麥卡遜 (MCK) 2003 Q1 法說會逐字稿

Good afternoon and welcome to the Per-Se Technologies 2003 first quarter earnings release conference call. All participants will be able to listen only until the question and answer session of the call. This conference is being recorded. If you have any objections you may disconnect at this time.

I'd now like to turn the call over to Mr. Phil Pead, president and chief executive officer. Mr. Pead you may begin

Thank you, Alfred DA good afternoon welcome to the Per-Se Technologies conference call.

I have with me Chris Perkins, chief financial officer.

This morning we released our results for quarter ended March 31st, 2003 and before we begin I would 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 Litigation 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 the 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 issued this morning and in our SEC filings, including the Form 10-K for the year-ended December 31st, 2002.

Also in accordance with regulation G, please refer to our press release issued this morning and the investor section of our web site for a discussion and reconciliation of non-GAAP financial measures. Discussed in this call to their most directly comparable non-GAAP financial measure. I'd like to comment on our operations and Chris will provide you with detailed financial information later in the call.

During the first quarter, we achieved year-over-year revenue growth of approximately four percent, and excluding the impact of costs related to our litigation with Lloyd's of London, as well as the write off of deferred debt issuance costs we more than doubled our income from continuing operations over the first quarter of last year. We had a strong new sales performance in all three divisions, as we continued to expand our presence in the marketplace. In our Physicians Services division, new sales in the first quarter were 30 percent higher than in the first quarter of 2002. Our quarterly new sales trend is very positive.

This is driven in part by our larger more effective sales organization and our continuing investment in technology to reduce the revenue cycle or the time it takes for a physician to receive payment for the services performed. One of the largest contributors of delayed payment is denials from payers. A better understanding of the reasons for denials is in the early resolution of issues associated with the claim prior to submission will decrease the revenue cycle and improve physician reimbursement.

We have the largest repository of hospital-based physician claims data in the nation, and mining that information to improve physician reimbursement is a significant differentiate tore of our services our new denial management reporting will provide a key value proposition for our sales force as well as improving our operational effectiveness. Revenue in the division increased by over four percent on a year-over-year basis.

This increase was due to the implementation of new sales, continued strength in client retention, and a continued improvement in our client's metrics. Turning to the macro HK environment for a MOX. Medicare increased reimbursement rate for physicians by 1.6 percent, effective March 1st of this year. We estimate that Medicare represents approximately 17 percent of the net reimbursed that we collected for our physician clients.

Although any increase in Medicare reimbursement is generally positive after analyzing the reimbursement rate schedules we have determined that the net positive impact on our revenue during 2003 will be minimal. Turning to our E-Health division over the past two quarters we've made substantial investments in personnel in the division to support our operations and to further our sales and marketing efforts.

As the E-Health division continues to expand its presence in the marketplace, it is obviously imperative that we have the right personnel in place to support our growth objectives. We have increased the division's sales organization by over 50 percent hiring seasoned professionals with relevant industry experience.

We continue to win large prestigious clients such as Johns Hopkins which we announce during the first quarter. We're growing our client base in certain geographic areas, taking advantage of competitor weaknesses. We continue investing in functionality for physicians and hospitals with a goal of improving the revenue cycle of providers.

For example, the same denial management functionality utilized in our physician services division is being successfully sold to hospitals by the E-Health division. Helping hospitals understand why a claim is being denied by a payer and arming them with the ability to proactively address that denial in the future is functionality that is significantly adds to a hospital's bottom line.

During the second quarter, we will begin implementing enhancements to our connectivity infrastructure that will add functionality, facilitate higher levels of customer support and result in cost efficiencies for the division's operating structure.

Additional functionality will include real time customizable reporting capabilities providing clients with multiple views of their information, as well as tracking capabilities for up-to-date claim status. Turning to our applications software division, our resource one scheduling solutions had a strong sales quarter, increasing new sales by over 70 percent compared to new sales in the first quarter of 2002.

We have begun capitalizing on the preferred vendor agreement we signed with Health Trust Purchasing Group during the fourth quarter of 2002. As a preferred vendor, Health Trust is recommending our staff scheduling solutions to its 900 member hospitals, which are required to purchase at least 80 percent of their annual expenditures through the purchasing group.

