麥卡遜 (MCK) 2002 Q3 法說會逐字稿

Good morning and welcome to the PSTI teleconference. Following today's presentation, there will be a formal question and answer session. Until that time, all lines will remain in a listen-only fashion. This conference is being recorded for instant replay purposes. If there are any objections, you may disconnect at this time. I'd now like to introduce today's host Mr. Pead. Sir you may begin.

Thank you operator. Good morning and welcome to the Per Se Technologies third quarter conference call. I have with me today Chris Perkins our Chief Financial Officer. This morning we released our results for the quarter ended September 30th, 2002, and before we begin I'd like to read the following Safe Harbor statement. Please be aware that certain statements made in this call will be forward looking in nature within the meaning of the Private Securities Reform Act of 1995. These statements will include expectations with respect to future results and the assumptions on which such expectations are based. As with all things, actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is found in our press release and in our SEC filings including the form 10-Q for the quarter ended June 30th, 2002. I'd now like to comment on our operations and Chris will provide you with more detail financial information later in the call. We achieved revenue growth and significant margin improvement in all 3 divisions compared to the third quarter of 2001. There was continued improvement in our earnings per share and we generated good operating cash flow in the quarter. In our Physician Services division third quarter revenues increased over 7% and revenue per business day increased approximately 6% compared to the prior year. We had one of our largest new sales quarters in the last 5 years resulting in a significant increase in our net backlog on a sequential quarterly basis. The investments we made in sales and marketing this year is beginning to have a positive impact on our sales momentum. During the past year, we replaced and more than doubled the size of our sales organization. While we recognize this would be a challenge, we still underestimated the time that would take for the new sales organization to become effective. However I believe based on our third quarter new sales and the strength of our pipeline to Q4, that our sales organization has developed the skills and experience necessary for us to meet our expectations for the future. Last quarter we stated we expected to achieve a substantially higher growth rate in the second half of this year driven by higher sales from a strong pipeline and a more seasoned sales organization. While new sales exceeded our expectations, a majority of these third quarter sales closed in late September. As a result the majority of the revenue associated with the implementation of the new business will be realized in the first half of 2003. We expect to exit the fourth quarter at revenue run rate of 8% over 2001. Client retention continues to be strong as the productivity initiatives we've implemented and the proactive reporting and performance e-monitoring programs that we have in place continue to improve the level of service for our customers. In e-Health division our provider focused solutions helped improve physician and hospital reimbursement and we continue to sequentially grow our transaction volume and gain market share. We released two new products in e-Health during the third quarter. Our first is an accelerated Medicare offering for hospitals. This solution allows hospitals submitting claims to Medicare to reduce the reimbursement time through improved reporting capabilities and accelerated remittance processing. In the market place today 30% of all claims processed are Medicare claims. Therefore Medicare represents a significant portion of our client's revenue and reducing the reimbursement time for Medicare is key for their cash flow. Our accelerated Medicare solution reduces reimbursement by an average of 2.5 days and accelerates secondary payments by as much as 14 days, both of which result in substantial savings for our hospital clients. Our second new product introduction was the web-based version of ClaimTrack, which is our Claims Management System for hospitals. We looked for the web-based version of ClaimTrack to be popular with small to mid-sized hospitals, which is a market we've not targeted historically. We recorded our first sale for both these new offerings in the quarter. In the second half of 2002 we began phasing out the business of a large e-Health print and mail customer whose business was non-medical claims related. This client was part of the Medicis hospital services division, which was sold in 1998. And this business will be completely phased out in early 2003. Looking at our application software division we continue to achieve strong financial performance. During the third quarter, we had our first Patient One sale in the United Kingdom. The Lancashire Teaching Hospital, National Health Service Trust selected Patient One because of its intuitive work flow driven functionality and the sub-second response time that are critical to physicians. This sale added $7 million to our backlog, which will be recognized over the implementation period. With this sale, we believe, we are well positioned to take advantage of the UK market opportunity driven by the UK government's computerized patient record initiative. As I mentioned in our last call, we are competing in more Patient One opportunities both nationally and internationally. We continue to see demand in the market place for clinical information systems and the market remains very competitive. We have currently been selected as one of the best of few in several competitive deals. Since late 2001, we have succeeded in raising market awareness for Patient One and I am pleased with the level at which we are currently participating. In addition, we've seen incremental sales momentum in our staff and patient scheduling products. Staff and scheduling purchases are being driven by the nursing shortage and the need to go to enterprise wide staffing process to gain efficiency. Patient scheduling purchases are being driven by upgrades to Oracle technology, which give facilities, better tools and reporting to enhance utilization of surgical units, which is a hospital's most profitable operation. I would now like to turn it to over Chris Perkins to discuss our financial results for the third quarter, Chris.

