麥卡遜 (MCK) 2003 Q4 法說會逐字稿

Hello and welcome to the Per-Se Technologies fourth quarter earnings release. Following today's presentation, there will be a formal question and answer session and instructions will be given at that time. Until then all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host President, Chairman, and Chief Executive Officer, Mr. Philip Pead. Sir, you may begin.

Thank you, Annie. Good afternoon and welcome to the Per-Se Technologies fourth quarter conference call. I have with me today Chris Perkins, our Chief Financial Officer. 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-Q for the quarter ended September 30, 2003 and the Form 10-K for the year ended December 31, 2002. Also in accordance with 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.

This morning we released our results for the quarter ended December 31, 2003. I would like to thank you all for joining us this afternoon. We moved forward our release from its originally scheduled date of Thursday, February 5 to enable us to discuss the significant net new business sold in our Physician Services division during January including the University of Texas contract that was announced yesterday. I would now like to comment on our operations and Chris will provide you with more detailed financial information later in the call.

During the fourth quarter, we doubled our income from continuing operations excluding restructuring expenses as compared to the fourth quarter of 2002. During 2003, we significantly improved our operations and our capital structure resulting in both income and cash flow improvements. In our release this morning, we reiterated our 2004 guidance of 7% to 9% consolidated revenue growth and fully diluted earnings per share of $0.85 to $0.95, an increase of 31% to 46% over our 2003 performance. We also reiterated our cash flow from operations guidance of $40m to $43m, an increase of 59% to 71% over 2003. Given our renewed strategic focus and our strong net new sales performance today during 2004 in our Physician Services division, I am confident in our ability to meet or exceed expectations for the coming year.

Turning to our Physician Services division. We had record net new business sold in January of 2004 of $11m. Net new business sold in this one month exceeded the level of net new business sold in any previous quarter. I am particularly proud of the sale we announced yesterday. The University of Texas Health Science Center at Houston has outsourced revenue cycle management for their entire faculty practice plan to Per-Se. This includes 16 clinical departments and over 550 physicians and represents our second full practice plan outsourcing agreement. As part of the agreement we are hiring University of Texas' 180 employees and are opening a national center of excellence for academic medicine in Houston throughout 2004, we will be implementing technology tools and best practices that will improve the productivity of the employees and the client metrics of UT. This agreement significantly raises our profile in the academic medicine marketplace, an area of great opportunity for our physician services division. I had anticipated that most of the new sales in January would close during the fourth quarter. The timing of sales closes resulted in the division having negative net new business sold for the fourth quarter as well as a negative net backlog of $2m as of year end. However, at January 31, 2004 the division had a record net backlog of $11m. It is this net backlog that will help drive our revenue growth in the coming year. Our sales force has made good progress throughout the year although it has taken longer than I had expected to reach the desired level of productivity. However, given our strong value proposition, we typically do not lose deals to competitors and therefore achieving our sales targets as a function of building an appropriate pipeline and increasing our close rate. Both of these tasks improve as the sales force matures.

Our client satisfaction remains high as we continue to deliver high-quality service to our client base. The key performance metrics for our clients were positive throughout 2003. As we have previously mentioned, we believe that net new business sold and net backlog are the most meaningful indicators of our projected revenue growth. Although both metrics were negative in the quarter, this was the result of the timing of new sales and higher than expected client losses. During 2003, our client retention level was approximately 90%, which was below our mid 90% target. The largest contributor to our lower than targeted retention level was a few large clients who migrated their billing in-house. We have evidence that the move from outsource to in-house is not typical and even though this has happened from time to time, we have had clients return once they realize the value of our service. Our client satisfaction and customer services levels have never been better and we do not anticipate this trend continuing.

We are excited about our prospects of revenue in 2004. I am confident based on our strong January 2004 performance that we will achieve our revenue growth guidance of 6% to 8% for the physician services division. Turning to our hospital services division, with a renewed focus on our resource management products, new sales of these products during 2003 were higher than each of the past two years. Hospitals need products that help manage their most expensive resources, labor and the operating room. New sales of our revenue cycle management tools continue to be depressed by hospital's efforts to comply with the HIPAA standard electronic transactions. By way of background, in September of 2003 the centers for Medicare and Medicaid services issued transitional guidance that allowed non-compliant electronic transactions to be submitted after the original October 16, 2003 compliance deadline. With hospitals focused on complying with these standards, we continue to see longer sales cycles for our license-based revenue cycle, management products which use electronic transactions to improve cash flow for hospitals. We expect the sales environment for these products to begin improving during the first half of 2004 as hospitals become HIPAA compliant and can turn their focus to solutions that improve their financial health.