We continue to raise awareness for both our enterprise-wide patient 1 clinical solution and our business 1 patient accounting solution. We're best of few or vendor of choice in several deals for our enterprise-wide products and our [inaudible] Activity continues to be strong. Internationally we see significant opportunity for our clinical solutions, particularly in the united kingdom.

Our first patient 1 implementation in the UK health system is continuing as planned. As the only U.S. company that has completed a clinical solutions sale in the UK, we believe we have an advantage in that market. I would now like to turn it over to Chris Perkins to discuss our financial results for the first quarter.

Chris...

Thank you, Phil. First, reviewing our consolidated results, revenue was 88.5 million, as compared to 85.4 million in the first quarter of 2002. Operating income was 6.5 million, or 7.4 percent of revenue, as compared to 6.1 million or 7.2 percent of revenue in the prior period.

Excluding the impact of our litigation with Lloyd's of London, operating income in the first quarter of the year was 7.8 million or 8.8 percent of revenue. Income from operations for the first quarter was 1.6 million, or five cents per share on a fully diluted basis, compared to 1.4 million or four cents per share on a fully diluted basis for the first quarter of last year.

The first quarter of 2002 had no impact related to the Lloyd's matter. To provide like comparisons, income from continuing operation, excluding the impact of the Lloyd's matter and the write off of the un-amortized debt issuance in the quarter was three million dollars, or ten cents per share on a fully diluted basis.

This reflects our base operational performance delivered in approximately 100 percent increase in bottom line profitability. In the physician services division, revenue was 59 million in the quarter, as compared to 56.5 million in the first quarter of last year. Operating income for the division was 7.3 million, or 12.5 percent of revenue for the quarter.

Compared to 4.6 million, or 8.1 percent of revenue in the prior year quarter. On a sequential quarterly basis, revenue increased approximately one percent due to one more business day on the first quarter compared to the fourth quarter of last year. Looking at revenue on a per business day basis, revenue in the quarter decreased approximately one percent compared to the fourth quarter.

The first quarter revenue is historically impacted by seasonality, this seasonality is a combination of our physician clients performing less procedures during the fourth quarter holiday season and our physician clients patients requirements to satisfy their benefit deductibles in the first quarter.

Our net backlog at the end of the first quarter was approximately three million in annualized net revenue. Our positive net backlog along with sales momentum generated over the last few quarters will contribute to revenue growth in future quarters. Our E-Health solutions division WS revenues was 16.9 million as compared to 15.8 million in the prior year. Revenue growth in the division was seven percent for the first quarter on a year-over-year basis.

As stated in the press release this morning, the division is phasing out a large, non-medical claims print mail customer which negatively impacted our year-over-year comparisons. This client was part of the transition from the sale of our hospital services division that was sold in 1998. Excluding the impact of this customer, revenue growth in the division was 12 percent higher than the first quarter of 2002. While this client's business was substantially phased out as of the end of first quarter, year-over-year revenue comparisons in the second quarter would also be negatively impacted.

Operating income in the division was 1.4 million, or 8 percent of revenue for the quarter, compared to 2.2 million or 14.1 percent of revenue in the first quarter of 2002. The division is in the process of converting customers of its ASP based physician practice management solution onto a new platform.

Cost incurred in the first quarter associated with this conversion were approximately $600,000. Excluding these costs, operating income in the division was $2 million, or 11.8 percent of revenue for the first quarter. The division's investment in personnel to meet its operational and growth objectives is also reflected in the margins for the first quarter. Our application software division, revenue was 15.9 million for the first quarter, compared to 16 million in the first quarter of 2002.

Operating income for the software operation was 1.7 million or 11 percent of revenue in the quarter, compared to 2.3 million or 14.2 percent of revenue in the first quarter of last year. As we discussed in our press release this morning, we did not recognize any revenue in the first quarter for the implementation of patient 1 in the UK health system. Due to the unique characteristics of the UK governments private finance initiative, payments begin when the base system is substantially delivered, rather than throughout the implementation period.

While implementation of this contract started innerness in early 2003, payments are scheduled to begin from the customer in 2004. During the first quarter of 2003, the company concluded that the appropriate revenue recognition approach would be to recognize revenue under the contract when payments begin as opposed to revenue being recognized as the implementation progresses. This had a negative impact on projected revenue in the quarter of approximately $600,000.

