麥卡遜 (MCK) 2003 Q3 法說會逐字稿

Good morning, and welcome to the Per-Se Technologies third quarter earnings call.

All participants will be able to listen only until the question and answer session.

This conference is being recorded. If anyone has any objection, please disconnect at this time.

Now, I would like to turn the call over to Mr. Phil Pead, Chairman, President and CEO of Per-Se Technologies. 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, 2003. 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 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-Q for the quarter ended June 30th, 2003, and the form 10-K for the year ended December 31st, 2002.

Also, in accordance with the Regulation G, please refer to our press release issued this morning for discussion and reconciliation of non-GAAP financial measures discussed in this call to their most directly comparable GAAP financial measure.

Please also refer to the investor section of our website for historical financial information presented with the Business1 product line classified as discontinued operations.

I would now like to comment on our operations, and Chris will provide you with more detailed financial information later in the call.

The third quarter was our eighth consecutive profitable quarter and our eleventh consecutive quarter of meeting our external earnings per share guidance.

Income from continuing operations during the quarter more than doubled over the third quarter of last year. As a result of our continued strong operational performance, as well as other factors, such as the disposal of Business1 and the completion of our refinancing initiative, we expect full-year earnings per share in the range of 63 cents to 68 cents on a fully-diluted basis, compared to previous guidance of 50 cents to 60 cents per share.

During 2003, we have taken actions that have sharpened the long-term strategic focus of the company and have improved our financial performance and our financial flexibility.

Turning to our Physician Services Division, our year-to-date new bookings are substantially ahead of last year, even though new business sold in the third quarter was below our very strong level in the third quarter of 2002. In addition, new sales for the fourth quarter are forecast to be strong with a solid pipeline as we expand our presence in the marketplace.

New sales are the key to accelerated revenue growth in the division, and has been a primary focus during 2003. With our new sales momentum and solid retention rates, I am confident in our ability to grow revenue on a long-term sustainable basis.

While I am pleased with our new business solid performance, third quarter revenue was below our expectation. As we stated in our press release this morning, two primary factors negatively impacted revenue during the quarter; same-store growth and the faster-than-expected ramp down of terminated business. Same-store growth is the growth in our revenue attributable to the existing client base. This growth comes typically from the growth in our position client practices as they increase their revenue, primarily from the volume of procedures they perform.

While same-store growth is positive on a year-to-date basis, it was negatively impacted in the third quarter by unusual volume reductions, primarily caused by changes in the business practices of two larger clients. One client, for example, disbanded a series of ambulatory clinics, reducing the number of physicians in the group from 100 to 20. While changes in our clients' business practices are fairly common, they usually result in higher volumes and charges. We see these volume reductions as an unusual event and expect that the fourth quarter will return to positive same-store growth.

Also negatively impacting revenue in the third quarter was the faster-than-expected ramp down of business terminated in previous quarters; again, from a small number of clients. Typically when a client leaves us, their business ramps down over roughly nine months, or approximately the same time frame that new business ramps up. Over the ramp-down period, the client will usually insist that we collect the accounts receivable that we originally billed in order to minimize the negative cash impact during the transition. The majority of this revenue is attributable to clients who have been using our services in a nontraditional business model and were able to transfer their accounts receivable balances at the same time that we cease performing their billing. These clients were a vestige of previous billing practices, and we have no other existing clients of this type.

Both these factors will negatively impact revenue in the fourth quarter.

Despite the negative impact of these factors on our third quarter revenue, the operations of the Physician Services Division are strong with good client retention and a profitable, proven business model.

As I mentioned earlier, the key to long-term sustainable and accelerating revenue growth in the division is new business sold. I am confident in the ability of our sales force to execute based on the strong new business sold performance of this still-maturing sales organization.

Turning to our Hospital Services Division, during September, the Centers for Medicare and Medicaid Services, or CMS, issues transitional guidance related to the October 16th HIPAA deadline for standard electronic transactions. As part of the guidance, CMS stated that they were implementing a contingency plan to accept non-HIPPA compliant transactions after the October 15th compliance deadline. new compliance deadline was established with CMS, who stated that they would regularly reassess readiness of the industry to determine how long the contingency plan would remain in effect.

After CMS's announcement, commercial payers also began activating their own contingency plans to accept non-compliant transactions after the October 16th HIPAA deadline.

