麥卡遜 (MCK) 2004 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the meeting over to Mr. Phil Pead. You may begin.

Thank you, Anna. Good afternoon and thanks for joining us on this call to discuss our first quarter 2004 earnings. 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 March 31st, 2004 and the Form 10-K for the year ended December 31st, 2003.

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

During the first quarter, we increased our income from continuing operations, excluding the cost associated with the additional procedures by more than 65 percent as compared to the first quarter of 2003. We achieved strong levels of new business sold in both our divisions, as well as our targeted client retention levels. In our release this afternoon, we reiterated our 2004 guidance of 7 to 9 percent, consolidated revenue growth and fully diluted earnings per share of 85 cents to 95 cents, an increase of 31 to 46 percent over our 2003 performance. We also increased our cash flow from operations guidance to $48 to $51 million as a result of our settlement of the Lloyd's of London litigation.

During our first quarter operational update call on April 19th, we provided you with details on the nonfinancial metrics of our operations. I will not repeat all of this information this afternoon, but I would like to comment on our Physician Services revenue growth and spend a few minutes talking about HIPAA. Chris will then provide you with more detail financial information later in the call.

In our Physician Services division, as we discussed in our first quarter operational update call on April 19th, we achieved record net new business sold of approximately $12 million. Achieving this significant level of net new business sold early in the year will have a positive impact on revenue growth in 2004. New business sold in the first half of the year has a greater impact in revenue growth in the current year than new business sold in the second half.

Client retention, which is another key driver of our revenue growth, continues to be strong. We are also beginning to see an increase in procedure volume in certain areas and in certain specialties as the economy strengthens. This will be a key contributor to our same-store growth metric. However, this is being partially offset by HIPAA challenges that the industry is experiencing. On a year-to-date basis, we have seen a minor impact to our Physician Services revenue due to claim payment delays. These delays are primarily caused by HIPAA-associated systems upgrades by payers and clearing houses. The systems changes result in the erroneous denial of claims that must then be refiled by providers, resulting in payment delays. We expect these HIPAA-associated system upgrades to be resolved by the third quarter as the industry achieves HIPAA compliance.

Turning briefly to our Hospital Services division, we achieved sales of $7 million in the first quarter, up from $6 million in the first quarter of last year. HIPAA compliance efforts continue to dampen demand for some of our revenue cycle products, although our sales were up on a year-over-year basis. Sales of our resource management solutions, in particular our staff scheduling solution, are strong from both an upgrade and net new sales perspective.

A portion of these sales is resulting from our preferred vendor agreement with the Health Trust Purchasing Group that we announced in early 2003. 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.

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

Thank you, Phil. First, reviewing our consolidated results, revenue was 84.6 million as compared to 82 million in the first quarter of 2003. During the first quarter, we incurred approximately 3.9 million in cost associated with the additional procedures requested by our extra auditor that resulted in our 10-K filing delay. We also incurred approximately $47,000 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 7.8 million, or 9.2 percent of revenue as compared to 8 million, or 9.8 percent of revenue in the prior year period. Income from continuing operations for the first quarter was 5.6 million, or 16 cents per share on a fully diluted basis compared to 3.3 million, or 11 cents per share on a fully diluted basis for the first quarter of last year.

In the Physician Services division, revenue was 63.2 million in the quarter, as compared to 62.1 million in the first quarter of last year. There was one more business day in the first quarter of 2004 than in the prior year period. Operating income for the division was 6 million, or 9.4 percent of revenue for the quarter compared to 7.3 million, or 11.8 percent of revenue in the prior year quarter.

First quarter revenue was negatively impacted compared to the prior year due to the ramp-down of business terminated in previous quarters, as well as some negative impact due to the HIPAA related claim payment delays that Phil mentioned earlier. During the first quarter, the division implemented a record level of new business into its recurring revenue stream. Included in this implemented business was the University of Texas Health Science Center at Houston, which outsourced the revenue cycle management for its entire faculty practice plan to Per-Se in January 2004.

As expected, this 7.5 year contract had negative margins in the first quarter as we took on UT's billing office staff and began to streamline operations and improve efficiency at our new Center of Excellence in Houston. We expect margins to improve in the second quarter, but remain below normal levels. We expect this business to achieve more normal margins in the second half of 2004.

