice President Investor Relations and Business Development

Thank you. 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 it 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, expected uses of cash, expected benefits from the Intermedix acquisition, 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.

The forward-looking statements made on today's call are based on R1's current expectations and projections of our future events as of today only and should not be relied upon as representing the company's views as of any subsequent date. Subsequent events and developments, including actual results or changes in our assumptions may cause our views to change. 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.

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. 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 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 -- President and Chief Executive Officer

Thanks, Atif. Good morning everyone and thank you for joining us. I'm pleased to report we closed out 2018 on an excellent note with adjusted EBITDA above the high end of our guidance. Fourth quarter revenue of $262.9 million was up 87% over the prior fourth quarter and adjusted EBITDA of $27.1 million was up $21.4 million. For the full year, we generated revenue of $868.5 million and adjusted EBITDA of $57 million. The entire team performed exceptionally well over the course of 2018.

I'm encouraged by the pace of execution across our customer base led by a disciplined deployment of our operating model. We continue to see faster margin progression relative to our model targets at customers in the margin-ramp phase. The sustainability of this accelerated margin progression gives us a higher degree of confidence in the 2019 and 2020 EBITDA guidance ranges we provided earlier this year. I'm also encouraged by the progress that our commercial team is making and gaining industry recognition for R1 and advancing potential new deals through our pipeline and process. We're also focused on product innovation and technology leadership to drive further value for our customers. We're particularly excited about our digital transformation program. I'll discuss this and our other initiatives shortly, but first let me cover some of our 2018 accomplishments.

In January, we announced a new 10-year operating partner agreement with Intermountain Healthcare. Intermountain was a long-standing co-managed customer and the new agreement expanded the scope of our relationship to cover the physician and post-acute care settings. Despite a single instance of an EHR widely deployed at Intermountain, we were able to demonstrate the value we bring to the table with our deep expertise in the revenue cycle. This is a great example of how our technology-enabled services offering can deliver superior value, relative to traditional software vendors and point solutions currently available in the market. Our deployment activities are progressing well. Today, we transitioned more than 2300 employees to serve the Intermountain footprint and have rationalized 74% of targeted third party spend. Intermountain is a great partner and a globally respected thought leader in healthcare. We're pleased to collaborate with them and next quarter, we plan to open a technology and innovation center in Salt Lake City. We expect this state of the art facility to foster innovation in the revenue cycle to develop solutions that improve the patient experience and drive financial results for healthcare providers.

In February 2018, we announced that Presence Health selected us for

In February 2018, we announced that Presence Health selected us for their revenue cycle needs under a 10-year operating partnership. In June, we announced the expansion of this relationship to include AMITA Health. We began our deployment activities at Presence and AMITA Health shortly thereafter. By year-end we started ramping up shared services functions and last month we welcomed more than 1,000 associates to R1. Our deployment activities are in full swing at Presence and AMITA, third party vendor spend rationalization is currently up 43% of target, which is substantially ahead of our normal trajectory given deployment activities have been going on since last summer.

In May, we completed the acquisition of Intermedix. This was a transformative step for R1 launching us into the physician RCM market with a highly scalable and established platform. Intermedix brought us a diverse base of more than 700 customers and on a combined basis we have the expertise at scale to serve more than 75 different physician specialties. Their data analytics and automation capabilities were also highly complementary. Most importantly, Intermedix allowed us to accelerate our vision of providing an integrated physician acute revenue cycle solution to large health systems. Integration efforts are progressing according to plan and we are gearing up for the formal launch of our physician offering targeted toward physician groups that are part of IDNs.

Concurrent with the announcement of the Intermedix acquisition, we announced the addition of $2 billion in NPR from Ascension Medical Group. We started onboarding this new business in the fourth quarter and are on track to onboard the majority of work performed out of Ascension's centralized locations in the first half of 2019. For the work that was performed out of Ascension's centralized locations, we are well on our way to rationalizing third party vendor spend and are currently at 75% of target. When fully deployed, we expect to have more than 15,000 office space providers in the IDN setting.