As we stated last quarter, we have seen a lengthening of the sales cycle for license-bases revenue cycle management solutions, as hospitals focused on compliance with the HIPP electronic standard transaction deadline.

Our revenue cycle management solutions, such as our automated remittance processing and denial management products typically range in price between $50,000 and $100,000. We had projected sales of these licensed-based solutions to accelerate in the second half of 2003, after a sluggish second quarter sales. With the extension of the HIPAA deadline, we now do not expect sales of licensed-based solutions to increase until the first half of 2004.

In the release this morning, we announced that we have initiated a process to sell our patient accounting system, Business1. Business1 is an enterprise-wide patient accounting solution for hospitals. Our Hospital Services Division is focused on improving the financial performance of hospitals. Our solutions accomplished this by improving revenue through transaction and licensed-based offerings, such as denial management that allow hospitals to reduce payer reimbursement denial.

Hospital financial performance is also improved by decreasing expenses through our market-leading solutions, such as our staff scheduling product, that allow hospitals to better manage their resources, decreasing the need for expensive temporary agency staff and overtime.

It is not the strategic direction of the division to sell large, enterprise-wide software. The discontinuance of Business1 allows us to focus our resources on solutions that will provide a better strategic return for our company and our shareholders.

As we look into 2004, we are very excited about the significant growth opportunities for both our divisions as we strategically focus on the financial needs of providers.

Chris Perkins will now discuss our financial results for the third quarter. Chris?

Thank you, Phil.

First, reviewing our consolidated results, revenue was 84.5 million, as compared to 82.8 million in the third quarter of 2002.

During the third quarter, we incurred approximately six million in costs associated with our debt refinancing initiative, and approximately $200,000 in restructuring costs associated with our reorganization after the Patient1 divestiture. These costs are excluded from the financial measures I will now review.

Operating income was $10 million, or 11.8% of revenue, as compared to $7.2 million, or 8.7% of revenue in the prior year period. Income from continuing operations for the third quarter was six million, or 18 cents per share on a fully-diluted basis, compared to two and a half million, or eight cents per share on a fully-diluted basis for the third quarter of last year.

As Phil discussed, we have initiated a process to sell our Business1 product line, and accordingly, Business1 has been classified as discontinued operations for all periods presented in our press release this morning.

Business1 had an operating loss in the quarter of approximately one million dollars, or a negative three cents per share on a fully-diluted basis. Including the Business1 operations during the third quarter, fully-diluted earnings per share were 15 cents, which is in line with our previous guidance of 14 to 16 cents per share for the quarter.

In the Physician Services Division, revenue was 63.5 million in the third quarter, as compared to 62.7 million in the third quarter of last year. Operating income for the division was 7.4 million, or 11.7% of revenue for the quarter, compared to 7.2 million, or 11.5% of revenue in the prior year quarter.

As we have discussed previously, customers of the division's ASP-based physician practice management solution are being converted onto a new platform. Costs incurred in the third quarter associated with this conversion were approximately one million dollars. Excluding these costs, operating income in the division was 8.5 million, or 13.3% of revenue for the third quarter.

Net backlog in the division was two million dollars at the end of the third quarter. During the third quarter, we implemented new business at a record pace in the division. While our new business sold is up 20% over the prior year on a year-to-date basis, our new business implemented into our recurring revenue model is up 55% on a year-to-date basis over the prior year.

In our Hospital Services Division, revenue for the third quarter was 24.4 million, as compared to 23.5 million in the prior year period. As discussed in previous quarters, the division is phasing out a large, non-medical claims print and mail customers, which negatively impacted year-over-year comparisons. Excluding the impact of this customer, revenue growth in the division was eight percent higher than the third quarter of 2002.

Operating income in the division was 5.9 million, or 24.1% of revenue for the quarter, compared to 4.2 million, or 18% of revenue in the third quarter of 2002.

Moving to the balance sheet, our total cash position at September 30th, 2003 is 19 million, compared to total cash at the December 31st, 2002 of 51 million. Since the beginning of the year, we have used 50 million in cash on hand to retire debt, including the net proceeds of 27 million from the Patient1 divestiture. Discontinued operations have been a use of cash of $12 million in the current year.

