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Operator
Good day. All sites are on line and in a listen-only mode. I'd like to turn the call over to your moderator, Mr. Steve Hicks. Go ahead, sir.
Stephen Hicks - VP and General Counsel
Thank you. Welcome to the earnings call for VitalWorks, Inc.
As the operator mentioned, my name is Stephen Hicks, Vice President and. General Counsel. I'm here with Joseph Walsh, Chairman and CEO; and Michael Manto, Vice President and Chief Financial Officer. Stephen Kahane, our Vice Chairman and Chief Strategy Officer who normally joins us on these calls, is not available.
Before beginning, I would like to inform you that during this call we will discuss our business outlook and make many other forward-looking statements. The particular forward-looking statements and all other statements that may be made during this conference call that are not historical facts are subject to a number of risks and uncertainties. Our actual results may differ materially from those suggested by our forward-looking statements.
For more information on the risk factors that could cause actual results to differ, please refer to our earnings press release issued prior to this call, as well as the various documents that we filed with the SEC, including our most recent annual report on Form 10-K.
In addition, I want to point out that in light of SEC Regulation G, we will no longer use or comment on non-GAAP financial measures in our presentation, such as EBITDA.
Now I would like to introduce our CEO Joe Walsh.
Joseph Walsh - Chairman and CEO
Thank you, Steve. And thank you, everyone, for joining us as we review VitalWorks' results for the first quarter of 2003.
We'll begin our conference with Mike Manto, who will go over the first quarter's fiscal results. I will then review the quarter's operational accomplishments and close with a brief summary. After that we will then take any questions you may have.
I will now turn the call over to Mike Manto. Mike?
Michael Manto - CFO
Thanks, Joe. And thank you all for joining us this morning.
Yesterday we reported that the company's revenues for the first quarter increased to $28.6 million from 28.2 million for the March 2002 quarter. Revenues rose slightly, primarily due to an increase in services revenue, including EDI services.
Net income was $2.7 million, or six cents per diluted share for the March 2003 quarter, compared to net income of 7.6 million, or 16 cents per share for the corresponding period ended March 2002.
The March 2002 quarter included credits of $3.5 million, related to the recovery of former officer loans.
Operating income was $3 million for the March 2003 quarter. Included in operating income is depreciation and amortization expense of $1 million.
Turning to the balance sheet, we ended the quarter with cash of $39.6 million, up from 16.6 million at March 31, 2002. Long-term debt totaled $17.5 million at March 31, 2003, which is down from 28.6 million a year ago.
In terms of working capital, our current ratio is 2.1 to 1, compared to 1.2 to 1 at March 31,2002.
Days sales outstanding was 41 days, down from 45 days for the same quarter of the prior year.
A complete copy of our balance sheet and statement of income can be obtained from our Web site.
Looking forward, given the effects of the weakened economy, we currently expect full year results for 2003 to be at the low end of previously announced estimated ranges, which were projected revenues of $124 to $130 million, operating income of 18 to 22 million, and net income of 33 to 40 cents per diluted share.
These estimates assume, among other things, an effective income tax rate of less than 2% due primarily to the company's net operating loss carry forwards, and depreciation and amortization expense of approximately $5 million.
And now back over to you, Joe.
Joseph Walsh - Chairman and CEO
Thank you, Mike. Well, we achieved good results for the quarter and have made important progress in several areas.
We continue to see a hesitation in buying decisions as we saw in the fourth quarter of last year. We believe that this is due primarily to economic conditions, and not due to competitive pressures or competitive losses.
During this time we continued to improve our balance sheet and remained focused on our goals of profitable growth and consistent quality earnings.
As Mike stated, our total revenues for the quarter were $28.6 million. This consists of maintenance including software and hardware support and EDI of 18.5 million, services of 4 million, and software and system sales of 6 million.
Last quarter I mentioned that we expect to see a continued decline in recurring revenue for several more quarters. But I am pleased to see that this decline has leveled off sooner than expected. This is due to HIPAA-related EDI growth during the quarter and the addition of new customers.