Full year revenue impact of the revised accounting approach is forecast to be approximately $2 million. Free cash flow will not be affected for 2003. For 2004, we now anticipate recognizing approximately four million in revenue related to this contract. Revenue backlog for the division increased to approximately 54 million dollars at the end of the first quarter, which is an increase of 38 percent over the first quarter of 2002 levels.

Moving to the balance sheet, our total cash position as of March 31st, 2003, is 21 million dollars, compared to total cash of 51 million at December 31st, 2002. During the first quarter we used cash on hand to repurchase approximately 15 million dollars of our senior nine and a half percent notes.

Also, the first and third quarters include a use of cash related to our semiannual interest payments on the company's long-term debt. For accounts receivable our days sales outstanding were in line with our expectations. By division, DSOs at the end of the first quarter were 46 days outstanding for Physicians Services, 48 days outstanding for E-Health and 73 days outstanding for applications software. DSOs in all divisions are lower or in line with first quarter 2002 levels. As anticipated, we experienced a slight increase in DSOs compared to year-end 2002 levels due to seasonality, which is consistent with our prior year trends.

Turning to the Lloyd's matter, during the first quarter we absorbed approximately 1.3 million or four cents per share on a fully diluted basis and increased insurance premium and litigation expenses. Lloyd's negatively impacted free cash flow for the first quarter by 2.8 million dollars. Our receivable from Lloyd's was 7.2 million dollars on March 31st, 2003.

Litigation process is proceeding in California. As we stated in our press release this morning, we're pleased with the progress of discovery and requested the earliest possible trial date. We continue to expect to achieve positive resolution of this matter through successful litigation in 2003.

Cash flow from continuing operations for the first quarter was a use of 8.2 million dollars, compared to a use of 8 million dollars in the prior year quarter. In our release this morning we also discussed the retirement of 15 million dollars of notes which were repurchased on March 17th. In conjunction with the debt retirement, a portion of our un-amortized debt issuance costs which were capitalized at the original issuance of the note were written off in the quarter. The negative impact to earnings by approximately $200,000, or one cents per share on a fully diluted basis in the quarter.

The full year 2003, the transaction will be accretive by two cents earnings per share on a fully diluted basis, and will have a positive cash flow impact of approximately $700,000. We continue to explore avenues in which to proactively address our debt in the coming year

Thank you Chris in our release we reiterated our full expectations for 2003 and provided quarterly earnings per share guidance. Briefly on a consolidated basis we expect revenue growth of 10 to 12 percent, operating income growth of 20 to 30 percent, and fully diluted earnings per share in the range of 45 cents to 55 cents on a GAAP basis, which represents a 60 to 100 percent increase over our 2002 earnings per share performance.

We expect to generate free cash flow for the year in excess of 15 million dollars. On a quarterly basis, we expect positive year-over-year trends throughout 2003, with steady revenue growth and continuously improving bottom line profitability. Year-to-date, all divisions are experiencing positive sales momentum as we continue to focus on revenue growth. In addition, continued leverage in our business has provided for expanding margins and strong free cash flow generation. That completes my comments, operator. I'd like to open it up now for questions.

If you would like to ask a question press star 1 you'll be announced prior to your question. If you would like to withdraw press star 2. Once again to ask a question press star 1.

One moment, please. Our first question comes from Sean Jackson with Avondale Partners

Good afternoon. Just regarding again the accounting treatment for the UK deal, I guess you anticipate any future UK deals to have the same type of treatments?

Well, we would have to certainly analyze each UK contract in the future on a case-by-case basis. But certainly the UK contracts would be based on funding under the private funding initiative, finance initiative, as was consistent with this contract.

Okay. So that does not affect any other contracts beyond the UK, correct?

That is correct.

Okay. Also, regarding your tax rate, what is the expectation for the rest of those three, and even into '04, if you can think that far ahead?

Yeah, our tax rate should probably be in the seven to 10 percent range. Certainly through 2003 and 2004. That really represents cash taxes that we incur related to state and local municipalities. That, I think, is a consistent percentage basis that we could use for the short-term.

Okay. And lastly, just for the Lloyd's issue regarding the EPS hit, you've stated, again, four cents in the March quarter, 15 cents overall. When exactly do you expect to renew the insurance? And obviously one of the aspects of that is extra insurance costs. I was wondering when are those extra costs from insurance going away?

