Eastman Kodak Co (KODK) 2003 Q3 法說會逐字稿

Good morning everyone. All participant are now on the conference line in a listen-only mode If anyone requires assistance during the call today, please press "*" and "0" on your touch-tone telephone and an operator will be standing by to assist you. Now, our moderator is Mr. Steve Hicks.

Thank you. Welcome to the Earnings Conference Call for Vitalworks, Inc. as the operator mentioned my name is Steve Hicks Vice President in General Council here with Joe Walsh Chairman and CEO, Steve Kahane our Vice Chairman and Chief Strategy Officer and Mike Manto our Executive Vice President and Chief Financial Officer.

Before beginning, I would like to inform that you during this call we will discuss our business outlook and make many other forward-looking statements. These particular forward-looking statements and all other statements that may be made during this conference call that are not historical facts are subject to number of risks and uncertainties.

Our Actual results may differ materially from those results may differ materially from those suggested by our forward-looking statements. For more information on the risk factors that could cause actual you results to differ, please refer to our earnings press release issued prior to this call as well as the various documents that we file with the SEC including our most recent annual report on form 10-K and 10-Q. In addition, I want to point to you that light of the SEC regulation G we'll no longer comment on non-GAAP financial measures in our presentation. Now, I would like to introduce our Chairman and CEO, Joe Walsh.

Thank you, Steve. Thank you all for joining us for the Vitalworks results for the third quarter of 2003. We'll begin our conference with Mike Manto who will go over the third quarter's fiscal results. I will then review the accomplishments. Steve Kahane will discuss ingenuity EMR and provide a brief summary. After that, we will take questions. I now turn the call over to Mike Manto. Mike?

Thanks, Joe. And again, thank you all for joining us this morning. Yesterday, we reported to the company's revenues for the third quarter were $28.1 million to get the $28.7 million to the September 2002 quarter. The slight decline reflects a short flow in software and system sales targeted to large physician group practices largely offset by increases in services revenue and sales into the small group market.

Net income was $3 million or 6 cents per diluted share in the September 2003 quarter compared to $4.1 million or 8 cents per share for the corresponding period ending September 20002. The September 2003-quarter includes charges of $300,000 related to merger and acquisition initiatives.

Operating income was $3.3 million for this September 2003 quarter. Included in operating income is depreciation and amortization expense of $1 million. For the quarter, research and product development expenditures totaled $4.4 million, which represented 15.7% of total revenues.

We continue to invest expensively in the development of web-based applications for physician practices. Turning to the balance sheet, we ended the quarter with cash of $36.8 million and long-term debt of $16.1 million. We have working capital of $32 million, net of deferred revenue, and our current ratio is 2.2 to 1 compared to 1.9 to 1 at year-end. Day sales outstanding was 47 days for both September 2003 and 2002 quarters.

A complete copy of our balance sheets and statements of income can be obtained from our Web site. We currently expect total revenues for the December 2003-quarter to be approximately 28 to $29 million, and earnings per share to be approximately 6 cents. These estimate as 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 $1.1 million. Now, back over to you, Joe.

Thanks, Mike. From an operational perspective, I'm pleased with the results we've achieved this quarter. We ended the quarter with 80% of our clients contracted for HIPAA EDI ready solutions and we see an increase in new systems of our next generation products solidating our strategy of R&D investment.

As Mike stated our total revenues for the quarter were $28.1 million. This consists of maintenance, hardware and software support of EDI, $18.6 million, services of $3.7 million and software and system steals sales of $5.8 million. For the past 8 quarters, a great deal of business as been driven by HIPAA.

This has had a positive impact in our service revenue through the sale of our HIPAA service packs and licensed revenue through system upgrades as clients bring their system into HIPAA compliance. As I stated approximately 80% of our clients have already contracted for these services, which will provide them with a HIPAA ready EDI solution, but also with all of the benefits that come from an all payer integrated system.

As HIPAA driven revenues begin to wind down, our course strategy, which including investing in the future, becomes increasingly important. I am pleased that we have already seen signs of this strategy beginning to take effect and delivering positive results. I'll discuss some of these finds as I discuss the results of each division.