Throughout 2004, we will be investing in the products of our hospital services division as we further integrate its products and technology. I would like to briefly discuss one of these initiatives. Our Hospital Services division is focused on improving the financial performance of hospitals. A significant improvement to the revenue cycle process is to ensure that patient information captured during registration before patient care is delivered is complete and accurate. During 2004, we will be introducing an access management portal that will be delivered via the Web. Our access management portal will offer real-time eligibility and editing capabilities that hospitals can use to ensure patient demographic information is complete and accurate before it is entered into a hospital's patient accounting system. Hospitals utilizing this functionality at the beginning of the care process instead of at the back end as part of claims processing, for example, will enable hospitals to shorten their revenue cycle. In the next phase, we will significantly increase the value proposition of our resource management solutions by integrating this functionality with our patient scheduling products. 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 fourth quarter. Chris?

Thank you, Phil. First reviewing our consolidated results, revenue was $82.6m as compared to $82.1m in the fourth quarter of 2002. During the fourth quarter, we incurred approximately $700,000 in restructuring cost associated with the reorganization after the Patient1 divestiture. These costs are excluded from the financial measures I will now review.

Operating income was $9.4m or 11% of revenue as compared to $8.3m or 10.1% of revenue in the prior-year period. Income from continuing operations for the fourth quarter was $7.2m or $0.21 per share on a fully diluted basis compared to $3.6m or $0.11 per share on a fully diluted basis for the fourth quarter of last year. In the Physician Services division, revenue was $61.6m in the quarter as compared to $61.7m in the fourth quarter of last year. Operating income for the division was $6.6m or 10.7% of revenue for the quarter compared to $7.6m or 12.2% of revenue in the prior-year quarter. Revenue during the fourth quarter was negatively impacted by two factors discussed during our third quarter release, lower same-store growth and the impact of terminated business from previous quarters that ramped down faster than usual. Same-store growth for the full-year 2003 was 0.5%, which was slightly below our expectations. We expect same-store growth to improve to normal level of 2% to 3% during 2004.

As we had discussed in previous quarters, the division's operating margin was negatively impacted by the cost of converting the customers of the ASP-based Physician Practice Management solution on to a new platform. In our Hospital Services division, revenue for the fourth quarter was $24.3m as compared to $23.7m in the prior-year period. As discussed in the previous quarters, the division is phasing out a large non-medical claims Print & Mail customer, which negatively impacted year-over-year comparisons. in the division, excluding restructuring expenses, was $6m or 24.7% of revenue for the quarter compared to $4.7m or 20% of revenue in the fourth quarter of 2002.

Moving to our balance sheet, our cash position at December 31, 2003 is $25m compared to total cash at December 31, 2002 of $51m. During 2003, we used $50m in cash on hand to retire debt including the net proceeds of $28m from the patient loan divestiture.

Our account receivables, our days sales outstanding by division at the end of the quarter was 45 days outstanding for Physician Services, and 65 days outstanding for Hospital Services. In our earnings release this morning, we provided an update on Lloyd's. Our receivable from Lloyd's is $17.4m at year-end that now remain only two open cases that are covered under the Lloyd E&O policies. Cash flow from continuing operations for 2003 was $24.4m compared to $24.5m in the prior year period. Per year cash flow included $4.3m in cash that's been associated with our debt retirement and refinancing initiatives. During our earnings release this morning, we announced the sale of our Business1 product line effective January 31. While we received no cash upon closing we will receive a payout based on the product lines due to performance. The buyer has hired most of the Business1 employees and will continue to service the Business1 customers. The product line has been classified as discontinued operations for all periods presented.