Thank you Phil. Reviewing our consolidated results, revenue was 89.9 million compared to 82.2 million in the third quarter of 2001. EBITDA was 12.7 million or 14.1% of revenue as compared to 10.2 million or 12.4% of revenue in the prior year period. Income from continuing operations for the third quarter was 2.1 million or 7 cents per share on a fully diluted basis compared to a loss from continuing operation excluding special items of $578,000 or 2 cents per share for the third quarter of last year. In our Physician Services division revenue was 59.5 million in the quarter as compared to 55.5 million in the third quarter of last year. It was one more business stand in the third quarter of this year compared to 2001. Third quarter revenue increased on a sequential quarterly basis despite the normal Q3 seasonal impact of fewer medical visits than the summer months. EBITDA for the division was 9.6 million or 16.1% of revenue for the quarter compared to 6.4 million or 11.6% of revenue in the prior year quarter. Contributing to our strong margin improvement was the completion early in the third quarter of phase 2 of the process-improvement project, which I will discuss in a moment. Our net backlog at the end of the third quarter was approximately 5 million in annualized revenue. Net backlog represents the annualized revenue related to the new contract signed that had yet to be implemented minus the annualized revenue related client discontinuance notices received that had yet to be written down. The significant increase on our net backlog is directly attributable to our strong new sales performance in the third quarter. A positive net backlog along with our positive outlook for new sales to be booked in the fourth quarter will contribute to revenue growth in future quarters. As I mentioned, phase 2 of the process-improvement project was completed during the third quarter. We achieved our targeted productivity improvements of 10% with productivity initiatives implemented in 15 processing centers during the first three quarter of 2002. Phase 2 resulted in annualized cost savings of 2.5 million, which were inline with our expectations. We have now implemented our process improvement project in a total of 27 offices resulting in over 8 million in annualized cost savings for both phases of the project. These offices represent approximately 80% of the divisions' total revenue. And in our e-Health Solutions division, revenue for the third quarter was 17.6 million as compared to 15 million in the prior year period. EBITDA was 3.5 million or 20.1% of revenue for the quarter compared to 3.3 million or 22.2% of revenue in the third quarter of 2001. During the third quarter EBITDA for the division was nevertheless negatively impacted by an approximately $200,000 right off a certain development cost related to our ASP based Physician Practice Management Solution. Excluding these onetime expenses EBITDA margins for the division would have been 21.2% [inaudible] in the third quarter. Looking at the Application Software division, revenues were 16.1 million for the third quarter compared to 14.7 million in the third quarter of 2001. EBITDA for the Software operation was 3.6 million or 22.4% of revenue in the third quarter compared to 22.9 million or 20% of revenue in the third quarter 2001. Revenue backlog for the division increased to approximately $45 million at the end of the third quarter. Moving to the balance sheet, our cash flow -- our cash position at the end of the third quarter was $33 million, which is inline with our position at June 30th 2002. Historically, in the first and third quarter our use of cash due to the semi-annual interest payments related to our outstanding public loans. Account receivables our day's sales outstanding were inline with our expectations. By division, DSO of September 30th 2002 were 42 days outstanding for physician services, 51 days for e-Health, and 87 days for our Application Software division. During the third quarter, we generated positive free cash flow of 1.3 millions. Free cash flow defined, as operating cash flow less capital expenditure and capitalized software developments was a negative of $6.2 million on a year-to-date basis. Year-to-date cash flow was negatively impacted by 5.4 million related to our litigation matter with Llyod. During 2002, we have absorbed approximately 3 million or 10 cents earnings per share on a fully diluted basis an increase in insurance and litigation expenses, as well as $7-9 millions negative cash flow impact related to our ongoing litigation with Lloyds. For 2003 we will forecast -- forecasting absorbing of 5 million or 15 cents per share on a fully diluted basis and we expect to absorb $8-9 millions in negative cash flow. There has been no significant change in the status of the litigation with Lloyds. We expect to recover the cost we have funded and recorded as with receivables from Lloyds through a successful litigation in 2003.