In our office space divisions, total revenues for the quarter grew 17% to $9.1 million from the prior year quarter. This is increase was due to Hep (Ph) related to service revenues as well as record sales for Intuition-PM and Intuition-EMR. The total value of contract orders during the quarter for the Intuition product line increased 66% from the prior year.

It is interesting to note that 50% of these Intuition orders were made to new clients and there has been a marked increase in the size of many of these Intuition contracts. The Intuition product line has definitely created an excitement in the marketplace. That along with increased marketing efforts has resulted in 150% increase in the number of leads generated during the quarter, which have increased to 554 up from 222 leads generated during the third quarter of last year.

To effectively handle this increased number of leads, we are continuing to build out our sales force for the Intuition product line. We currently have 13 sales resources in this area, an increase of over 50% since the second quarter and we expect to have 16 by the end of the year.

As Mike indicated we have seen slow down in software and system sales in the large physician group practice. In our enterprise division, total revenues were $9 million, which represent the decrease from the third quarter of the prior year.

However, it also represents an increase over the $8.6 million generated in the second quarter of 2003. Most of the activity in the enterprise space is being driven by EMR systems this is why our anticipated release of ingenuity EMR, our browser based enterprise level.

I'm pleased to report that we have signed our first dated test site for ingenuity EMR and will begin implementation this quarter. This is a significant event that will pave the way to an entire new market opportunity for Vital Works. Steve Kahane will discuss ingenuity EMR in greater detail later in the call.

In our radiology division, total revenues were $9.9 million, 7% decrease from the prior year. This decrease is a result of the decline in upgrades related billing sales related to HIPAA (Ph) driven upgrades. However, this was largely offset by strong sales of our Rackenett (Ph) risks and replica systems.

As indicated in our earnings release, the total value Rackenett risk orders during the quarter increased 57% over the prior year. I would like to point out that the market acceptance we've experienced with Rackenett risk continued to be very strong which bodes well for our other soon to be released billing in clinical products which will operate on the exact same operating plat platform.

With Rackenett risks, we are the first choice in a significant number of comparative situations and the feedback we received from prospective clients has been positive. I was recently at a client site, who has an exhausted extensive evaluation of the risk products on the market and had a discussion about how Rackenett risk compared to these systems.

He simply replied, there is nothing else in the market even compares to it. Replica sales also remain strong during the quarter. The company participated in 18 trade shows during the quarter, significant meetings included the American Academy of Dermatology, the RBMA for educational conference and the Emergency Nurses Association 2003 annual meeting. The company generated 262 new leads from these trade shows.

In R&D, investments remain strong and the roll out of new browser-based open plat forms products continues. As I mentioned our first dated test site for Ingenuity EMR and will begin testing shortly. The development of RadConnect PM continued and we plan to begin testing during the first quarter of 2004. At this time, I will turn the call over to Steve Kahane who will discuss progress with ingenuity EMR and initiatives in more detail. Steve?

Thank you, Joe. Good morning, everyone. As many of you know, Vitalworks is organized into three divisions, each of which focuses on a specific sub segment of the physician practice marketplace. Put simply, we have a division that focuses on radiology, one that focuses on the small office market, that's the one to 20 doctor practice market, and a third enterprise division focuses on what we refer to internally as the middle market, 20 to 200 doctor practice market.

In past calls, we've provided some detail about our programs in radiology. More recently, we've described our progress with small office divisions important Intuition product line program, including the very exciting market reaction to and sales result associated with Intuition EMR.

Today we will provide you with more background information on one of our most important programs in the enterprise position. Our development and planned deployment of enterprise electronic medical records products with ingenuity EMR.

Let us start by pointing out we believe that this middle market is made of up of about 4,000 entities. It is the market that is close to 100% penetrated with practice management and billing systems that being said, our estimates are that this middle market is only 5 to 6% penetrated with EMR.