The last key development in 2018 that I'd like to highlight is the launch of our Digital Transformation Office or DTO. While we had an ongoing digitization and automation capability at R1, the additional automation capabilities we acquired from Intermedix created combined scale to accelerate our momentum. Over the summer, we launched an extensive evaluation to determine the best approach to systematically automate our transactional environment on an end-to-end basis. The result of this work was the formal launch of the Digital Transformation Office. This office is fully resourced with dedicated internal talent and best-in-class partners allowing us to build this capability at scale in a relatively short period of time. Given the $30 billion plus of net patient revenue that we manage on a full control basis, we believe we have a unique opportunity to leverage our scale and expertise to maximize the automation of manual tasks performed in the revenue cycle.

In summary, 2018 was a pivotal year for the company. We nearly doubled our revenue and grew adjusted EBITDA by $52.9 million compared to 2017. We added more than $10 billion in new contracted NPR, at the same time remain focused on execution at customers on-boarded in prior years. With the acquisition of Intermedix, we entered a new target market at scale and added meaningful new capability. Lastly, by establishing the DTO, we created a pathway to generate incremental, sustainable value for us and for our customers. Overall, we are much stronger company as we enter 2019. With that backdrop, let me discuss our four major priorities in 2019.

First, new business wins. We have an incredibly robust platform to serve the revenue cycle needs of healthcare providers. We have a strong point of view that a technology-enabled services offering delivers superior outcomes than software alone or relative to the combination of fragmented solutions in use at hospitals today. This viewpoint is resonating in the industry and we are encouraged by the progression of opportunities in our pipeline. We are seeing strong interest across all three of our go-to-market models, operating partnership, co-managed partnership and modular engagements. We continue to remain optimistic in announcing a new end-to-end customer by the middle of 2019. The volume and quality of conversations with prospective customers, reinforces our confidence in our business model and market positioning. We see a growing inclination by large complex health systems and physician groups to select an infrastructure partner to holistically address the revenue cycle operations, in light of continued financial pressure, increasing complexity and growing demands from patients and physicians.

Second, we are intently focused on superb execution on our contracted book of business, exceeding customer expectations as the long-term driver of our success. We've invested heavily in upfront cost to ensure successful onboarding of new customers over the last three years. As we move past the onboarding phase into the margin-ramp phase and into the steady state phase, we intend to stay focused on operational execution to drive consistent sustainable improvements for our customers. As we exit 2019, we expect to have approximately $16 billion of NPR in the margin-ramp phase, which will contribute additional EBITDA in 2020. As we exit 2020, we expect to have $6 billion in NPR in the margin-ramp phase. As we've discussed in the past, this translates to margin expansion into the 2021 to 2022 timeframe and room for upside beyond the 19% adjusted EBITDA margin at the midpoints of our 2020 guidance. Also important to note, financial benefits from the DTO program are not factored into these projections.

Third on our list of key priorities in 2019 is digital transformation. As a reminder, our DTO program is based 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 with 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 RPA technology, and the third is using advanced analytics methods to improve complex revenue cycle processes such as denials via machine learning and predictive modeling. Comprehensive scaling of RPA is the core focus area for us in 2019 with a goal of deploying several 100 digital workers or bots over a five quarter period. The first phase of this program is now complete. We've conducted a detailed review across our 13 core revenue cycle processes assessing the vast majority of our cost base in the process. We have identified an executable pipeline of opportunities where we can generate significant value through automation. For example, across four of our key processes within the 13 I referenced before, there are 40 million touches annually, given a 25% to 30% reduction in manual processes we've absorbed in our automation efforts to date. This equates to 8 million to 10 million fewer manual touches in these areas. Across the broader R1 footprint, we estimate there are an additional 85 million to 90 million touches per year representing further opportunities for automation. As we move into the development phase of the DTO program, our team is developing 30 process level routines, which have been prioritized across three dimensions; financial return, speed and ease of deployment, and value to us and our customers. The initial build of six of these routines is complete and the bots are currently in the testing phase with an expectation of going live in the second quarter. As we progress through 2019, we will continue to provide additional progress updates on our DTO program and aim to be in a position to quantify the financial benefits as we exit 2019.

