Accretive Health third quarter net services revenue increases 38% to $218.9 million

Accretive Health, Inc. (NYSE:AH), a leading provider of comprehensive end-to-end healthcare revenue cycle management services and population health management services infrastructure, today announced financial results for the third quarter ended September 30, 2011.

Financial Highlights - Third Quarter 2011

• Net services revenue increased 38% to $218.9 million from $158.4 million in third quarter of 2010.
• Net income increased 154% to $7.3 million from $2.9 million in third quarter of 2010.
• Net income per diluted common share increased 133% to $0.07 from $0.03 in third quarter of 2010.
• Non-GAAP adjusted EBITDA increased 87% to $21.7 million from $11.6 million in third quarter of 2010.
• Non-GAAP adjusted net income per diluted common share increased 83% to $0.11 from $0.06 in third quarter of 2010.

Mary Tolan, Accretive Health's Founder and Chief Executive Officer, said, "I'm pleased to report that as of today our Projected Contracted Annual Revenue Run-Rate is in the range of $960 million to $990 million, up $313 million, or 47% year-over-year at the midpoint of the range. This is the largest absolute dollar gain in PCARR in our operating history, and underscores that demand for our services remains strong and that the investments we have made in our people and sales capabilities are yielding significant results.

"Our recently announced revenue cycle strategic collaboration with Intermountain Healthcare validates our market position as the partner of leading healthcare systems with strong track records of clinical and operational excellence. More importantly, this agreement places us at the forefront of innovation with the creation of our Center of Excellence in the West, which will serve as a training, research and development vehicle for the benefit of the industry. Finally, we expect this strategic collaboration to increase our penetration in the West, a market where we see great opportunity for future growth.

"In our Quality and Total Cost of Care business, we continue to deliver significant improvements in key operating metrics beyond our initial expectations. We are also working on intra-stay quality enhancement, which we believe has applicability to all hospitals, regardless of whether they have population health contracts. Finally, our Physician Advisory Services business continues to grow at a rapid pace as hospitals face increased regulatory pressures and intensifying recovery audits."

Financial Review - Third Quarter 2011

Net services revenue for the third quarter of 2011 grew by 38% to $218.9 million, an increase of $60.5 million over the third quarter of 2010. The following is a breakdown of net services revenue for the third quarter of 2011:

• Net base fee revenue was $177.3 million for the third quarter of 2011, an increase of $41.2 million over the third quarter of 2010.
• Incentive revenue was $29.7 million during the third quarter of 2011, an increase of $10.6 million over the third quarter of 2010.
• Other services revenue was $11.9 million for the third quarter of 2011, an increase of $8.6 million over the third quarter of 2010.

Operating margin for the third quarter of 2011 was $49.0 million, or 22.4% of net services revenue, compared with $32.2 million, or 20.3% of net services revenue, for the third quarter of 2010, an increase of 210 basis points.

Infused management and technology expense for the third quarter of 2011 was $21.3 million, or 9.7% of net services revenue, compared with $15.8 million, or 9.9% of net services revenue, for the third quarter of 2010. Selling, general and administrative expenses were $15.5 million for the third quarter of 2011, or 7.1% of net services revenue, compared with $11.9 million, or 7.5% of net services revenue, for the third quarter of 2010.

Non-GAAP adjusted EBITDA for the third quarter of 2011 was $21.7 million, or 9.9% of net services revenue, compared with $11.6 million, or 7.3% of net services revenue, for the third quarter of 2010, an increase of 260 basis points. Excluded from these results, among other things, were non-cash employee stock based compensation expenses of $7.3 million and $5.3 million, respectively. The higher non-GAAP adjusted EBITDA margin for third quarter of 2011 reflects the operating leverage inherent in the company's business model, in which margins are expected to increase over time as customer contracts mature and as incentive revenue becomes a higher proportion of total net services revenue.

Net income for the third quarter of 2011 was $7.3 million, compared with $2.9 million in the third quarter of 2010. After adjusting for non-cash employee stock-based compensation expenses on an after tax basis, non-GAAP adjusted net income for the third quarter of 2011 was $11.7 million, compared with $6.0 million in the third quarter of 2010. Non-GAAP adjusted net income per diluted common share was $0.11 for the third quarter of 2011, an increase of 83% over the adjusted net income per diluted common share of $0.06 in third quarter of 2010.

For the third quarter of 2011, operating cash flow totaled $31.1 million, compared with $9.3 million for the same period of 2010. Free cash flow, defined as operating cash flow less capital expenditures and the acquisition of software, was $28.9 million for the third quarter of 2011, compared with $4.7 million for the same period of 2010. For the nine months ended September 30, 2011, operating cash flow totaled $2.7 million, compared with $7.0 million for the same period of 2010. Free cash flow for the nine months ended September 30, 2011 totaled negative $6.4 million, compared with negative $2.7 million for the same period last year.

At September 30, 2011, Accretive Health's total cash balance was $182.1 million, compared with $155.6 million at December 30, 2010.

Fiscal Year 2011 Outlook

Reflecting strong year-to-date contract signings, the company has increased its PCARR estimate for December 31, 2011, and now expects PCARR to be in the range of $970 million to $1 billion. This represents a year-over-year increase of 40% at the midpoint of the range, and positions the company with a strong book of business for 2012.

While the company exceeded its original goal for new business signings, several large contracts were signed later in the year than planned, resulting in lower than expected base fee revenue in 2011. As a result, the company is revising its fiscal year 2011 revenue outlook to $820 million to $835 million, which at the midpoint of the range represents growth of 36% over 2010.

The company now expects fiscal year 2011 adjusted EBITDA of $78 million to $82 million. In light of strong year-to-date signings and expansion of its pipeline, the company has and will continue to increase investments to support its growth trajectory. This includes securing new executive appointments to bring substantial new breadth and depth of talent, and expanding its industry leadership position and geographic reach through the recently announced Center of Excellence in the West.

As a result of these factors, the company expects adjusted net income per diluted common share of $0.42 to $0.44 for fiscal year 2011.