We've signed the one year policies in June of last year. And so we will be renewing new policies in June of this year.

So given that, it looks like that most of the costs are non-insurance, extra insurance premium costs. Otherwise it would sort of -- there would be a lot of June quarter costs, correct?

The costs that we incurred in the first quarter, which were consistent with the level of costs we incurred in the third and fourth quarter of last year. And the 1.3 million was the majority of that cost was related to the extra premium costs. As the case goes to litigation and expected to be completed and resolved this year, we do expect that litigation costs will increase over the quarterly rate we had last year. Or for the last three-quarters. But we do expect that we will have a benefit from lower insurance premiums as we get to the third and fourth quarter of this year and certainly through 2004

Okay. That clears it up. Thanks

Next question comes from David Francis from Jeffries and company.

Congratulations on a good quarter, guys. Couple questions. First, staying on the Lloyd's theme, Chris or Phil, can you give us a little bit more information or your sense as to why you remain so confident that this matter will be resolved by the end of this year given the potential for appeals and whatever other processes? And second was wondering if you could comment on your thoughts relative to growth in the Physicians Services business, if you were pleased with the levels there for this quarter and what your expectations are for the balance of the year. Thanks.

I'll take the Physicians Services piece and I'll let Chris answer the Lloyd's piece first. BOM LEFT 2: I guess what I would say is in our release we anticipated the earliest trial date. We were pleased with the discovery process, and our outcome in the discovery. It's really based on what we see as the strong merits of our case.

We think once the litigation was focused entirely in one jurisdiction or California, that the process has been moving along appropriately and we feel that it will continue to do such. We don't control the specific timing, but again we do feel like we will have this resolved this year. And that continues to be our position.

Chris, if it were to continue to go on further than your expectations, is there any way to quantify the additional extraordinary costs you guys might incur?

It's difficult to quantify. I don't think there would be any significant extraordinary costs. The cash flow impact of that we're experiencing related to the Lloyd's matter thus far the majority of that has been two areas. One the additional insurance premiums that we are running through our P&L, and in our cash flow on a quarterly basis as we incur those costs.

That will be reduced as we, beginning with the second half of 2003. And the other cost is where we have been funding claims that have been settled but have not been funded by Lloyd's as underwriters of that policy. We feel that we will be substantially through those cases by the end of this year. So the ongoing costs, if there is an extended process, would really just be related to litigation

Thanks and the fist?

Yeah, let me take that, Dave. I'm very pleased with the performance of the sales organization for the first quarter, as we indicated in the prerelease new sales exceeded last quarter's sale by 30 percent. As I look to the quarters ahead of us, what I'm particularly pleased about is the fact that our pipeline has grown substantially as I expected it to, but I think more importantly the quality of the prospects that we're working, the sales cycle that our sales force is engaged in has really good visibility for the closings of these deals.

And I'm very encouraged by the, not only the maturing of the sales organization, but the speed with which they ramped up that pipeline. And so as long as this progress continues, I'm very encouraged about our new sales performance. And I think that will start to be reflected in our revenue growth in Qs 2, 3 and 4.

Finally can you tell us what the retention rate was for that business in the fourth quarter.

Still in the mid 90 percent range. Again that's a critical metric, Dave. I appreciate you bringing that out. Clearly we cannot grow this business if we see deterioration there. So we still have the same focus on client service as we've had in the last two years.

Great. Thank you

Next question comes from Steven Halper from Thomas Weisel

Quick question on the shares outstanding. Any reason for that declining on a sequential basis a little bit, Chris?

It was only related to the share price and the accounting for the dilutive impact of stock options. So the share price was trading in at a lower level this year than it was the first quarter last year.

On a sequential basis

In the fourth quarter as well, I'm sorry.

Do you have a schedule as to what the share count would be based on a stock price of 8, 9, 10, 11?

Yes, the $9 range you're talking just over 31.5, that's the average stock price for the period. $10 range, just a touch over 32 million. 11, about 32 and a half

Okay. Phil, relative to the Physicians Services business, do you look at that business and say, okay, Q2 is going to have a nice quarterly sequential pick up in the revenue or is this Q3, Q4 recognizing I know you lost the print and mail price and the accounting for the dilutive impact of stock options. So the share price was trading in at a lower level this year than it was the first quarter last year. customer, but we've been at 59 million dollars for the last four quarters. Is this Q2 pick up or is this a Q3, Q4 pick up?