Thank you Chris. In our release this morning we stated 2002 fully diluted earnings per share expectations of 26-28 cents per share and our full year free cash flow expectation of $8-12 million, both of which are within the range of our previous guidance. Our full year expectations for 2003 were also outlined in the release this morning. Briefly, we expect consolidated revenue growth of 10-12%, and EBITDA growth of 20%, and fully diluted earnings per share in the range of 45 cents to 55 cents on a GAAP basis. We expect free cash flow for the year to be in excess of $15 million. As we look forward to 2003, we expect the sales momentum we have achieved in all three divisions to continue. The strong financial performance we have achieved so far this year provides a solid foundation for our future top line and bottom line growth. I am excited by our prospects and look forward to another strong performance in the fourth quarter of 2002 and the year 2003. In summary, we are excited about our achievements over the last two years. For the first time in six years revenue in the Physician Services Division were grown on a year-over-year basis. And we'll exit the year with a fourth quarter run rate of approximately 8% over the prior year. We successfully completed major customer service and productivity initiatives, which yielded over 8 million in annual margin improvement and enabled retention rates in the mid 90% range. We have built the third largest claims clearinghouse with over 240 million transactions per year and continue to forecast strong revenue growth for the future. With the improvement of our products and the industry recognition we have received, the Software Division is competing more effectively in the market place. And finally, improved performance in all of our divisions has contributed to significant improvement in free cash flow providing us with greater flexibility to invest in our future. That completes my comments. Operator, I would like to open it up now for questions. Operator.

Thank you. At this time we begin the question and answer session. If you have a question simply press "*" "1" on your telephone touch pad. At anytime you may withdraw your question by pressing "*" "2". And if you use a speaker equipment, please raise your headset prior to pressing "*" "1". Once again, that is "*" "1" if you have a question and "*" "2" to cancel. One moment while the questions register. And our first question comes from Sandy Draper of SunTrust Robinson.

Thanks and Good morning. A couple of questions. Phil if you can talk a little bit about the competitive landscape and any changes you are seeing especially on the Application and Software side and you mentioned you feel like your getting more competitive. Have you seen any players moving in or out? Or why do you think -- or what sort of helping you there? And then on the e-Health side, you obviously continued to grow nicely there. How much of that do you think is the market growth versus your ability to take business away from other players?

On the software side Sandy, the landscape I think is still the same as it has been throughout the year. I don't see anyone other than [inaudible] is the dominant player. But for us, the -- I think the contributing factor to why I feel so positive about this business is the fact that we are -- have been now selected in the best few status on a substantial number of opportunities. As you know, the actual selection process begins with a lot more vendors participating in the ROP. Then the selection process comes to best of few and then vendor of choice. So, I think the majority of the deals that we're working in have come as a result of the industry recognition that we have for the products and of course we recently won the Davis Award at the Queen's Health Network in New York City. I think that's helping us tremendously and we've also, as you know, upgraded our sales organization and I think it's beginning to pay dividends for us. And I expect to see some of these opportunities close in the near future as they progress through the sales cycle. As far as e-Health, I think that the strength in that division has come from a number of areas. One is, it did provide a focus, as you know, so that our revenue is really driven by the value that we're offering hospitals and physicians in reducing their revenue cycle. And I think we continue to be very innovative in our product set, which again helps us grow that business. I think we still take market share from the traditional EDI vendors like NDC Health and WebMD, but the majority of our revenue growth I see going forward continues to be the value that we add in reduction in revenue cycle for providers.

Okay. Great. Thanks. And one quick follow-up, looking at '03 guidance that's the 45-55 cents, I think Chris you indicated that includes about 5 million or 15 cents of negative impact from Lloyd's of London. Is that correct?

That's correct.

So essentially, I mean you know, again you've got to deal with this issue. But, you know, normalizing that out you are looking at sort of a normalized run rate of somewhere between 60 and 70 cents of earning power?

That is correct Sandy. That would be the case if you quote from Lloyd's negative impact. And clearly while there are no assurances, we do expect positive resolution of this litigation during 2003, and we certainly do foresee that our EPS run rate will improve after that litigation is resolved.

Okay and even when you take a worse case scenario, even if it's a negative resolution, what do you done as you look out to the -- go for earnings power of the company and, you know, looking on to '04; that gets normal and even if it's negative, it goes away.

That is correct Sandy.

Okay. Thanks.

Thank you and our next question comes from David Francis of Jefferies & Company.

Phil, back on the software side, can you give us a little bit more color on the pipeline and bookings expectations as you go into what's typically a seasonally strong bookings period in the fourth quarter?

I don't have any numbers with me, Dave, on that. You know, as you know, we really point to a backlog, which did increased in the third quarter over the second quarter. And, I can't tell you that both combined new sales are as sold and our backlogs are growing around 20%. And so, as we grow that backlog and look to 2003, I feel very comfortable that we'll able to grow that business 10-15%.

Thank you.

Thank you. And, our next question comes from John Souter, SG Cowen.