At the HIMSS Conference last week, automation and artificial intelligence were important discussion themes. While there is a lot of discussion in the industry around RPA and AI, we believe we are in a unique position to deliver a superior level of automation benefits to the industry than many point solution vendors can since we are responsible for running the revenue cycle operations for our customers, our operator led deployment approach at the level of domain expertise to the development cycle. Our control of the revenue cycle also means our operators can quickly provide feedback and identify areas for improvement for further opportunities to deepen the level of automation. We've evaluated and absorbed many of the automation technologies on the market today, and in many cases, we believe we can double the automation percent rate observed in other solutions on the market. This is the overarching reason why we are investing heavily in RPA. Once we achieve critical mass, we believe it will be a meaningful competitive differentiator.

Our fourth major priority in 2019 is the launch of our physician group solution for IDNs. 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 hospital-based physicians. Today, health systems typically have separate RCM functions for the physician-based and hospital-based care. This results in patients receiving multiple bills and phone calls, as well as limiting the ability to provide the patient with a unified brand experience.

Our offering is designed to meaningfully improve the patient experience via integrated patient statements, customer service and collections across hospital-based and office-based physician segments. For health systems, this allows for improved ability to estimate patients out of pocket payments, a reduction in avoidable bad debt and improved denial management. With improved visibility across the continuum of care, it allows for increased revenue under value-based reimbursement programs. We believe we have uniquely broad coverage of provider RCM requirements based on the results we are achieving on behalf of 25,000 office space providers we serve today. This innovative approach is attainable only via the integration of the acute and ambulatory RCM platforms, which we can do given our end-to-end RCM approach across different care segments.

In closing, I'm very pleased with the progress we made in 2018. The investments we've made in our people, technology and shared services infrastructure and process improvement have created a strong, highly scalable platform to manage healthcare provider's revenue cycle operations. We saw the dividends from these investments start to materialize in 2018. Our team delivered an outstanding year staying focused on execution while absorbing significant growth. We're 16,500 people strong today and we look forward to continued growth given the market opportunity ahead of us. I feel good about our competitive positioning, our offering and our value proposition to healthcare providers. We expect the investments we are making in the DTO and in technology in general to further improve our competitive position. We will 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.

Chris Ricaurte -- Executive Vice President, Chief Financial Officer and Treasurer

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, transaction related costs and a portion of DTO related expenses and certain other costs. A reconciliation of GAAP to non-GAAP financials is available in today's earnings press release.

Now turning to Q4 results. Revenue for the quarter was $262.9 million, up $122.6 million or 87.4% year-over-year driven by new business on-boarded over the course of 2018 and contribution from Intermedix. Relative to Q3 2018, revenue was up $12.5 million, driven primarily by the contribution from Ascension Medical Group and Presence and AMITA Health. From a cost standpoint, adjusted cost of services in Q4 was $211.3 million compared to $206.5 million in the prior quarter and $121.9 million in Q4 2017. The sequential increase was driven by the onboarding of Ascension Medical Group and upfront cost to support the onboarding of Presence Health and AMITA. Adjusted SG&A expenses in Q4 were $24.5 million, up $1.1 million sequentially in line with our growth as we remain disciplined in our SG&A expenses. Adjusted EBITDA for the fourth quarter was $27.1 million compared to $20.4 million in the third quarter and up $21.4 million from $5.7 million a year ago. The sequential and year-over-year increases were driven by increased profitability from new customers on-boarded over the past couple of years and the contribution from Intermedix offset by cost associated with onboarding new customers. Lastly, we incurred $7.5 million in acquisition-related expenses and other costs in Q4, primarily related to digital transformation office, the Intermedix acquisition and employee severance costs. These costs are not reflected in the adjusted EBITDA, but are included in the other expenses line on our GAAP income statement.