Thank you Chris. As I stated earlier we've reiterated our previously issued 2004 guidance in the press release issued this morning. We also provided quarterly earnings per share guidance. Briefly, on a consolidated basis, as I stated earlier, we expect full year 2004 earnings per share of $0.85 to $0.95 on a fully diluted basis. We expect consolidated revenue growth of 7% to 9% for 2004. By segment we expect revenue growth in the Physician Services division of 6% to 8% and operating margins between 12.5% and 13%. Margins in the first quarter will be negatively impacted by seasonality as has occurred in prior years. Also the implementation of the significant new business sold in the January of 2004 period will negatively impact margins during the first half of 2004. In the Hospital Services division we expect revenue growth of 8% to 10%, and operating margins in the range of 20% to 21%. As with Physician Services division, seasonality will negatively impact margins in Hospital Services in the first quarter. Margins throughout 2004 will be lower than the prior year, as I mentioned earlier, we invest in product initiatives in this newly formed division. Consistent with previously issued guidance we expect to generate cash from continuing operations of $40m to $43m and expect capital expenditures and capitalized software development cost to be between $15m and $16m for 2004. 2003 was our second full year of bottom line profitability and our third year of strong cash flow generation. The operation on capital structure improvements we made during 2003 have laid the foundation for even greater profitability and cash flow in the coming year. Revenue growth is our focus for 2004. I am confident that we will meet our revenue growth targets for the coming year. That completes my comments. Operator I would like to open it up now for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request press start two. One moment please for the first question.

One moment please. Alexander Draper with Deutsche Bank, you may ask your question.

Thanks and good afternoon. A couple of questions. First, Phil if you could comment when you look at the revenue for the fourth quarter, obviously you had a little bit of slippage in terms of the sales and discontinuances. Was there anything else, does it look like you are at slightly below the bottom end if it's your sort of targeted range? You commented and Chris commented that there were some expected losses, was it really just the slippage of business or is there some other new clients a lot faster even more so than what you saw on the third quarter?

No the primary lower than expected revenue was due to same-store growth. We were expecting a higher level of same-store growth in the fourth quarter that did not materialize and they were really, that same-store growth was really going to be derived from some of the initiatives that we have put in place in the quarter, but we just didn't see that result in an accelerated revenue that we were expecting and that's really where the difference is.

Okay, and then looking at '04 obviously you've got a great start in terms of the new salesmen and when you look at same-store growth, continuing new salesmen than on customer discontinuances, what are the one or two things that most worry you because obviously you are sounding pretty confident now with the new sales, you can deliver the numbers, but if you had to sort of rank that one or two things that would most likely cause a negative surprise, what would they be as you look out into '04?

Well, given that '03 was not where we wanted to be for retention Sandy, I would like to make sure that that's the number we are tracking very carefully in '04 because that's the one that would impact our revenue growth the most.

Okay.

Same-store growth, I expect that to go back to the 2% range that we talked about earlier and, but really for us it is maintaining that mid-90% range for client retention. That's a very important metric for us.

Great, thanks.

David Francis of Jeffries and Company, you may ask your question.

Good afternoon, a few questions. First Phil or Chris, can you tell us how many accounts made up the -- or were included in the new sales in January to swing backlog 13 million bucks.

There were several Dave, we don't necessarily comment on individual contracts but I can tell you that the University of Texas contract was the largest part of that revenue.

And can you give us a sense of what our magnitude was at 50%, was at 80%?

It was substantial, it was more than 50%.

Okay. Turning to the discontinuances issue, again the -- you had made mention of some of the discontinuances that you had not expected in the third quarter. I guess I was a little surprised although perhaps I shouldn't have been at the effect of that or the impact that that had on the numbers in the fourth quarter. Were there a number of accounts that once again discontinued on you and did so very quickly to create the revenue shortfall in the quarter or could you just give us a sense of the dynamic there if you could?

Dave, this is Chris. Now, as far as our expectation for fourth quarter revenue, the discontinuances level did not cause any real shortfall from our expectation. The primary element that we came up short on was in the same-store growth based on the initiatives that we have in place to achieve, accelerate some same-store growth revenue from our clients.

Okay. And can you remind us what some of the initiatives were that you put in place in the fourth quarter specifically that you'd expected to drive some of that same-store growth that didn't materialize?

One of those, Dave, was a claimed reconciliation reporting initiatives that we had where we are able to track down exception reports to claims that had inactivity up to some period of time that would allow our processors to capture that information sooner, rather than later. So, they are able to reduce the revenue cycle by getting an exception to the claims that had inactivity sooner. The way that we had it before, they would be part of the overall reporting and they were not picked out as exception. So, it was a major initiative for us. My sense is that we just didn't get enough time in the quarter for us to see the results, but we do expect to see that as being a positive contributor to revenue in 2004.