Our accounts receivable, or days sales outstanding, were in line with our expectation. By division, DSOs at the end of the third quarter were 45 days outstanding for Physician Services, and 63 days outstanding for Hospital Services.

Cash flow from continuing operations for the first nine months was 12.8 million, compared to 9.5 million in the prior year period. We expect full-year cash flow from continuing operations of 26 to 29 million, and continue to expect full-year 2003 free cash flow in excess of million.

In our earnings release this morning, we provided an update on Lloyds. We expect full-year 2003 costs associated with Lloyds to be three to three and a half million, with a full-year negative cash flow impact of seven and a half to eight and a half million.

As Phil stated earlier, we initiated a process in the third quarter to sell our patient accounting product line for hospitals, Business1. The product line has been classified as discontinued operations for all periods presented. In accordance with FAS 144, accounting for the impairment of -- or disposal of long-lived assets, the company incurred a write-down of Business1 net assets of 7.7 million in the third quarter. We expect to sell this product line in the near future.

Also during the third quarter, we completed the sale of the Patient1 clinical product line to Misys Healthcare Systems. Patient1 has been classified as discontinued operations for all periods presented. Net proceeds from the sale of Patient1 were approximately $27 million, and we recognized a gain on the sale during the third quarter of $9.4 million related to this transaction.

We are currently in the process of finalizing the closing balance sheet with Misys, which may result in an additional gain recognized during the fourth quarter.

During September, we completed our refinancing initiative, which resulted in the additional permanent reduction of $35 million in debt and the refinancing of our remaining $125 million in debt outstanding at very favorable rates. On an annualized basis, the refinancing of our debt will yield approximately eight million dollars in cash interest expense savings based on current rates.

Thank you, Chris.

As I stated earlier, we expect full-year 2003 earnings per share of 63 cents to 68 cents on a fully-diluted basis, compared to previous guidance of 50 cents to 60 cents per share.

In the press release issued this morning, we provided our full-year 2004 guidance. We expect consolidated revenue growth in 2004 of seven to 9%, and consolidated earnings per share growth of 35 to 40%. 2004 earnings per share guidance is in the range of 85 cents to 95 cents on a fully-diluted basis.

By segment, we expect revenue growth in the Physician Services Division of six to 8%, and operating margins between 12 and a half and 13%.

In the Hospital Services Division, we expect revenue growth of eight to 10%, and operating margins in the range of 20 to 21%.

We expect to generate free cash flow in excess of $25 million in 2004; an increase of approximately 65% over 2003 free cash flow guidance.

While I am not satisfied with the revenue growth we will generate in 2003, I am proud of the more than doubling of our bottom line profitability. As we look into 2004, I am confident in our ability to deliver on both our revenue growth and earnings per share guidance. We have established new sales momentum in both our divisions and the underlying performance of our operations continues to be strong.

During 2003, we took steps that have significantly improved our financial performance and our financial flexibility. We have disposed of unprofitable business lines, decreased our total debt by a third, and reduced our debt carrying costs by half. We have realigned the operations of our company around our core healthcare constituents, physician practices and hospitals, and we have clearly defined our strategic focus around the administrative functions of healthcare.

With the positive changes that we have made and our leadership in revenue cycle and cost management solutions for providers, I am very confident about our future prospects and our ability to continue to generate value for our shareholders and our customers.

That completes my comments, operator. I'd like to open it up now for questions.

Thank you, sir.

At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star, one. You will be announced prior to asking your question. To withdraw your question, you may press star, two. Once again, to ask a question, please press star, one.

On moment, please.

Our first question comes from David Francis from Jefferies. You may ask your question.

Good morning, Phil.

I guess, two questions off the top. First, you mentioned that you expect Q4 revenue performance in Physician Services to also be adversely effected by the events you described on your comments. Can you give us a sense as to the magnitude of that? And second, tell us from a management perspective, what it is that you're doing to ensure that you don't have similar types of occurrences again within the customer base, and what it is that gives you the confidence that you shouldn't expect to see similar occurrences.

Yeah, sure, David. Let me take the second part of the question, and I'll have Chris give you an update on the first part of that question.

With regards to both these events occurring in the third quarter with regards to same-store growth and the ramp-down in business, both of these events were unusual events, Dave. The issue for same-store growth is one of a business practice that related essentially to two clients. The first being one that was a Midwest hospital who was in a series of ambulatory clinics that decided that they no longer, for financial reasons, wanted to continue with that business model. It was unusual in that, you know, we typically don't offer services to primary care physicians. But in this instance, given the size of the group, we agreed to take on that business.