In our Hospital Services division, revenue for the first quarter was 24.8 million, as compared to 23.2 million in the prior year period. Operating income in the division, excluding restructuring expenses, was 5.8 million, or 23.6 percent of revenue for the quarter, compared to 4.6 million, or 19.7 percent of revenue in the first quarter of 2003. Revenue in the division increased approximately 7 percent in the first quarter over the prior year period. Revenue was positively impacted by previously unbilled maintenance for certain software customers that is being recognized upon receipt of payment. Systems conversion in prior years had resulted in the maintenance not being billed in a timely manner. We decided that the conservative approach would be to recognize the revenue related to previously unbilled maintenance when payment was received. Payments were higher than we had originally anticipated during the first quarter.

Moving to our balance sheet, our cash position at March 31st, 2004 is approximately $21 million, compared to total cash at March 31st, 2003 of $21 million. For accounts receivable, our days-sales-outstanding by division at the end of the first quarter were 48 days outstanding for Physician Services and 59 days outstanding for Hospital Services. Cash flow from continuing operations for the first quarter was a use of $713,000 compared to a use of cash of 5.2 million in the prior year period. Current year cash flow included 2.4 million in cash spent associated with the additional procedures.

As we discussed in our press release, we have finalized the closing balance sheet related to the Patient1 sale. Finalization of the closing balance sheet resulted in a positive working capital adjustment of $4.3 million, which is expected to be received on June 1st, 2004. We will recognize an additional gain on the sale during the second quarter when we receive the cash.

During late June or July, we will be moving our corporate offices to a new location in Atlanta. This move will result in a cash flow savings for the Company of more than $5 million over the life of the ten-year lease, compared to our current office lease. As a part of the new lease arrangement, the new landlord is funding the remaining eight months lease obligation on our current corporate facility. While this arrangement is neutral in the current year from a cash flow standpoint, we record a onetime non-cash expense of approximately $1 million when we exit the facility.

As Phil stated earlier, we reiterated our revenue growth in earnings per share guidance in our release this morning. Our earnings per share guidance excludes the cost of the additional procedures as well as the gain on the Lloyd's settlement. Our guidance also excludes this onetime non-cash expense associated with our corporate move.

Thank you, Chris. I am pleased with our operational performance today in 2004 and believe that it lays the foundation for meeting our revenue, profitability and cash flow growth targets for the coming year. That completes my comments. Operator, I would like to open it up now for questions.

(Operator Instructions). Sean Jackson, Avondale.

Nice quarter guys. Can you comment a little bit on the second quarter guidance? I think it was a little less -- a touch less -- than the guidance previously. Is this a factor of maybe some of the business that you expect in the second quarter actually came in in the first quarter, or is there another reason for that?

No, Sean, you are right that's the primary reason. Some of the back-filled revenue that we received in the Hospital Services division came in somewhat earlier than we had anticipated.

Okay. Thanks. And also on just the client retention rate side, you mentioned that it looks like it's back to what you call normal levels. Again, is there a reason given for that? I mean, is there something different that you've changed or what exactly was this?

No, Sean. It really relates to what we described in the second half of last year. It was an aberration regarding some of the clients that we lost and we expected to be at these levels in the future so this is really just getting back to where we expected.

Okay. And lastly, just regarding HIPAA, is there any way to kind of quantify how much that is costing you? You said that it has to do with just some claims that are I guess -- I will call them false positive or false errors or whatever. Can you somehow quantify that?

Yes. Actually, Sean, this is really a timing issue for us, you know, where we're seeing delays in claim payments because we're having to refile. And so the revenue impact is not one that will -- where the revenue won't come in. The only concern we have is the timing of when that revenue will arrive, given that it might straddle a quarter where we are refiling for these erroneous rejections.

Right now, it's minor and not material. But, one of the concerns we have is, given the disruption that HIPAA is causing in the industry, we're concerned that we might see more of that as we get through this. And, we just wanted to kind of mention it in the call.

Okay, thank you.

Right now, we're not concerned about it. But, we are just seeing a lot of it out there and we're just concerned about the timing.

Okay, thanks.

(Operator Instructions). Steve Halper.

Hi, this is George Segan (ph) for Steve. I have a couple of quick questions for you guys. Be sure that I heard a couple of things right. The million dollars that you talked about for the move, is that something that you guys plan to expense, or will that just be something we will see in the cash flow statement?