For the full year 2018, revenue was in line with the guidance we had provided in February 2018 and adjusted EBITDA was above the high-end of our guidance range. Revenue of $868.5 million was up $418.7 million or 93.1% from 2017 also driven by the onboarding of new business and contribution from Intermedix. Adjusted EBITDA of $57 million was up $52.9 million year-over-year. This substantial improvement in adjusted EBITDA was a function of cost reduction and on-boarded business as part of our operating model, along with partial year contribution from Intermedix. The $57 million of adjusted EBITDA relative to the $55 million high-end range of our guidance was driven by strong operational execution at customers on-boarded over the last nine to 15 months.

Turning to the balance sheet, net debt at the end of December, inclusive of restricted cash, was $313.6 million compared to net debt of $325.3 million at the end of September. This change was driven by cash generated from operations of $24.3 million, offset by CapEx of $13.4 million, related to purchases of software licenses and computer equipment as well as capitalized software. Net interest expense in the fourth quarter was $10.7 million and we continue to elect to pay interest on the subordinated notes in cash. The net debt to EBITDA ratio based on run rate of Q4 annualized EBITDA was 2.9X in line with our goal of less than 3X net leverage exiting 2018. We expect to start paying down debt using cash generated from operations around the midyear timeframe. Simultaneously, we are evaluating the best options to refinance all or a portion of our debt.

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. For the first quarter, we expect revenue to ramp higher, driven by the onboarding of Presence and AMITA. We also expect adjusted EBITDA to ramp slightly higher, driven by continued progression along the profitability curve at customers on-boarded in 2016 to early 2019 timeframe.

In closing, I'm very proud of our team. We once again delivered results in line or better than targets we had set for ourselves early in the year. The team's continued focus on execution and customer success continues to drive strong results. We entered 2019 on very stable footing to deliver on the goals we have outlined and to capitalize in the market opportunity ahead.

Now, I'll turn it over to the operator for Q&A. Operator?

Questions and Answers:

Operator

(Operator Instructions)

And your first question comes from the line of Charles Rhyee with Cowen. Your line is open. Mr. Rhyee, your line is open.

James -- Cowen and Company -- Analyst

Hello.

Joseph Flanagan -- President and Chief Executive Officer

Hello.

James -- Cowen and Company -- Analyst

Can you guys hear me?

Joseph Flanagan -- President and Chief Executive Officer

We can hear you.

James -- Cowen and Company -- Analyst

Sorry, I'm sorry, James (ph) on for Charles. Can you guys maybe talk about the ability to achieve profitability targets ahead of plan for the businesses already on-boarded, is this a function of a pull forward or a full run rate or could we see the full run rate EBITDA maybe above that 26% range applied into (inaudible) profitability profile?

Joseph Flanagan -- President and Chief Executive Officer

Yeah, I think a couple of things. Let me start with what's driving -- in our results today, what's driving a faster ramp of profitability compared to our models that we've used to communicate these various offerings and the margin progression on those offerings. I think right now we're seeing the benefits of the significant investments we made in 2016 and 2017 in terms of infrastructure to absorb the optimization of the infrastructure or the optimization of the work that we're transitioning control of. And the second thing is, we've invested heavily as you may remember from prior calls, we've invested

And the second thing is, we've invested heavily as you may remember from prior calls, we've invested heavily in our deployment function and the methodologies we used to assess and create the roadmap for performance improvement in our role as a partner with the customer, and I think those are directly correlated to our ability to see margin progression sooner than we had modeled on the prior on-boarded book of business.

As you look a little bit more longer-term and target studies state profitability ranges in the 26%, contributed EBITDA that you reference, I really think as we look at that, the major driver that we're working on right now to potentially rerate that target margin range up is the impact of DTO and as we referenced, we're right on track with our plans for the DTO office. We're right now in the process of codifying a number of major processes that we blueprinted and we'll have those coming out in production in the next couple of months.

And so as we head into the second half of the year, we expect to have been through a full cycle of that process and be in a position to have the visibility we need to talk about rerating margins up and that's why I referenced in my prepared comments, at the end of 2019, that's a very key objective for us as it relates to the DTO efforts.

James -- Cowen and Company -- Analyst

Okay, great. And also it's been noted for quite some time that you expect to announce a net new operating partnership win in the first half of 2019. Can you just maybe give us some additional commentary regarding the sales pipeline? Obviously, and in particular, how conversations have progressed with the multiple pursuits the sales force has been engaged in since the last quarter?