Our operating income margin for the quarter was 10%, impacted by higher costs associated with EDI-related obligations and higher expenses, including R&D related to our Ingenuity (ph) platform. We expect a reduction in these costs over the remainder of 2003, and as revenues increase, expect to achieve an operating income margin for the year of approximately 15%.
At this point I'd like to discuss our HIPAA-ready EDI solution RapidServices. As I mentioned last quarter RapidServices is an all payer solution providing claims processing, remittance, eligibility checks, patient statements, and other electronic services, and provides connectivity to almost every major commercial and government payer.
As a total solution, this not only addresses the HIPAA-related needs of our clients in the most effective way possible but will likely increase the volume of their EDI transactions as clients take advantage of the new EDI services now available to them.
Our HIPAA-ready EDI solution provides current revenues in the form of software upgrades and services and also provides a base for building recurring revenues as clients subscribe to the service. We had strong sales of the HIPAA solution in the first quarter, led by our office-based division. We have orders of HIPAA solutions from approximately one-third of our customer base and expect to see continued sales throughout the remainder of the year as we reach the balance of our customers.
Let me highlight some of our accomplishments and sales for the quarter. In our radiology and enterprise division, the company signed 34 substantial contracts. Twenty-six are in radiology. Two are in anesthesiology. And six are enterprise-level systems four of which were clinical. Of these contracts 11 of them -- or 32% -- represent new client sites.
At the divisional level, total revenues in our office-based division grew 11% to $9.1 million in the first quarter of 2003, up from $8.2 million in the prior year. This increase was primarily due to HIPAA-related services and upgrade sales.
Total revenues in our enterprise task division decreased to 8.6 in the million from 9.3 million from the prior year's first quarter. This reflects the decline in system sales due to the market conditions I mentioned earlier, which has a greater effect at the upper end of the market.
Total revenues in our hospital-based division grew to 10.7 million to the first quarter of 2003 from 10.3 million in the prior year. It should be noted that in addition to upgrade sales to existing clients, sales to new clients continues to increase. This change in the division's source of revenues is an important indicator, not only in terms of increased recurring revenue but in terms of the acceptance and competitiveness of our new products and technologies in the marketplace.
Just as in the fourth quarter of last year, sales of our new products RadConnect RIS and Replica remain strong. Nine RadConnect RIS contracts and six Replica contracts were signed in the quarter.
In sales and marketing we continue to add resources continuing sales managers and reps in each of our three divisions. The company participated in 29 trade shows. Significant meetings included the HMMS (ph) Annual Conference, the American Academy of Dermatology meeting, the PAX (ph) 2003 Annual Conference, and the American Academy of Cosmetic Surgery Annual Meeting.
The company generated 395 new leads from these shows.
In R&D, we continue to roll out new products based on our Java and browser-based Ingenuity (ph) platform, the same platform used by our RadConnect RIS system. Pre-release versions of our Ingenuity (ph) Practice Management system will soon be available for preview at trade shows. Beta testing for the radiology and anesthesiology version of Ingenuity (ph) Practice Management is schedule to begin at the end of the second quarter.
Our clinical products continue to play an increasingly important role in our product line. And we see this area as significant future opportunity for the company.
With this in mind, development of Ingenuity (ph) EMR, our next generation medical record system, continues to aggressively and on schedule. And we anticipate beta testing of this product to commence during the latter part of the year.
While the environment for IT spending remains constrained, which reinforces the importance of focused expense management, we believe the market position of our medical applications, combined with our strong financial condition will allow us to continue to realize solid operating results.
At this time I'd now like to open the conference to any questions you may have.
Operator
At this time, if you would like to ask a question press star and the one on your touch-tone telephone. If you would like the withdraw press the pound key. Once again, if you'd like to ask a question press star and one on your touch-tone phone now. Please wait a moment while I queue up the first question. One moment, please.
OK. Our first question comes from the site of Sandy (ph) Draper with SunTrust Robinson Humphrey. Please go ahead, ma'am.
Alexander Draper
Thanks and good morning. A couple of questions. First, Joe, I appreciate the incremental break out in the maintenance and support in terms of implementation services in the quarter. Can you give us that historically maybe for the first quarter or year ago quarter, and also the fourth quarter for comparables?