I think the print and mail business, Steve, was in the E-Health division.

I'm sorry.

But no, I expect to a sequential pick up in Q2. I think as we give guidance for the year, we're going to see that growth rate accelerate as we go through Q3 and Q4?.

Is that based on business that you've signed or business that you need to sign?

As you know, we really will not get much of an impact on revenue for sales that we close in Q3 and Q4 of this year. So really the biggest impact to our revenue growth for '03 is going to come from the second half of last year's new sales added to backlog for implementation. And the first and second quarter of this year. So what we're looking at is really the deals that we've closed in Q1 and those that we expect to close in Q2 with some portion of those new sales affecting revenue in the third quarter.

And finally, on the revenue recognition topic for the UK, could you just talk a little bit in detail about the accounting treatment there? Because it doesn't seem like the, quote, matching principle will hold here as you're implementing that. I'm just curious to see what the thought is there. And I'm assuming that has -- you've got the auditor approval to recognize revenues like that

Yes, first let me say that yes we have reviewed this accounting currently with our auditors and accounting literature that's available out there. The UK contract on the private finance initiative, we're the first and it is unique. In that regard. And there is nodded not any really direct accounting literature or precedence to set this by. It is -- it doesn't necessarily come in line appropriate with the matching principle.

Under the accounting that we've adopted that we think is the most appropriate in this method, in this situation, is that we will recognize no revenue until the payments from customers begin.

Once you do receive revenue or payments from a customer, you do catch up your revenue under the percentage of completion accounting method. So we'll have no revenue in 2003. We will be expensing direct costs as incurred in 2003. Once payments begin in 2004, we'll get the benefit in that year of the full two years worth of revenue. And we'll only be dispensing the direct costs that we incur in that year.

But what is it about the private finance initiative that causes you to do that?

It's really the (inaudible) payment terms that the time that the payments commence, which is a little bit unique. The payments don't really commence until the project is substantially delivered. So the fact that the payment doesn't start for beyond 12 months of the contract signing and implementation causes us to utilize percentage of completion accounting, but again does not -- we didn't feel it was appropriate to recognize revenue until the payment stream started.

Okay.

Our next question comes from John Souter with SG Cowen Securities Corporation.

The investments and technology you made to speed up the revenue cycle are those home grown technologies or were those acquired?

I'm sorry, was there another -

Go ahead

They are developed internally. We as you know we capture a significant amount of information associated with all the transactions that we incur on behalf of our physicians. And so that creates a huge data warehouse for us, and what we've done is we have used some software that we developed internally to analyze in this first phase the denials that we are receiving from payers so that we can learn from the information that we derive from this data warehouse to first of all ensure that the information is captured at the front end, and secondly if we've received it without it, that we don't submit a claim before we get that information.

That way it really does reduce the days that we would receive some notification of the claim acceptance from the insurer. And that significantly reduces the revenue cycle for our physicians and improves our revenue as a result.

Would you say that is one of the key reasons why you talk about some acceleration in revenue in Physicians Services?

No, what we're really talking about there is really as we're rolling this out now John. This is a differentiate tore for us for reporting, for our sales organization to show why, again, they should do business with Per-Se technologies, along with other advantages we offer them but secondly internally it does provide us with the opportunity to go back and look at the way we have managed the claim process and just improve efficiencies there. So we're at the early stages. But I wanted to let everybody know the kinds of investments we're making in technology in that business.

This would be something that could help the backlog going forward and revenue more for '04

Correct.

Great. In terms of the type of practice that you're seeing more traction in, is there any trend to that? Is it geographical or specialty, could you talk a little bit more detail about that

Specifically, John -

I guess, is there any trend to the practices, the new customers coming on, is it more in one size practice or one specialty or one area of the country? Is it broad-based or is any trend to what you're seeing in terms of those customers in the acceleration

I think there's nothing specific, John, that I would point to that is creating opportunities for us. In fact, it's very broad based. There's no specialty that I look at right now that jumps out and says that this is clearly an area of opportunity for us that's greater than others. So the answer is I think it's just a general, all specialties are experiencing the opportunity.