Joseph Flanagan -- President and Chief Executive Officer

Sure. So, as we said, we are very encouraged by the activity in our pipeline across all three go-to-market models, on an end-to-end basis, the operating partner or the co-managed offering and to some degree those are interchangeable as we go through the dialog with customers that are very focused on establishing a partnership to comprehensively cover their revenue cycle. So, again, we can serve those customers in a flexible matter in that regard either with a full transitional control or in a co-managed offering on an end-to-end basis.

So, we see very good activity across all three of those go-to-market models. Specific to the end-to-end opportunities, what continues to give us a degree of confidence is the dynamics around such where we're seeing the progression of those discussions. So, we have multiple systems where we're under NDA, where we're exchanging data and we're actively in dialogs about value propositions at a quantitative level which only occurs once we've had a chance to synthesize data and assess actual current state processes.

And the sign post for us on that, in addition to just transmitting data is allocating capacity at lower levels of the organization inside of those customers to this project, which starts to obviously broaden the breadth of the discussion inside that customers organization and is an important sign for us to allow us to build our confidence.

As we've said many times, these things are complex engagements and there's a lot of stakeholders that we have to navigate in the decision making process and so that is not lost on us at all and I would emphasize that in the context of this discussion. But for the reasons, I just mentioned, we are encouraged with the progression and that progression is different than what we've seen in prior quarters. And I think it's just a result of the mobilization efforts that Gary Long, our Chief Commercial Officer, has been driving for the past year working these opportunities.

James -- Cowen and Company -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from the line of Matthew Gillmor with Baird. Your line is open.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Hey, thanks for the question. I was hoping to get an update on the competitive dynamic, I guess, in our view it seems like it's a pretty wide open market, you do have one of your peers going through a sales process. So, just curious, if you're seeing anything different or new from a competitive standpoint and if you could characterize the pipeline discussions whether they are competitive in nature or just a direct negotiation between you and the system?

Joseph Flanagan -- President and Chief Executive Officer

Sure. Thanks, Matt. Just in terms of the competitive landscape, what I would say is your characterization of wide open and -- I think, that creates a great opportunity for us and so what we're -- our mode of operation right now is just heads down, building on momentum and building on the clear focus we have as a company. I think to the extent we use that to our advantage that will serve us well as it relates to capturing, I think, a very significant market opportunity that exists right now.

You have customers that have a need. We have a value prop that as I commented we feel really confident in and you've got a set of, from a competitive dynamics, you've got a lot going on that people are having to digest. And so to the extent we can play offense and leverage our focus, I think that's a good thing. As it relates to the pipeline and some of the specific opportunities, I would say it would be naive to me -- for me to say, they are not competitive. There all competitive and we operate with a healthy sense of just having to win business at every meeting, every discussion, win the hearts and minds of customers, because it goes without saying, those discussions are always competitive. Now, what I would say is, most of our pipeline is not born out of formal structured RFP processes. It's more born out of relationships that have been cultivated and discussions that have been ongoing for quite some time that are now starting to take a deeper level of activity, a broader level of engagement across perspective organizations and those are encouraging dynamics.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Got it, thanks. And following up on the DTO discussion and the benefit to margins, it sounds like you'll give us some more details later in the year. But, just as a framework, I think you mentioned for the processes that you're looking at encompass 40 million touches and then with the DTO initiatives you could reduce the number of touches by 20% to 30%. Is that a reasonable framework in terms of like the amount of cost reduction you could see relative to those processes?