Joseph Walsh - Chairman and CEO
Sandy, I don't know that we have that available here for comparables. I think we can make a note of that and possibly give you a breakout on our next conference call.
Alexander Draper
Great. Second question. This may be more for Mike.
On the gross margin side, just looking at the numbers, the cost of software and systems really spiked up pretty sharply. Is that just due to the lower software sales and what cost are in there? I would think there would be a little more variability in the margin there and not quite such a high fixed cost structure?
Michael Manto - CFO
Sandy, that has to do with an increase in the amortization of cap (ph) software over March 2002, and also increased royalties regarding third-party software.
Alexander Draper
OK. But if I'm looking at the numbers where I actually back out the amortization and just look on an apples and apples, excluding amortization the biggest increase would be the third party royalties?
Joseph Walsh - Chairman and CEO
There's one other item that Mime had mentioned, which is the cost of hardware. In the first quarter of last year we moved several large very profitable pieces -- servers. And in the -- again that's more of the lumpiness of the business. In the first quarter we moved a lot of hardware, but it was lower margin hardware
Alexander Draper
OK.
Joseph Walsh - Chairman and CEO
Smaller systems.
Alexander Draper
OK. Thanks. And one final follow-up and I'll jump back in the queue.
In terms of looking at the guidance and looking for revenue and EPS at the lower end of the range, what are the critical components in your view in terms of hitting those numbers? Is it more re-accelerating top-line growth? And how are you dependent there? Or do you have the ability to manage to that maybe if the market stays tough for the whole year just by managing expenses?
Joseph Walsh - Chairman and CEO
I think we have some ability to manage expenses further, depending on how revenues -- but certainly we plan on moving the top line. As we've said previously, we only have about 30% of our client base have orders in for HIPAA. That doesn't mean we've recognized 30% of the revenue yet.
In addition, we - as new products get to the market and we get momentum, especially with the radiology area, where right now we don't have that many installations, that many reference sites with the new product line. But as that expands we expect sales to expand also in that area.
But again if the sales don't materialize we always will be looking at the expense side of the business.
Alexander Draper
OK. Thanks.
Operator
We'll take our next question from the site of Cory Tobin (ph) at William Blair. Go ahead.
Cory Tobin
Good morning.
Joseph Walsh - Chairman and CEO
Good morning.
Michael Manto - CFO
Hi. How are you?
Cory Tobin
Good, thanks. Just to follow up in the gross margin question. It looks like gross margins came in a bit also on the maintenance and services side, both year-over-year and sequentially. Any particular reason for that?
Joseph Walsh - Chairman and CEO
I think I mentioned on my call that we had contractual - I mean we had obligations with EDI. And we expect those cost of goods to move down on the EDI side. And that was primarily the leading expense.
Michael Manto - CFO
That's right. Primarily increase in third-party EDI costs in the third quarter.
Joseph Walsh - Chairman and CEO
But we expect that to move down throughout the year.
Cory Tobin
OK. OK. And then with respect to SG&A, on previous calls you talked about increasing head count on the sales rep. You mentioned some of that had taken place.
Can you give us a bit of update there? Where are you in terms of where you want to get to? Are you more than halfway there? Is there more to come? What should we expect with respect to SG&A spending throughout the course of the year?
Joseph Walsh - Chairman and CEO
Cory, I don't know -- on the sales side, I think we talked about maybe 15 headcount additions last quarter, I believe. And I believe we still are in the process of adding about 10 or 11 to sales. So we are maybe a third of the way where we want to be.
Cory Tobin
OK.
Michael Manto - CFO
Cory, overall headcount remains substantially unchanged, around 650 employees on average. And we expect it to be within that range, up to 660, 665.
Cory Tobin
OK. And so as that hiring ramps up should we expect to see an increase in absolute dollars on the SG&A side?
Unknown Speaker
Yes.
Cory Tobin
OK. OK. Great. And there's one final question. Can you give us an update on customer churn? Should we take the increase in maintenance and service revenues as a positive sign in that area?