The group has essentially significantly decreased in size, and obviously, significantly impacted our volumes, and therefore our revenues associated with that group.

We don't typically do that anywhere else, Dave. That was an example of something that we've not done since that time, and wouldn't do in the future.

And the same really applies to the same-store growth and the ramp-down of our business. These are -- they were business models and they were customers that we signed up in the 90s, and we have no contracts of this kind in our customer base today, and so I'm confident that these events are not recurring in the future.

And if you on the back of the envelope do the math, it would appear as though these events were, combined, about 5% of the total revenue base. Is that a fair estimate? And are we to assume that's correct that, again, there is no one else out there or no other groups of business or circumstances that could have a similar degradation on the revenue line?

I would say yes, that's correct, Dave. In total, those groups don't consist of 5% of the total revenue, but they are a meaningful impact on the revenue growth.

OK. And finally, can you tell us what the retention rate was in the business for the third quarter and remind us what it was in the second?

The third quarter, Dave, is in line with our expectations; it's just slightly below that mid-90% range. We expect to be, again, at our target levels for the end of the year. And I think it was in line -- if my memory serves me -- with where we were at the end of the second quarter. So, I mean, we're still tracking to our expectations.

Very good. Thanks.

John Souter from Susquehanna Financial, you may ask your question.

Hi, Phil.

Could you talk a little bit about what is going on in the market in Physician Services -- perhaps any external factors that are working, you know, either for or against you? It seems like there are so many different reimbursement issues, both private and public reimbursement, as well as other things about groups forming and some of the structural changes in perhaps the large practices that you deal with.

Sure, John. Actually, all the -- with the exception of these two events that happened to us in the third quarter, all the activities in the marketplace right now are very positive. If I look at the mix of prospects that we're working, the majority of the prospects that we're working fall in the in-house category.

If you remember, the market is probably 70% in-house and 30% outsourced, yet, we're seeing a swing in the number of prospects that we're working, where physicians are seriously considering, and those that we've signed up this year fall into -- a larger percentage fall into the in-house category.

So, in terms of reimbursement pressure for physicians, it's about the same as it was this time last year. We've seen some increases in Medicare from some specialties, and then, some declines in others. But the focus that we have in our sales organization is that we're seeing a lot more business being transferred from in-house to outsource, which I think is very positive, considering that's the largest market potential for us.

And secondly, if I just look at the performance of the sales organization this year, up substantially new business from last year, and more importantly, we're implementing that business at a faster rate than we have.

So, to me this was just an event in the third quarter that's obviously gonna impact our fourth quarter, that I don't see as recurring. And I'm very optimistic that we ought to -- we have the opportunity of exceeding our revenue growth rates for 2004.

OK. So, when you look -- excluding these kind of handful of customers, or the couple of customers that we just talked about -- when you look at the pipeline, you know, would you anticipate -- exiting '04, would you anticipate that to show significant growth relative to perhaps the first half of '03?

Well, the only caution I have for that, John, is that we always show a seasonal impact in the first quarter of '04. But, notwithstanding that, absolutely. If I look at the new business that we've implemented and the new business that we've sold, excluding these two events, our revenue in 2003 would have grown at a faster rate. And so, I expect that to start showing up in our top line in the first half of 2004.

OK. And in terms of the sales force, you're still content with the level of sales reps that you have? In terms of their getting up to speed, you'd say they're just about there?

Absolutely, John. You know, we began this process of tripling our sales organization really at the end of 2001. And we hired most of these folks really throughout 2002. And I would say that we were fully ramped up by the latter half of 2002 -- probably going into the fourth quarter of '02.

So, since that time, they've built their pipelines, identified their prospects. And if I look at where we are today versus where we are in 2002, we've got a much larger sales organization, the majority of whom are performing extremely well. We've grown each of the specialties substantially, with the exception of probably academic; that takes a much longer sales cycle, John, because of the size of the opportunities we're working. But every other specialty is performing extremely well, and I expect that in '04 we'll start to see a much higher volume of closed business, again, than we were in 2003, and I think 2003 will be a great year for us.

Great. OK. Thank you.