Joseph Flanagan -- President and Chief Executive Officer

Yes, I think it's a -- as you think long-term out, I think it's a reasonable framework. The reason we're being cautious here on not wanting to rerate margins and running to update guidance or whatever the measurement may be is because we know as operators, there is some leakage in the translation of the technical calculation of an automation to the practical implementation of it and that's really what we want to stress test as we get these first four core processes through development and essentially run the digital operation to run the digital process. There will be some breakage and the opportunity is so great, that even when you account for that breakage, we expect this to be a meaningful impact. But, we know, just myself and starting with myself and Chris were born from an operations background and I think we understand very clearly the potential of technology, but we understand the reality of getting that technology at scale in the operation. And it won't be one for one, kind of off the theoretical math and that's really where we're at. There is nothing that we've seen that doesn't give us confidence that this absolutely should be a significant opportunity

Should be a significant opportunity to be more efficient and drive value -- financial value to our key stakeholders, but equally, if not more important, drive transformational value to our customers both financially and in terms of their ability to serve patients and physicians competitively.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Got it. Thanks very much.

Operator

Your next question comes from the line of Donald Hooker with KeyBanc. Your line is open.

Donald Hooker -- KeyBanc Capital Markets Inc. -- Analyst

Great, good morning. Question, as you look at your pipeline and your prospecting opportunities, how kind of small can you go in terms of client size, net patient revenue. I know -- I think in the past, you talked about a $2 billion, there is sort of a floor below which you really didn't want to go, but is -- can you maybe talk about if that could evolve over time. Is there some limiting factor there that you can work through?

Joseph Flanagan -- President and Chief Executive Officer

Yeah, so let me talk about it in two contexts. One on an end-to-end engagement, we don't have a hard and fast limiting factor per se, but we would say the lower end of our sweet spot is around $1 billion. Now as you start to think about engaging below $1 billion of NPR, we absolutely can do that. It's simply that the value prop that we can afford to the customer may not be as compelling simply due to kind of the investment we need to make to get that return and the scale of revenue that you have to offset that investment per se, but I would say a general rule of thumb for us is we would like to be trafficking for end-to-end engagements, $1 billion of NPR plus.

Now most of our pipeline right now, I mean, I think this is very, very healthy. It is between the $2 billion and $5 billion type opportunities in the regional large health systems and I think that's a very big market. It's got a lot of characteristics that are favorable to our model and I'm encouraged to that kind of that's the major composition of some of the target customers we're looking at for this end-to-end offering, whether that be co-managed or that be on a full control operating partnership. Now as you think about the modular offering, in that area we can absolutely scale down if we wanted to, but strategically, as we've said before, we want to focus our efforts on the modular offering against strategic opportunities that have the potential to progress into deeper and broader relationships. And so I'm encouraged, 82% of our modular pipeline right now is at target customers that absolutely would be candidates for a progression into an end-to-end offering.

So they're north of $1 billion, they've got all the characteristics that kind of we monitor to understand the propensity of those customers over time to engage on a more strategic level, and so I'm encouraged that the commercial team has been thoughtful in their segmentation and how they're deploying their capacity right now in the market.

Donald Hooker -- KeyBanc Capital Markets Inc. -- Analyst

Great, thank you and maybe just one quick one. I'm sure, it's not a big issue, we would love to hear if you have any thoughts in terms of your relationship in conversations with Ascension, some of the -- sort of management changes there, structural changes with maybe some of the people you're dealing with, I know you have them under a long-term contract but nonetheless, maybe can you talk about what you're seeing at Ascension with regard to management changes?

Joseph Flanagan -- President and Chief Executive Officer

Right, I won't comment on the Ascension side. The only thing I would say is we've got great relationships top to bottom inside the Ascension organization and I just finished a joint review Board session with them a couple of days ago, and I'm really encouraged on how the respective teams are working together and we're delighted to have them as a partner and the team is very motivated on both dimensions to create value with them, but our team is very motivated, just based on the working relationship to serve them on a qualitative level as well.

Donald Hooker -- KeyBanc Capital Markets Inc. -- Analyst

Thank you.

Joseph Flanagan -- President and Chief Executive Officer

Thank you, Don.

Operator

(Operator Instructions) And your next question comes from the line of Stephanie Demko with Citi. Your line is open.

Stephanie Demko -- Citi -- Analyst

Hey, guys. Thank you for taking my question. Given that you mentioned your pipeline is mostly from ongoing discussion, could you tell us a little bit about the dynamics you're seeing outside of the core Ascension affiliated base, so -- for any of the hospital system that has absolutely no relationship with Ascension. How are you going in there and how are you selling?