Joseph Walsh - Chairman and CEO
I think that's -- again, we look more at the dollars, more so than the actual customer counts. We think that's more important. And again I think we mentioned we were pleased to see that the number was actually a little bit higher on the maintenance side, which again is a reflection of lower attrition and the fact that we're putting on more new customers . And as you know, the new customers are really the only thing that's really going to contribute to the increase in maintenance.
So we were pleased to see that happening.
Cory Tobin
OK. Very good. Thank you.
Operator
We'll take our next question from private investor Frank Johnson (ph). Go ahead, sir.
Frank Johnson
Good morning.
Joseph Walsh - Chairman and CEO
Good morning, Frank.
Michael Manto - CFO
Hi, Frank.
Frank Johnson
On the revenue side, just doing the math, revenues declined slightly in the fourth quarter -- excuse me -- one quarter versus fourth quarter. How do you expect to reach that minimum of 124 million that you forecast for 2003?
You'd have to average almost 32 million per quarter from now on. Do you think you can do that?
Joseph Walsh - Chairman and CEO
Well, Frank, I think we spoke in the last conference, and when we gave the guidance, that we expected the revenue to be back end loaded. It's not unusual -- I mean fourth quarters are historically a higher revenue quarter, as far as system sales in this business.
And in addition to that where we are with our HIPAA, getting the HIPAA solution out as a percentage of the base plays a major factor on where we're going to be with revenues. And in addition to that as these new products come along, we expect sales to increase.
Frank Johnson
So you're confident that you can make at least the minimum of 124 from 130 million forecast for this year?
Joseph Walsh - Chairman and CEO
Yes. At this time, with these economic conditions, we are still comfortable on the low end of the previous announced guidance on revenues.
Frank Johnson
Let's talk for a minute about this $30 million in cash. What interest rate are you receiving on that, I guess it's in the bank somewhere?
Michael Manto - CFO
Yes. Interest rates, as you know are quite low. And I believe we're receiving about 1.5%.
Frank Johnson
And what interest rate are you paying on your bank debt?
Michael Manto - CFO
We're paying 5.8% on bank debt.
Frank Johnson
Are you giving any thought to maybe paying off more of that bank debt?
Michael Manto - CFO
We consider that along with other opportunities, absolutely.
Frank Johnson
Well, as far as other opportunities, what's your feeling now or philosophy about the buy-back? You have an authorization of $15 million, I believe. And you've expensed 6 million if I'm correct. Are you planning any further buy-backs? Or do you feel that the stock price was too high recently to justify any further buy-backs?
Joseph Walsh - Chairman and CEO
That's right, Frank. We do have authorization going forward. And like we've said before, we will consider buy-backs along with other opportunities. We always play to act opportunistically. During the quarter we were considering other uses of capital during this past quarter.
Frank Johnson
Do you expect the many class action suits against the company and against yourselves to actually go to trial?
Stephen Hicks - VP and General Counsel
The class action suits take time, whether they end up going to trial it's too early to tell.
Frank Johnson
All right. Would you want to discuss any bonuses that you may have been paid this year?
Joseph Walsh - Chairman and CEO
Frank, we were paid bonuses with respect to 2002. Our proxy statement will be mailed in the first week of May, which will detail the executive bonuses and a complete report by the compensation committee. So I'll leave it at that.
Frank Johnson
There's been some feeling that you don't communicate enough with your stockholders. Do you have any plans to change that?
Stephen Hicks - VP and General Counsel
Well, Frank, I think you know there are only certain forums that we can relate to our - or even -- because of Reg FD -- where we can communicate to our stockholders. And this is the forum that when everyone can share information. So again if you have information and questions to ask, ask them now, Frank.
Joseph Walsh - Chairman and CEO
Frank, I also happen to believe that our disclosures are quite complete.
Frank Johnson
OK. That's all the questions I have. Thank you.
Joseph Walsh - Chairman and CEO
Thanks, Frank.
Operator
Once again, if you would like to ask a question please press star and one on your touch tone phone now. One moment, please. It appears there are no questions at this time.
Joseph Walsh - Chairman and CEO
OK. Well, thank you everyone for joining us for the conference call. We look forward to meeting with you next at the end of the next quarter. Thank you, again.
END