Sean Jackson from Avondale Partners, you may ask your question.

Hey, good morning.

Correct me if I'm wrong. You mentioned about the new sales in the third quarter. Did you say it was actually a little lower than the third quarter of last year? And if so, I mean, why did that happen?

It was lower than last year, Sean. Last year's third quarter was an exceptional quarter for us. And occasionally, as you look at the ramp-up of sales cycles in the new business, I expect to see some fluctuation in the closing of new business.

So, as I compare this quarter with last quarter, even though it was a strong quarter for us, it was not as strong as it was last year.

OK. And also, regarding the interest savings you guys are realizing from the refinancings -- obviously, the fourth quarter will show a full quarter's effect from those -- how much of the third quarter was involved, was affected by the refinancings?

You're right. The fourth quarter will have the full impact of that interest rate reduction. In the third quarter, it was really a couple or few hundred thousand dollars. We closed our refinancing in the middle of September, so it certainly wasn't a significant amount of interest cost reduction in Q3.

OK. Thank you.

Steven Halper from Thomas Weisel Partners, you may ask your question.

Hi. Relative to the Business1 divestiture, what's your implementation status there, and how many hospitals are you working on right now?

We've got two that we're working on right now, Steve, for Business1.

And what's the status of those implantations, or what's the response from the customers? Obviously, I'm assuming you've mentioned this to them.

We went out really at the same time, Steve, as the earnings release to give them the information regarding the sale of Business1. And the message here really is that we expect the buyer of that product to take on the support and continue the implementation with the customers that we're working on.

OK. And then, lastly on the Physician Services business, you indicate that your new sales year-to-date is up 20%. Will you ever be in a position to provide, you know, a hard number in terms of the amount of business that you've actually signed?

We're gonna look at that, Steve. I think that's a fair question. I think it's important for us to provide you with as many metrics as we can to give you a sense of where the business is going and when to expect that revenue growth. So, we're gonna look at that for our February release, and try to provide you with as much information as we can to show the performance of that sales organization.

Great. Thanks.

You're welcome.

Gene Mannheimer from Roth Capital Partners, you may ask your question.

Good morning, Phil and Chris.

A couple of questions. First, do you publish a backlog number for the Hospital Services Division?

We do not, Gene, and primarily it's because a large percentage of the revenue in that division is recurring in nature. And then the software business, as you know, both our scheduling products' relatively low average sales prices, and we tend to sell and implement those relatively quickly.

And so, it's not as meaningful as it is, for example, in the software industry, where you've got large contracts that you're implementing over a long period of time.

I will just comment that our backlog is up, compared to the prior year's third quarter, and the prior in Q2 of 2003 for that division.

OK, thank you. And next, what was the number of business days in the quarter for purposes of the revenue-per-day calculation for Physician Services?

64, Gene.

I'm sorry.

64.

64, which was the same as the prior year quarter.

OK, thanks. And then, just to expand a little bit on the Businesse1 discontinuance -- is this to say that current implementations will be, you know, put on hold until a buyer of the product line appears and then assumes support of that product?

No, Gene. We're actually continuing. And we have several opportunities that we're working for new sales, too. But, clearly, that would all be conditioned upon the prospects knowing that the product is for sale. But, we're continuing with the implementations and we expect the new buyer to take on support for those.

And is there any estimated time frame for when that sale would take place?

We're working currently on several prospects and opportunities there. We would hope it would happen soon, but we'll see how that develops.

OK. Thanks very much, guys.

You're welcome.

Brad Evans from High Rock Capital, you may ask your question.

Good morning.

Good morning.

I've got a number of questions here, actually, if you'll bear with me. What effective tax rate are you assuming for '04?

For a consistent tax level or tax rate that we'll have in 2003.

So, 15%?

Probably slightly lower than that; in the 10 or so percent range.

And you will be sheltering the majority of the current taxable with the NOL, correct?

That's correct.

So, cash taxes will be diminished?

That's correct. The provision is consistent with our cash taxpaying rate.

OK, understood. And I'm sorry, the effective -- or your weighted average cost of that is now where?

It is currently at LIBOR plus 425 basis points.

So, you're roughly around 6% today?

I think it's a little bit lower than that.

OK, so we're looking at -- you know, call it conservatively -- about seven and a half million of interest expense, assuming steady interest rates today?