Okay. Lastly, back on the Lloyd's situation, I couldn't recall, was it California that you wanted this in or that Lloyd's wanted this in. A. That is a venue that we thought was appropriate. Would we expect to hear more news by maybe the end of the summer or do you think this truly could be a fourth quarter event before we have any more developments there?

I expected, we can't sit here and say we'll predict it but I expect some update on the case in the next quarter's conference call

Last question, related to the debt, given the interest rate situation, I'm going to put you on the spot here, Chris. Do you have a preference in terms of how you can chip away at that, is it kind of slow and steady like we saw in the quarter or would you be inclined to do something, some type of instrument like a convertible debt or just straight bank debt to get that down to an interest rate that's more appropriate for the current levels?

I think we have to be realistic that the capital environment market, as it relates to financing is favorable now. And we will continue to vault all those items. And again the market conditions are positive. And we'll continue to evaluate utilizing our resources and looking at what the market has to offer that maybe appropriate.

Thanks

Our next question comes from Eugene Mannheimer with Roth Capital Partners.

I have a few questions. First, in E-Health for practice management, is there a cost to customers to convert to that? Do you anticipate any of that wooden convert, could you just elaborate on that?

There's a cost, Gene, it's relatively minor. It covers training and implementation charges for the conversion. But it is relatively minor for the conversion. And given the new functionality that is contained in the Medicis platform, we've actually seen an actual conversion rate from our existing customer base onto the new platform.

Okay. Thank you. And again back to the revenue recognition in the UK on patient 1. Not to belabor this too much, I think it was Chris that mentioned, payments begin when the project is substantially delivered, is that basically acceptance of a software? What constitutes deliver RANS?

It's the base delivery of a system, Gene. We have a scope and a definition with functionality that is all predetermined prior to contract signing. It's really the scope of the project. And once we hit that milestone, payments will begin.

And then on the backlog, in the application software division, at 54 million, how do you define that? Do you expect to recognize that over 12 months?

Some of that will certainly be recognized over a long period, June. Our resource 1 family of products generally do have an opportunity to be recognized over the next 12 months. But on our enterprise solutions which are a significant part of that backlog, the implementations are generally in the two-year or 18 to 24 month range. We go more than one year

Thank you, Chris. And cash of 21 million dollars. Do you anticipate that to be the low point for cash for '03?

Yes. Yes, we would -- the second quarter is typically a flat to slightly positive in terms of cash. We certainly expect that the first quarter will be at the low quarter end period.

Thank you very much

Our next question comes from Ely Rudenski (ph) from [inaudible]

Congratulations too, two questions, regarding Lloyd's, did you have any discussion with Lloyd's themselves to discuss any form of settlement or preliminary discussions in the quarter?

The second question leads to E-Health. Could you give us a sense of what your revenues are on a per clinic basis now versus where they were last year so we can get a trend for how that pricing is going.

The third thing on your debt, I believe you mentioned in the press release we mentioned alternatives, mentioned it recently. When would be your time to implement that? In the first two quarters, three-quarters? What timing is that

The Lloyd's matter, I don't think it would be appropriate to discuss whether it's legal or other discussions related to the status that again we've requested a trial date at this point and that's what we're focused on

Are they trying to delay that or are they also in agreement to do it as fast as possible?

I don't know if I could characterize specifically what their specific actions are. Again, I don't think that would be appropriate to do that. But again I think the courts will make the decision. Discovery is essentially completed so we feel that the case is ready for trial.

Okay.

On transaction pricing, I'll answer that and I'll let Chris answer the second point you mentioned. I'm not seeing any deterioration on pricing in E-Health. In fact, it's been pretty consistent. It's something that we've been monitoring because obviously there may be some downward pressure of because of HIPAA, but actually our transaction volume has increased because of HIPAA. But our pricing has remained pretty consistent.

What was the last question

What had to do with the timing of any decision you'll make on the -

We will constantly evaluate that. There's not a magic number. Or magic point in time. Obviously in February of next year that's when we hit -- the debt will be due in one year from that time. So there's nothing magic about a date or a time or a strike point. We'll continue to evaluate that as the opportunities are there.

Thank you very much

Our next question comes from Kevin Casey with Casey Capital

Nice quarter. Question on business 1. How is that rolling out?