No, it will have no impact on cash flow. What it is is because we are exiting this facility, even though the landlord is funding the remaining rent on this facility, we are required to, once we exit the facility, record an expense at that time for the remaining rent on this facility.

So, it will be a $1 million non-cash charge?

That's correct -- in the income statement.

Okay. And then, have we seen the end of the charges for the accounting in the first and second quarter? We won't see any of those in the third quarter?

That's correct.

Should we expect to see any more restructuring charges in the third quarter?

No. We don't anticipate any restructuring charges. Those were just some -- the 47,000 of restructuring charges was just some carry-on of some compensation related items for some terminations or some people that left as a result of our restructuring.

Okay. And the net new business ones look pretty good, but can you speak about the profitability of the new book of business, as opposed to the book of business you guys have held for the last 12 months?

I'm not sure I understand the question, George.

Well, you guys reported $12 million in net new business wins. We want to know what the margins on that business are like, versus the margins on the business that you lost. Are you guys winning -- is the new business that you're winning higher margin or lower margin business than the business you have now?

I think it's consistent with the margins that we have on business now. We did say when we -- in our February conference call, when we announced the signing of the U.T. business, that there would be some negative profitability in the first and second quarter of this year. And we took on all of the U. T. staff and we're working on transitioning that business and implementing -- putting in some operational efficiencies. But once we get through that, it will be at our normal level of profitability. Otherwise, all the business we're signing is at consistently good profit levels.

Okay, thank you.

Chris Sasuni (ph).

Good afternoon. I had a couple of questions. During the last couple of months, you've announced a number of recent and new contracts. I was wondering if you could discuss the progress that you're having in assimilating those contracts and generating revenues from them and when will we expect to see their impact? Will it be the second half of the year? Or, will some of them actually lapse into next year?

Chris, I would say that, given that the ramp-up of some of the -- certainly the larger contracts -- take quite a bit of time here. I would expect to see the impact of that new business start to come through in the second half of the year, just given the timing of some of the implementations and the new contract we're signing. That's typically what we would expect.

Okay. If you look at the progress that you're having in assimilating the University of Texas contract, would you say that it's on schedule, ahead of schedule, or even behind schedule?

No, it's pretty much where we expect it to be at this point. In fact, maybe just slightly ahead of schedule.

Okay. Last question is -- could you review for us where you're at -- if we look at this year at this time versus last year, in terms of the size of the sales force and the ramp that you're getting in terms of getting the sales force seasoned, where are you at in that in terms of feet on the ground?

Well, if I look at -- in terms of our staffing, we are ahead of where we were last year. But, perhaps a more important metric that we look at is net new business sold number. And, we are significantly ahead of where we were last year.

And so, that's in large part why we see -- there's two reasons for the significant ramp in the earnings through the next couple of quarters. One is the fact that U.T. turns profitable, and the second part is -- I've got to believe that you would be generating higher and higher sales because of the number of foot soldiers, essentially, that you have on the ground.

Yes, we are expecting to have a good first half of the year, Chris, which of course, has the largest impact on our revenue and earnings in Physician Services for 2004. If you remember in previous calls, we see a lesser impact on new business sold in the second half of the year, given the ramp up and the revenue being recognized in the second half of the year. But the biggest impact that we have is on net new business sold in the first half. So, we are expecting a good first half of this year, which will translate into a -- into the growth numbers that we have given guidance on for the balance of the year.

Okay. Thank you.

(Operator Instructions). Sean Jackson, Avondale.

A follow-up. Is there any other U.T.-type deals kind of in the pipeline? I just want to get how common an opportunity that is, or is it just a rare event?

You know, we are always working to secure those kinds of deals, Sean. The issue we have clearly is that it's a strategic sale that requires a lengthy process. And so, we do not rely -- certainly we're not relying on those kinds of deals to make our numbers for 2004. But, there are opportunities out there, given our performance at U.T., that faculties are interested in. I think that this is a market that we have targeted. There are a significant number of faculties that are of similar size and we would expect to see some of those deals in the future.

But, in terms of timing, they take a long time. And so given their unpredictability, we have not included deals like that in our forecast for 2004.

Okay. Approximately how long was the sales cycle in the U.T. deal?

I would say that it was probably in excess of 18 months.

All right. Thank you.

I'm showing no further questions.

Thank you all very much for participating so late in the day, and I look forward to speaking with you on the next call.