Have you seen a number of clients already sign up for that and what sense of sales cycle do you have on simply that initiative?

Now this was an in-house initiative, Dave. It is really just making us better at capturing dollars sooner. That's what it referred to. It allowed us to follow up on our claim that had no activity with a player that we had submitted, and it allows us to bring forward that cycle that typically would take several days longer. So it was an opportunity for us to accelerate revenue for our clients as an initiative rather than this being sold as a solution to customers.

Okay. I will turn it over. Thanks.

Thanks.

Sean Jackson of Avondale. You may ask your question.

Yeah, good afternoon. Regarding operating margin on the physician services side, I mean you can see how it is less than what was last year, but it is also little less than what it was in the third quarter. Is that just a -- also a continuation of the things that happened in the third quarter regarding through extra conversion costs? So, what do you attribute to this sequential decline in operating margins in the fourth quarter?

The sequential decline was really attributable to the fact that we did not achieve sequential growth. We did have two fewer business days in the fourth quarter versus the third quarter. So that contributed to lower revenue, but also we didn't achieve the revenue growth that we had initiatives in place for our same-store growth initiatives. So, we did have the cost associated with those initiatives, without the revenue being added to it. So, that did have a negative impact on the quarter.

Okay. And also just the guidance given, obviously with the same throughout the year of 2004, but I will see it was distributed a little differently than before. Can you just reiterate those reasons, I think you mentioned a little bit about the implementation of these large deals having to happen? Can you go into more detail on those implementations?

Well, certainly one of the significant contracts that we discussed was the UT contract, and we are taking on their entire employee base, the 180 employees that Phil mentioned initially, and we will be going from a startup process for that business. So, we did mention that that business will be negatively impacting our margins for the first six months, primarily in the first quarter of 2004. So that is a substantial ramp up in business, again we are taking on a substantial number of employees that we will be getting more productivity as we bring them on our platform of doing business. And then in addition to that there is seasonality nature that the first quarter is typically a lower of profitability, if you are looking at seasonal basis for the year.

Okay and just lastly, the guidance assumes what tax rates for '04?

Guidance assumes about 5.5% tax rate.

Okay, thanks.

Steve Halper of Thomas Weisel Partners, you may ask your question.

Hi, two questions. Can you give us a run down on how revenues are going to be recognized for the UT deal that you signed, it appears as though it's more of an outsourcing type arrangement as opposed to your traditional percentage of collection contracts?

No, it is consistent and that it is with our typical arrangement and that we are going to be generating revenue based on a percentage of the cash we collect from the client. So, it is very consistent in that manner to a typical outsourcing relation for the hospital authority's physicians group.

So, are your contribution margins going to be comparable to your typical book of business because it seems like you are bringing on an awful lot of employees to service this business?

They will not be in the first six months of that contract, but on an overall basis the contribution margin will be comparable to our typical, contribution margin on a typical large customer, which is very comparable. So, as we take on those employees in the early stages and we are implementing our productivity and our processing procedures, they will be negative and we will begin to generate productivity going forward.

Do you have certain guarantees in terms of maintaining that level of head count?

Again what we are going to do, Steve, is when we look at productivity for each of the individuals that we are bringing on and because it's going to be a center of excellence for us there will be other opportunities for us to add business into that office.

But, on an overall basis, I don't think we have any such guarantees.

Okay. And then finally on the Hospital Services, the print and mail business that is going away, when is that over?

It is entirely out of our business as we exited 2003. So, 2004 there is none of that business.

Okay, so when we should we anniversary - when should than comparisons anniversary?

There was some minor amount of revenue in 2004, so I guess, I would say that --.

2004 or --?

In Q4 - there was a minor amount of revenue in Q4 of 2003. So, this will be a negative comparison quarter-over-quarter through the first half of the year. But, it will be a less of a negative comparison than it was throughout 2003.

Okay, thanks.

Eugene Mannheimer of Roth Capital Partners, you may ask your question.

Hi, just couple of questions. So, let us assume that the UT contract is more than 50% of the $11m booked in January. That is not to say that the contract - the value of the contract is under $11m. It would seem to me at the -- considerably higher than that on an annual basis? Is that correct?

The annualized revenue value, no, it will be lower than the total for the month of January.

Oh, it will?

Yes, the $11m that we quoted is the annualized revenue that we expect in the contracts that we signed in January, which includes UT.