Hi. Chris, just getting back to the Lloyds issue, what, I guess, gives you confidence that this will be resolved in '03? My history has been that these are painfully slow and usually take more time than we think and then as follow-on, I guess, how much of your time is being dedicated to this issue?

Well we -- our confidence is dealt from again the strong merits that we have as far as our case and our position. We've also had significant input from internal general counsel and external counsel that is very familiar with litigation of this type. We feel very positive that we will bring the matter to the court appropriately so that there is an opportunity for quick resolution. But we are [inaudible].

Yeah. As it's related to the amount of time we are spending John. It really is an update process from the appropriate counsel and it's not something that is consuming question either.

Okay, great, and then just on the physician services side, is there any reimbursement relation that scares you anything coming down the road from a reimbursement or a legislative standpoint that would have a big impact either positive or negative on '03.

There is nothing out there that scares me John. I think that one of the positive aspects that I could point to is the fact that Medicare reimbursement has been under pressure for many years, but there is a possibility that in '03 we may see a slight increase in Medicare reimbursement for our physicians, but it's not something that we are building in to our expectations for next year, and if it happens then that might be a positive impact for us. But, as we see it right now, there is nothing on the horizon that would concern me about reimbursement.

Okay, and just a last question as you roll out the productivity improvements, I guess, what's the timing of that in '03? Is it really consistent in straight line throughout the rest of the centers that have yet to receive it?

Yeah. Again we've gotten all the, I guess, the larger processing center [inaudible] 27 of our largest centers. We will continue to roll that out through the organization and it will be on a steady stream, the impact will not be significant from a productivity or a cost production point of view and [inaudible] though our larger centers, again there'll be positive impacts also in our possibility and our customer service from implementation throughout the organization.

Okay, great, thank you.

Thank you, and our next question comes from Ali Redinsky of Jeffrey and Company

This is on this quarter, I just wanted to clarify the pre-operating cash flow numbers that you have put for 2002 and 2003, for 2002 it was $8-12 million and that includes or excludes the $7-9 million of potential hit that you're assuming for the Lloyds litigation?

That is after the absorption of that $7-9 million.

In other words, the number would have been 20 after the 7-9 you are now forecasting 8-12?

That's correct. It would have been high teens to 20 million.

And then, what would have been 23, then you are absorbing 8-9 that's why you're getting to at least 15 for 2003?

That's correct.

Okay and do you see anything beyond the 2003, if in fact the case drags on or that should really be it for you?

We had not projected anything significant beyond that. Again, I think our cost related to taking the matter to litigation will be incurred in 2003, and that we'll have positive resolution. So that is we will not be required to fund any outstanding claims beyond that time.

Okay, and can you discuss on exports where we're now since 2/3 the way through October assuming much of the negotiations for renewals which come up January 1st, on the physician side has really been completed. Can you give us a little bit of insight what were you seeing there and do expect them to continue to be in the in the mid 90%?

Yeah I do, I mean, I think that the service level that we have maintained throughout '02 that really began in '01, continued to yield positive results for us and I expect to remain in that mid 90% range for attention for the future.

Excellent. Thank you very much.

Thank you.

Thank you, and our next question comes from Michael Mallarki of Markson.

Just a couple of quick questions. The 2003 free cash flow number after the capitalization of this offer is -- and afterwards is 15 million?

That's correct. That's after all capital expenditures, capitalized software development, and after absorbing some Lloyds.

Okay great, and then in -- you're doing a beautiful job and I am just wondering in 5 years, what will this enterprise look like? Will part of it have been merged with another entity in the medical area or, you know, what should we expect in 5 years from now?

Michael, that's really difficult for us to give you a color on it at this point. You know, clearly we are focused right now on '03, we've made great progress in '02. I think we can continue to grow this company at a greater rate, I think we have the potential to grow at greater rates than we're indicating for 03, and I think this company continues to be able to sustain profitability that we begun. The healthcare marketplace, in general, I think has significant opportunity for us to continue to grow our physician services business. As you know, we currently offer that service to 15,000 physicians and there are almost 250,000 physicians that are in the segment that we provide services to. Our e-Health business is growing nicely. There is still a lot of paper in healthcare, so I think we have got an opportunity to grow that transaction business and then some of the revenue cycle management tools that were helping hospitals realize their cash flow sooner, I think it gives us a great opportunity, and that's still a relatively small business segment for us, and software, I think that both nationally and internationally there are some great opportunities for us to be successful and to be able to grow that business beyond the percentages that we've indicated for '03. Sounds very positive about the future for this company.