Our competitive analysis reveals system pricing or EMR ranging from 6,000 to $30,000 per physician. We've seen pricing even higher than that. Also, it is interesting to note that there are only two or three players in this space today that have reasonable numbers of installed customers.

It appears as if a relatively small portion of middle market EMR customers are fully implemented and happy. There has been increasing activity in this area, but it is clear that we are at the very early stages of the technology solution adoption cycle. EMR for the middle market is still a wide-open and significant opportunity.

So why will Vitalworks be able to deliver value and win customers in this market first and foremost, Vitalworks is one of only a handful of major players with significantly installed practice management in this middle market segment. We absolutely believe that vendors with installed are best position to win more than their fair share of EMR in this segment. We're glad to explain that in more detail late are.

Second, we believe that Vitalworks should be the first major vendor to bring a browser based EMR offering to market in this segment. The ingenuity architecture helps address areas that we believe plagues the market's EMR endeavors, instalabitlity, supportability, and the need to be able to affordably handle rapid product evolution.

Also, as we mentioned earlier, several of the major models and ingenuity EMR have been in the field for sometime and have evolved based on real world and user feedback and guidance. Lastly, this product is being delivered by a company that has already had considerable real world experience with implementing clinical systems such as clinical charting software and full EMR.

Understand that Vitalworks is developing its next generation practice management and records products on a single modular platform and views the historical distinctions between practice management and EMR has artificial, counter productive, and unnecessary.

By delivering a rich set of information management modules on a single browser based platform, we will empower the middle market to design very specific technology adoption plans that address their very specific needs in a manner that should help maximize their return on investment in IT.

For convenience, the clinical modules have been packaged a suite we call ingenuity EMR. Rest assured we will allow it's not encouraged practices to adopt the platform this a manner that maximizes return on investment and addresses what they believe are their most pressing information management needs and requirements.

Potential benefits that can be realized from the use of the modules of ingenuity EMR suite include improved operating efficiency, meaning decreased cost associated with things such as chart pulls, transcription, coding and billing. Revenue enhancements and such things have improved charge capture and improved level of service coding.

Other benefits from improved marketing that should result in improved referring physician satisfaction, for example the timely of more complete and legible clinical notes, improved patient satisfaction, for example via delivery of E scripts and support for E encounters. And still other benefits from improved quality of care and reduced medical errors.

As Joe mentioned earlier, we believe most of this activity in this middle market served by our enterprise division is being driven by electronic medical records activities. We have been focusing on this clinical area and are now completing alpha testing of ingenuity EMR, an industrial strength browser based module electronic medical record.

We have signed our first beta site and plan to install this quarter as Joe mentioned. In fact, we have already started the early on site planning stages of the implementation at this practice. The practice has 32 providers and is located in the mid west. It is a multi-specialty group that did a thorough evaluation of EMR offerings and in fact had initially decided that no vendor had who that felt they needed.

Six months later they visited with Vital works and made a decision to go forward with us. We're very excited to work with them. Now that we do have several other groups in the pipeline for beta and several in the pipeline for general availability release as well.

In addition, I want to mention that I personally attended several sales presentations with customers and prospects as well as observed market reaction to ingenuity at recent trade shows. The level of interest in and enthusiasm for ingenuity EMR is as strong as we are continuing to see for RadConnect RIS.

Our team is energized by this market reaction and is working hard to execute our go to market plan for ingenuity. Right now, we expect a six-month multi customer multi site beta phase with product line general availability to follow shortly thereafter. In the coming quarters, we will update you on our progress with ingenuity EMR and tell you more about our plans for the practice management module of ingenuity, packaged as ingenuity PM.

In summary, this middle market for EMR is a billion dollar market in the very early stages of development. With single digit penetration, no dominant industry or product leader and market trends which should drive the need for continued adoption of clinical information management tools, we believe this market represents an exciting opportunity for Vital works. An opportunity to deliver significant value to an underserved segment that has intensifying information management needs. Joe, back to you.

Thank you, Steve. In closing, I would like to emphasize that we remain focused on our basic strategy of delivering profitable growth, offering compelling products and services to our target markets and obtaining dominance in the markets we serve.