We're focused right now on that large public health system down in Texas, Kevin, that we've been implementing now. Our expectation for that project is to go live at the end of the year, which will then give us a significant reference for business 1 as we roll it out I think in '04. The focus clearly for the last couple of years has been primarily on clinical systems. So this actually has given us time to develop our reference base and then go out in earnest next year.

Why has the clinical market been so strong?

It's really been driven primarily because I think the institute of medicine report that came out on medical errors really highlighted the fact that physicians should be doing the order entry in a hospital and the clinical system should support that. Since that report came out, I think there's been a significant focus by health care organizations to really improve their clinical delivery and the physician interaction with systems. So you've seen a significant demand over the last couple of years which we still think will go into '04 through this year and somewhat into '04 as these hospitals have upgraded their legacy systems to really provide that functionality.

And then business 1, all the bugs would worked out? You just wanted to make sure everything was right before you tried to start selling it?

Really, it's a product that has a significant upside for a chief financial officer in a hospital. It also has significant downside if it's a product that fails to perform? And so we've been pleased to date with the performance. This is a very large install. This is a very large health system that we're working with. We've increased the functionality of the product, working with this customer. So I think that when we go live at the end of this year, this will be a significant product for us and a major competitive advantage in the market.

I think you might have said, the attrition for the Physicians Services business

In the mid 90 percent range where we expected it. It remains in that area

Has it been improving over the there's three-quarters

It's been pretty stable actually to where we started to years ago. As long as we stay in that range, obviously we work hard to see if we can improve it every quarter. But as long as it stays in that range we feel that's an appropriate churn rate given the marketplace.

And actually there's probably not much room for improvement since it's probably just natural churn

No, I think there's always room for improvement. What we do is we take a look at every client that notices us to leave and we go back and make sure there wasn't anything we could have done better. And I think as a result we do improve our processes. So I'm always optimistic that we could get another point or so in our retention, which will help our revenue obviously in future periods.

Okay. Great. Thanks, guys.

Our next question comes from Sean Jackson with Avondale Partners

Quick follow-up on the E-Health division. Two things, one the timing of the extra conversion costs and infrastructure you are phasing out, is that phased out now or is it completely phased out by the end of June?

Essentially phased out in the second quarter. And is been on fairly good phase down over the last three-quarters and we expect it to be falling out at the end of the second quarter.

Thank you

Once again, to ask a question please press star 1.

Our next question comes from Michael Malarkey (ph) with [inaudible].

Could you just size the, give us the size of the opportunity in the UK. Do you anticipate that you have some kind of an advantage that will allow you to win additional difference there?

Yes, Michael there are significant opportunities in the UK. Right now as they, not too dissimilar in the, from a U.S. perspective, they in the UK are upgrading all their hospitals under the national health service to improve their care delivery and what the government has mandated simply is that by 2005 hospitals in the UK will have adopted approaches and install an electronic patient record up to a level that they describe in the NHS. And we have been working for the last two to three years on a lot of these potential opportunities. Getting the first contract, as we did last year, I think shows that we are investing there the country and, secondly, that we understand the requirements of the UK market. Their product is suitable for that market, and I think that that has represented us well as we work some of these additional opportunities that we expect to see being awarded in the balance of this year.

Great. My other question is, you've obviously done an impressive job, and I'm always confused when I try to visualize the company five years from now. In a sense, you're a multi-pronged enterprise. And I'm just wondering whether or not, you know, five years from now there will be greater focus on one particular area.

I think that as always five years is a long time, Michael. But if you look at our mix of business, the revenues is driven through services organization. And our opportunity to grow that business I think is substantial. Behind that, we obviously see great synergies between those businesses the Physicians Services business and our E-Health business because of the revenue cycle division that E-Health provides not only sister divisions but also externally.

In the applications software business that's been a great contributor for our EBITDA on that business, and with some of the opportunities that we're working on the enterprise side, I feel that there is again a strategic reason that we would continue to drive our software business. I know that, I recognize that you know five years from now each of the markets that we were working in with those respective divisions is certainly large enough not for us to see any impact on the growth in those businesses.

Okay. Thank you very much

At this time there are no further questions.

Well, thank you all very much for participating in the call. We look forward to speaking with you next time. Thanks.