Cash interest expense; that'd be correct.

OK.

There will be included -- we did, as required, we did capitalize and defer certain financing costs that are being amortized over the life of the credit.

And your assumption for depreciation and amortization for '04, is that still roughly 17 or 18 million?

Yes.

OK. I guess I'm trying to -- the midpoint of your guidance, then, assumes roughly -- it looks like 60 million or so of EBITDA. And if I take the cap ex and business development that you gave us in the press release, 16, and the seven and a half million for interest expense -- so, that's 24 and a half million. So, it looks like your assumption for 25 million and -- I don't what the plug there would be for working capital, but it looks like your free cash flow estimate of 25 million is fairly conservative. I mean, if you just follow the math, 60 million for EBITDA, 16 million for cap ex, seven and a half million for interest ...

I would say that we are confident and comfortable with our guidance for cash flow.

And does the 90-cent midpoint for the guidance -- what kind of assumptions are you making for further debt reduction in that number?

It's not significant. There is some debt amortization that is in the $10 million range over the course of 2004.

OK, so really, you're making no assumptions for that 90-cent number in terms of how you deploy that free cash flow at this point?

No, that's correct.

OK. And can I just ask you, do you expect the proceeds from the Business1 sale to be material?

We're not saying at this point until we further evaluate the prospects that we're currently working on at this point, but we are currently evaluating that.

OK. And I guess the other question I had for you was, again, within the guidance. What assumptions are you making for either an increase or decrease in the Lloyds' expense for '04?

We expect there will be a decrease in the Lloyds' expense for 2004. You may recall in the first half of 2003, we did incur some increased expense related to the large increase in premiums of our policies. And as we stated, those costs are going away in the second half of this year, and will no longer be incurred in 2004. Those costs totaled about one and a half million dollars in the first half of 2003.

Understood. So, just to refresh memories, what is the worst case scenario at this point for a Lloyds -- as this process winds down, I mean, it seems like the P&L has already born the brunt of, I guess, of that issue. But what are your thoughts in terms of the worst case versus best case scenario in terms of how we move forward here?

Well, the best case is obviously that we prevail, as we expect to do. We would have certainly the repayment of funds related to our receivable from Lloyds that is currently outstanding. Lloyds will provide any coverage on continuing claims related to their policy period. And we would expect to recoup some of our damages that we incurred over the course of this rescission attempt.

Worst case is that we would have no recoup of our damages, and we would not recover our current receivable from them, and have to write that receivable off through a non-cash write-off if that transpired.

Right. OK.

Our free cash flow for 2004 does not include any impact of the outcome of Lloyds.

Understood. And then just the last question I have for you is with the Physician Services side of the business. Are you expecting bookings in the fourth quarter to be up year-over-year? And could you just maybe comment on the early pacing of the business in the month of October?

We are expecting bookings to be up in the fourth quarter -- to be up over last year, Brad.

OK. Thank you very much. Nice quarter.

You're welcome.

Steven Halper with Thomas Weisel Partners, you may ask your question.

Yeah, hi, Phil. Could you just run through the logic of keeping the scheduling software at this point?

Sure, Steve. As far as our patient scheduling software goes -- if I address that one first -- that becomes a key for us in a strategy that we're pursuing called access management, which relates to making sure that when the patient shows up for service in the hospital environment that we know what they're responsible for for their payment, versus what the payer is responsible for. So, it's very integral to our strategy for access management, where we use both solutions from the e-health side for eligibility and authorization, the claim-processing piece. All that is driven by making sure that, as far as possible, the responsibility for payment is driven to the front end, as opposed to what seems to happen more often than not in healthcare that most of the accounts receivable is worked post-service.

For staff scheduling, the strategic direction of that product is to broaden it, because what we have here is an opportunity to reduce the cost of hospitals. That is a significantly -- the operating cost in hospitals is driven significantly by labor. And if you look at the marketplace right now, our ability to go in and help hospitals manage their labor component to the level that they need to -- particularly when it comes to their patient/nurse ratios, which a lot of other states are looking at now, as well as California -- staff scheduling gives us the opportunity of talking to the same constituents, the CFO, about reducing their expenses.

So, there's a synergistic sale for both access management and staff scheduling for our resource management products.

And who are your best competitors in each of those segments at this point?