Our financial condition remains strong and we are continuing to expand our sales force as our next generation products continue to roll out and create excitement in the marketplace. Management remains confident that we can continue to improve our value propositions to the market place, grow our business and deliver positive results for our shareholders.

At this point, I would now like to open the conference to any questions you may have

Thank you. If you have a question, press "*1" on your touch-tone telephone. You may withdraw your question from the queue at any time by pressing the "#" key.

Our first question comes from Frank Johnson who is an investor.

Good morning, guys. Could you elaborate a little bit on that $300,000 charge relating to merger and acquisition initiatives? What is your philosophy now about future acquisitions and the employment of your cash more productively then just leaving it in the bank?

Frank, it's Mike. Clearly as indicated in the press announcement, we're active in M&A activities. Unfortunately, most of the activities are conducted under a strict confidentiality agreement, so I'm not going to be able to elaborate any further but clearly we're active in that area.

That's what the $300,000 relates to?

Costs incurred, right, during the quarter for M&A initiatives.

OK. Well, what has happened to some of the cash in the last nine months in you had almost $10 million of net income, but your cash has dropped by about $2.6 million over that period. I know there's been a reduction of about half a million in liabilities, but basically why has the cash gone down? You haven't made any stock buy backs during this period, have you?

No, we have not. As you may remember, as we reported in May, we refund $4.3 million on our debt accounts to an EDI supplier, reduce our commitment to that supplier, and if you recall our announcement in May.

No, I didn't recall. Is that the reason, then?

Yes, that's the primary reason, Frank.

OK. And I know you've been talking about the new products and all the rest of it, but basically from the standpoint of us investors, when are you going to get out of this $28 million revenue and 6 cents per share earnings disrupted, you seem to be in right now? This is also the prediction for the fourth quarter. Will this begin to change in '04 for example?

I think what we're trying to get across here, a large part of the business over the past two years has been driven by HIPAA in terms of license service packs and upgrades that were required due to HIPAA. You can almost think of HIPAA as the Y2K like event that at the end of it those revenues would trail off.

Now, we anticipated that several years ago and realized that as a business we would invest in new core technologies, that we could build upon and grow the business. And I think what you're basically seeing here is even though the revenues appear to be the same, the make up of the revenues is completely different in this quarter. I would say of the licensed revenue we did this quarter, at least 50% of that revenue, the products didn't even exist 18 months ago. So there's a lot of good things going.

We have a lot of momentum in those new product areas. I think the secret to the company here is, we have to introduce other new core products such as ingenuity EMR. We need do some strategic acquisitions of products as we grow the sales force and grow those areas, that eventually is defining the company and how far we'll go.

OK. Thank you.

Thanks, Frank.

Thank you. Our next question comes from Shea Gurson with Corsair Capital.

Hello, good morning, guys. I have a bunch of questions. I'll start with the easy ones first. Mike, the R&D, in the statement you talked about $4.4 million but then when you broke it out, there's only $4 million R&D. Amortization is that where you're getting that 4.4 from?

No. The 4.4 is R&D expense on the P&L as well as the capitalized R&D! OK.

Now, obviously the SG&A was up quite dramatically, is that all just a function of ramping up the sales forces?

Sorry. Do you mean quarter over quarter?

Yes.

I think there was in the second quarter there was a credit that flowed through for about a $0.5 million.

OK.

As you'll recall. The other nearly already talked about the additional $300,000 related to MNA activity.

OK. And on that $300,000, I know you won't get into it, but can you tell us, is this something you've spent the money and it's still ongoing, or you've spent the money but that process, that possibility has gone away now we're kind of back at step one again?

I think it's safe to say that the area we're looking at is still very active. You know, the, I think I have to probably leave it at that.

OK.

I mean, Shea, these are third party costs.

Right. OK and now on the fourth quarter numbers, if you back out the 300,000 from this quarter, you guys really did 7 cents on basically $28.1 million. Are we expecting SG&A costs to go up and that's why you're saying that? Should we expect R&D at these levels and other things to stay at these levels for the fourth quarter?