Okay, and regarding Business1, who is the buyer there?

It's a private company, I think it will be getting disclosed in the future, but we have not disclosed it at this time, but it is a private base healthcare IT business.

Okay. And in terms of getting paid down the road from the performance of that product, could you just talk about what the milestones are that need to be met under which you'll get paid?

The milestones are primarily going to be based on a portion of the revenue generated from that product line in the future. Of the potential bonds in the future, it's not greatly significant. It's in the range of a couple of million dollars.

Okay, thanks Chris.

Yes.

Alexander Draper of Deutsche Bank, you may ask your question.

Thanks, just a quick follow-up. Chris, do you have the quarterly days, business days for each quarter this year?

Yes. In Q1, it was 63, Q2 and Q3 were 64 and Q4 was 62.

Is that for '03?

That's for '03.

What's it going to look like in '04? Then what pattern?

'04 it gets up, let's say, 63, 64, it's great .

Okay, great thanks.

David Francis of Jeffries and Company, you may ask your question.

Hi, circling back to the new business pipe on the physicians services business Phil, you guys had a very strong first half of the year in terms of new business signings in '03 relative to the business, which didn't seem to follow through at all in the second half, and I guess I'm trying to get a sense as to A, are you going after bigger fish and therefore should we expect lumpier performance a la a big UT like contract coming to the floor, or should we expect some more linearity to the business as we go throughout 2004 from the month of February on?

I think it's the latter, Dave, our goal is really to position ourselves where we feel we offer the most value to a prospect. I think we've mentioned before on other occasions that we really don't focus on a one to poor shop as a typical target for us. So, it should be more linear. The opportunity that we were working on with UT, we honestly felt that given that where we were in the revenues cycle that that would be a Q4 deal. And so, year-on-year we would have had a substantial increase in our performance. But we're not targeting for larger deals. This is, I think, going to be something that we will see more of in the coming years because academic practices really should be focused on delivering care and not on the administrative side of reimbursement, and it was very effective and, I think, UT will see the benefits of that. There are other academic practices that we're working in today where we've taken on just a few specialties where we believe will see those faculties come to us for a complete outsource as we have with now two faculties as customers. So, it should be more linear day rather than on .

And I guess to wrap it up, what kind of metrics or tracking processes do you guys have in place to be tracking the new business activity? As I recall, back in November at your analyst meeting you were anticipating at that point a significant amount of new business in Q4 in part because of slippage out of Q3, and that obviously has resulted now and a lot of business coming in January. What's being done to make that business more regular and more visible for you so that we don't have to worry about bounces up and down on a quarterly basis? Thanks.

Yes, the issue for me, Dave, has always been that, if we are selling, if we have a large enough pipeline and we are meeting a close rate that's consistent, then it's going to be a function of how many deals we have in some form of our revenue cycle that will make our performance more consistent. And as we ramped up this sales organization, that has been for me one of the challenges that I think we faced, in an immature, relatively immature sales force where you have added so many sales people that you are trying to bring up to speed and make productive. So, as we've done that and as we've built our pipeline I think we've got to a point now where we definitely have better visibility. I still think that it needs to be larger and we are working hard to do that every quarter. Once we get to that level, it should be a very consistent performance and then you just keep adding to it because obviously next year we are anticipating a higher growth rate.

Then one more if I can beat a dead horse, I'm sorry. You mentioned that you anticipate your retention rates going back to the mid-90s are higher again throughout 2004, given that we've had two quarters below those levels, what tangible evidence do you have that the most recent performance isn't going to continue? That's it, thanks.

Yes. I guess the tangible evidence for us is when we look at the nature of the discontinuances we had, Dave, were they typical or atypical, and for me they fell into the atypical category. What we would typically see for discontinuances other than for performance and I'm happy to say that the performance levels in 2003 were excellent. The other aspects that we see obviously is when physicians loose their contract with their hospitals, they retire, they merge into larger groups, and use a different billing service that's what we consider the typical 5% churn. These, they were fairly large customers that we had seen go in-house in 2003 that skewed that percentage. We don't anticipate seeing that kind of activity in 2004 as we look at the profile of our customer base.

Once again, to ask a question please press star one on your touchtone phone.

Okay. I'd like to thank everybody very much for moving the time of our earnings release and look forward to speaking with you in the future.