Joseph Flanagan -- President and Chief Executive Officer

Our pipeline -- the pipeline that I'm referencing has no relationship with Ascension nor with any of our other customers. So all of our activity is along those lines and our selling process is really, as I mentioned before, is to sit down and talk with those customers about the comprehensive solution that we can bring in a partnerial deployment mode, and then to unpack that solution and to credibly demonstrate to those customers why we're going to run their revenue cycle differently, and specifically identify those points of differentiation. I think that is really, really important unless you can sit down and prove to a customer what you're going to do different or what you're going to enable them to have access to that they don't have access to today. It's hard to convince them to engage on a strategic level in the type of relationships we're talking with them on. And our value prop, I'm very encouraged if you look at the external reference checks, industry reference checks that customers typically use, we're rated very well and number 1 in a number of those areas and so the external validation for our value prop and our offering is very strong right now as well and that's helping in those discussions.

And then once we get through that we progress to an assessment, we progress to engaging with the broader organization and as I've also commented before Stephanie, equally important to our capability is our approach and the mind set and the partnerial approach to respecting the customer's organization, to collaborating with their customers organization and as a result of those two things, I think that's directly related to progress in the pipeline and that's generally kind of how those dialogs take place. And again that's all with non-Ascension related entities.

Stephanie Demko -- Citi -- Analyst

Sounds (ph) good, good to hear. And if you had to pick one that really has the best draw for customers, would it be something like your KLAS score, is it the ROI that you could prove for your prior customers?

Joseph Flanagan -- President and Chief Executive Officer

I think it's a basket of things. I think every one of those reference points has pros and cons or has and so I think our -- the fact that our KLAS score is very, very strong right now. The fact that we've got all the HFMA certifications that we can get, and in many cases, we're one of a very few that has those certifications. The combination of just our results and then very strong reference clients in our current contracted book of business that when needed are more than willing to take those calls and proactively engage as we progress some of those sales pursuits.

Stephanie Demko -- Citi -- Analyst

Sounds good, good to hear. And one last one from me a question on the cost side. As you work on some of these automation projects on R&D, does it then free up any hiring capacity on the sales side or do you plan on more maintaining your sales force, as it stands, beside (ph)?

Joseph Flanagan -- President and Chief Executive Officer

Well, I think just the ability for us to increase the profitability of ***part5***

Well, I think just the ability for us to increase the profitability of the business as it relates to automating the operation gives us a lot of flexibility for reinvestment in value creating areas that could be the commercial capacity to your point Stephanie, that could be further investment to create differentiation on technology. So, I think there's a high correlation between us deploying DTO and the ability to continue to aggressively invest creating value for all our stakeholders, investors, customers, employees, et cetera.

Stephanie Demko -- Citi -- Analyst

Good to hear. All right. Thank you guys.

Joseph Flanagan -- President and Chief Executive Officer

Thank you, Stephanie.

Operator

We have no further questions at this time. I will now turn the call back over to Joe Flanagan, CEO, for closing remarks.

Joseph Flanagan -- President and Chief Executive Officer

Thank you, operator, and to close the call, I'd like to thank everybody for joining us today. As I mentioned in my comments, we're very optimistic about the future we continue to build and the capabilities that will further strengthen our offering. We expect our ongoing investments in technology and innovation, and hopefully that came through in our comments and then our Q&A, the commitment to that dimension of our offering to serve us and our customers well, and we very much look forward to updating everybody on progress against these future goals in the upcoming calls.

Operator, thank you again. And with that we can close the call.

Operator

And this concludes today's conference call. You may now disconnect.

Duration: 50 minutes

Call participants:

Atif Rahim -- Senior Vice President Investor Relations and Business Development

Joseph Flanagan -- President and Chief Executive Officer

Chris Ricaurte -- Executive Vice President, Chief Financial Officer and Treasurer

James -- Cowen and Company -- Analyst

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Donald Hooker -- KeyBanc Capital Markets Inc. -- Analyst

Stephanie Demko -- Citi -- Analyst

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