Our average employee head count is up sequentially going into the fourth quarter. We have to take that into consideration as well.

OK.

Also, the HIPAA revenues are very high margin revenues and as they get replaced by, you know, license revenue, we have to do more license revenues as we move forward. The mix of those license revenues are not quite as high on the margins as the HIPAA revenue, as it flows through. And we're in a growth stage of that license revenue. We're going to continue to grow that next quarter and beyond. But it's going to, you know, again, the revenue we're losing, the HIPAA is very, very high margin.

OK and the maintenance so revenue being down sequentially, is that a function of HIPAA? Is that a bottom out number that we should be looking at?

The number you're looking at, maintenance and services, includes the revenue related to the HIPAA service packs.

OK.

That is actually what's declining. If you were to look at our maintenance and EDI revenue and look at that, let's say, as compared to the beginning of the year, our run rate is about $2.5 million higher maintenance and EDI.

OK. That's what I had assumed. Now nor for a larger picture question. This may be for Steve. But on the ingenuity EDR, you spoke about their being 4,000, 5 to 6 penetrated and you spoke about 6,000 to 30,000 per doctor and I guess we're talking about anywhere from 20 to 200 doctors. Can you give us a ballpark number? If at all my figures are right, what the ballpark number is, what's the market size is? There are a lot of moving pieces but I'm sure you have a ballpark number there.

$1.2 billion total one time from system sales and then our recurring opportunity of anywhere from 20 to 40% of that.

20 to 40%.

To be conservative, I would say 20.

OK. And within your current install base and I don't know if you went over this on the enterprise side, does anyone in the install base right now have an EMR product? The first people you'll be going to?

We have about probably about 4 to 500 practices, of those 4,000 that will be Vital Works customers. I would imagine 5 or 6% have products already, other companies. It's a very exciting opportunity for us because it brings up a whole new revenue opportunity to the company

So even within your install base, we're talking close to 200 million opportunity it sounds like.

Yes.

OK. And then my last question on you know you spoke about Joe you spoke about the increase in the number of leads, the dramatic increase. Is that both a function of your new products? Can you talk about the economy and how you see the economy with your new products coming out and what effect that's going to have?

Where you're seeing the dramatic increase in the pipeline in leads is these Intuition product line, which is -- and a lot of that also has to do with the fact that we've introduced Intuition EMR this last quarter, the combination of the two products are very strong. Again, we've increased -- I think we talked about in past calls that about product line and practice management arena, we were adding features to that to increase the market size that we could go after. The product is being extremely well received in competitive situations. We're doing very, very well. It's a product that, again, we can either start going after our own base and up grading more aggressively with, and as we've expanded the marketing and we've gotten lots of references and lots of customers that are happy through word of mouth we're getting a lot of leads. We're getting a sales force -- I think if you look at the sales force last quart, there was probably 8 people that actively selling and we're up to 13 right now this quarter.

OK. I guess my question, you're obviously going to be going after the enterprise market pretty effectively over the next six months. What does the economy look like in that market, has it improved at all since the last call? What's your assessment of the economy in terms of that market?

I was thinking about Intuition market.

I understand.

As far as the enterprise market, where the company has not done well is on the building side, the practice management side of that market. And what we've seen is that the companies that are successful in that area are, what the catalyst for growth in those companies hand been EMR, all companies in that enterprise space. So again, just like we came out with red sin and done very well with that, we think we'll do extremely well with this product.

OK. Thank you. Very good job on the call.

Thanks.

Thank you. Once again if you would like to ask a question, please press "*" and "1" on your touch-tone telephone and we'll take just a moment for additional questions to register. We have no further questions. So, I would like to turn the call back over to Joe Walsh.

At this point, I would like to thank our management team for the vision and focus our sales team for their tremendous enthusiasm towards market dominant and our entire staff for the hard work and support of our company's goals. Thank you again for joining us this morning and I look forward to speaking to you again next quarter. Thank you.

Again, this concludes today's teleconference. Thank you all for attending. You may disconnect at any time and thank you all. Have a great day.