Well, for staff scheduling, we have the largest market share, and I would say that our biggest competitor is a mixture maybe three or four companies, Steve. I don't think there is one large competitor out there for us. For patient scheduling, we see McKesson, we see SIS, Tempest. Again, there are a handful of players in the space.

OK. Thanks.

You're welcome.

John Souter from Susquehanna Financial. You may ask your question.

Hi. Just a follow-up on physician services and the competitive landscape there. Is perhaps the delay of HIPAA allowing some of the smaller players to kind of hang on a little bit longer? In other words, had you - had you anticipated that some of these much smaller competitors that maybe have a hospital or a handful of hospitals that perhaps wouldn't be able to make it beyond HIPAA or wouldn't have the capital to make those investment, were going to have problems. But because it's delayed, they've been able to stick it out a little bit longer?

No, John, the HIPAA - the HIPAA compliance issue that the industry has faced, really relates to transactions. And to the extent that that's impacting our physician groups, it would only be in our ability to send an electronic claim on behalf of those physicians groups to the payer. And so far, even though it's kind of a confusing market place out there because we're dealing with compliant and non-compliant HIPAA transactions, it's not an impact for our physician services. As long as we continue to be able to manage their revenue cycle appropriately and we're seeing - we're seeing no increase in their days. That's really a key for us - as a result of some of the changes that are going on in the marketplace, we don't anticipate any impact, both positive or negative to - for our physician groups.

OK. And maybe asked a different way, in physician services, are there any changes to the competitive landscape. In other words, are you still seeing pretty much only the in-house competitors and maybe some smaller, very local competition?

I'm seeing that some of the regional players that we have been dealing with over the years are actually weakening, John, and for a variety of reasons. But other than that, I don't see much of a change in that landscape.

OK. Thank you.

You're welcome.

Once again, if you would like to ask a question, please press star, one. One moment, please. Brad Evans with High Rock Capital, you may ask your question.

Yes. Just a follow-up, actually. It seems like your credit it improving and you still - I mean, you have a fairly spread, the LIBOR on the bank line. Is there a - is a grid you're on right now and what are the prospects of you stepping down that grid?

Yes. There are opportunities for some improving that rate, primarily tied to rating - credit rating agency ratings of our debt.

And thoughts on when that might occur?

We'll be working on it and continuing to work with them to present our operational performance and the strength of our business model.

I mean, because it seems to me like there's probably a spread of at least 200 basis points there. It seems like it's excess relative to improving credit quality of the business at this point.

That may be aggressive. And that's, you know, based as far as what's built into our credit facility. It's much less of a spread - reduction opportunity than that.

And I should have followed up in terms of the thought process here in terms of the free cash flow priorities in terms of how you deploy that between, you know, buying back stock if possible, debt reduction and acquisition. How do you - how you do weigh those three opportunities?

Well, we've continued, historically, to focus on continuing to reduce - improve the capital structure of our business and reduce our leverage. We do have capacity, currently, with our existing facilities out there. And we'll continue to monitor our opportunities as they present themselves in the market.

Where would you like to see, you know, optimally, the balance sheet migrate over time, in terms of debt to capital or debt to EBITDA?

I think we should focus on staying in - below two times debt to EBITDA and certainly down towards one times is probably more appropriate. We do have the opportunity to expand upon that and to move it back up to the two times if we see that we have a, you know, a very strong cash flow generation in future periods to continue to reduce that.

Well, it looks like you're almost there. Let me just ask you a last question, I guess, in terms of - as you look out, moving forward here, could you just characterize your level of visibility as we get into the first half of - or how far can you see out right now in terms of, you know, reasonable visibility in the business?

I think it's, as Phil stated earlier, you know, driving your sales is very important as far as continuing our growth in our revenues. And that's something that we can generally see, you know, on a - on a modeling basis out one to two quarters with some clarity. There are circumstances that may present themselves for a short-term impact. But being that our revenue - our base revenue is a recurring revenue model, it's a very stable business model. So, it's very clear to see the opportunities for our base revenue for future quarters. But the revenue growth is something that we have to continue to drive new business with .

All right. Well, good luck.

At this time, there are no further questions.

Thank you, operator. Before I close, I'd like to invite you attend our annual investor day, which will be held on Tuesday, November 18 at the Regal Royal Hotel in New York. Thank you for participating in our call and look forward to seeing you in November.