Okay and, and just my last question. Lloyds for the litigation, is there a potential for a settlement in next 12 months or is this going to go all the way to a decision?

We can't predict that clearly right now. Again, we are very strong in our current position that we feel we will get positive resolution for us. We are in the process thus far in the status of the litigation is inline with what we expected it to be. It has not gone to trails at this point. So, it is difficult to predict at this time what course it will take, but again we are very positive about our position.

I don't want to put you in a position that you don't want to be put in. Is there anyway that you could just put a numerical probability on whether or not settlement would occur or not occur?

Well, it's very difficult. No, I don't think there is.

Okay.

Because that would involve, you know, some -- a clear position from the other side, the other party and I am not willing to make a projection on that right now.

Okay, great. Thanks.

And once again if you have a question simply press "*" 1 on telephone touch pad to withdraw your question, please press "*" 2, and our next question comes from Rachael Boarder of Goldman Sac.

It is going to be a little dense from the Lloyd's question. I just don't understand the expenses going into 2003. When you talk about 8-9 million of negative cash flow does that already include the 5 million of expenses that overrun to income statement or is that just paying out old claims?

No that does include the 5 million of negative of P&O.

Okay, fine and you have replaced the insurance carrier so if the pay are claimed or just unclaimed that occurred prior to June '02.

That claims were reported prior June '02 that is correct.

Okay and it is just you experience in claim's history because you are confident that there is none of that will run beyond 2003 and to 2004?

Well, if any new claims would be reported after June 2002 would be covered under our new policies.

I am just surprised that there are significant pay out in 2003 since you already got new policies in place?

Well. There --, there are matters that claim that were reported over the past several years relating from services performed in the late 1990s. So, they are items that have been reported to insurance care and to us well before the June 2002 change in insurances care.

Right and so it can take multiple year for these claims to finish their cycle?

That's correct, many - the majority of our claims get resolved with no settlement. So, there is a time period that goes by from the time it is reported to the time it ultimately gets resolved.

Okay, that's great. Can you comment on your bad debt expense? What sort of level is it at and is it consistent with historical level?

Yes, our bad debt expense is consistent with historical levels at least over the last 2-3 years. We did clean up some of our old arrears that was fully resolved, was written off during 2001. So, we basically cleaned up some of the old stock that what from much past period. But we are consistent of our bad debt levels going forward.

And what's sort of percentage of revenues are they running?

It varies by division, but it is not significant, it would be well under 2%.

Okay, great. Thank you very much.

Thank you and our next comes from Sandy Draper of SunTrust Robinson.

Thanks, a follow up too on the physician's services side. First, feel that the new business you are bringing in, have you looked at how much of it's coming from, you know, taking away business from other competitors versus people who were doing in-house that are now decided to out-source?

I haven't done that analysis, Sandy. But I do know of several that were physicians using other billing companies and have switched to us. And I also know of physicians that were doing it in-house. So I just don't have that ratio for you.

Okay, and then a follow-up to John's question, on the reimbursements side, to some extent understand, you know, if you have either positive or negative reimbursement to the physician that you are serving, well clearly that can change revenue, will that actually impact your margins and what you actually bring in or will it really end being a wash or could it actually benefit or hurt you?

It shouldn't affect our margins at all I mean we are talking about the physicians being reimbursed for the procedure on the Medicare.

Right.

Predominantly, I mean, I know that the commercial payers also mirror to a certain extent and to a large extent what Medicare reimburses but in fact, I think that if there, what we are seeing is potentially a positive increase in Medicare in '03, and should that occur, that will result, you know, positive for us, because we're taking a percentage of the net amount collected. So, that could be positive. If it's a negative impact on Medicare, which is of course the way it's predominantly been, this is usually off set Sandy by higher procedure in charge volume that the physicians, drive to improve their own reimbursements so we usually see higher volumes and also we bring on new physicians groups, so it doesn't really impact us.

Okay, great thanks.

Thank you and our next question comes from John Souter of SG Cowen.

Follow up on e-Health. Any change to pricing trends there, could you just comment on how pricing has been?

We haven't seen any John, on the traditional EDI business; I think that is still maintaining at the levels that we've seen throughout the year. I think that the opportunity for us going forward is to may be increase the value of some of the services that we offer and we may be able to see a slight price increase associated with that, but overall I have not seen any pressure as a result of HIPAA or any of the composition driving down prices.

Great. Thanks.

And at this time I show no further questions.

Okay, Thank you very much. I further appreciate everybody's participation on the call. I look forward talking to you next time.

And thank you for participating in today's PSTI teleconference and have a good day.