https://jehoshaphatresearch.com/wp-content/uploads/2023/10/RCM-Short-Report-by-Jehoshaphat-Research-October-2023.pdf
“WHY ARE THEY TELLING US TO INFLATE THE NUMBERS?”1 OUR OPINION IN BRIEF: We are short RCM. We believe its financial accounting is so misrepresentative, its corporate governance so surprisingly bad, and the reflexivity of its business model so misunderstood that its stock is practically uninvestible today. Our forensic accounting concerns have been reinforced by conversations we’ve had with former RCM and Cloudmed employees. We see idiosyncratic downside beginning to play out in the next several months as accounting games reach a natural exhaustion point on an overleveraged company (and the lockup on 33% of RCM’s shares expires in two months). We believe that it’s entirely reasonable that the stock will revisit the lows of $7 per share following Q3 2022 earnings, a precursor to many of the issues that we will highlight today. The accounting portion of our thesis consists of aggressive mark-to-model revenue recognition creating most of the revenue growth in the company today, creatively deflated expenses that inflate Adjusted EBITDA by approximately 55%, potentially systematic under-reserving for customer bad debts, hidden customer acquisition costs, chronically thin free cash flow, hidden capex, and sell-side estimates for incentive fee revenues that are too high, all occurring at a company with an irresponsibly high level of debt, especially considering its grossly inflated Adjusted EBITDA number. We believe that the above accounting gimmickry has been enabled by a level of grotesque corporate grift and governance failures normally reserved for the penny stock universe. Not only has the company recently seen the departures of the CEO, CFO, CCO and CSO, but it also sports an oversized board full of customers enjoying the fruits of this company’s desperation to show growth and an Audit Committee with two of its three members having previously held relevant positions in companies whose reputations (and stock prices) were trashed after financial and ethical scandals. We’ve identified a host of transactions that don’t stand up to scrutiny and appear both to benefit conflicted insiders and bury customer acquisition costs at the same time. Lastly, we believe that RCM’s business model is dangerously reflexive and requires a high stock price for the business to work: the company continually issues stock to win/retain customers, but needs to win and retain customers to keep the stock price high. RCM has outperformed the SPDR S&P Healthcare Services ETF by approximately 4,500bps over the past five yearsi , which we think speaks to the efficacy of all these distortions and misrepresentations. We expect the unraveling to begin this quarter with a miss on incentive fees, as Remaining Performance Obligations for near-term incentive fees are down double-digits YOY, but the Street is modeling incentive fee revenues to be up double-digits in Q3.
