麥卡遜 (MCK) 2004 Q4 法說會逐字稿

Good morning and welcome to today's conference call. All parties will be in a listen-only mode until the question-and-answer session of the call. Today's conference call is being recorded. If you have any objections, please disconnect at this time. Now I'll turn the meeting over to your host for today's call, Mr. Phil Pead, Chairman, President , and CEO. Sir, please begin.

Thank you, operator. Good morning, everybody, and thank you for joining us on this call to discuss our fourth quarter 2004 earnings. I have with me today Chris Perkins, our Chief Financial Officer. 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 the 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 30th, 2004 and the Form 10-K for the year ended December 31st, 2003. Also, in accordance with regulation G, please refer to our press release issue this morning and our website for discussion and reconciliation of non-GAAP financial measures discussed in this call to their most directly comparable GAAP financial measures.

I will begin by discussing the operations of our divisions, after which Chris will provide you with more detailed financial information. In our Physician Services division, we achieved record net new business sold during 2004 of $19 million compared to $2 million for 2003. Although our fourth quarter 2004 net new business sale was below our target, 50 percent of the new business that was expected to close in the fourth quarter, which would have brought us closer to the bottom end of our net new business guidance range, has already closed. Our pipelines continue to grow nicely and we are participating in more opportunities than this time last year. Our net new business sold target for 2005 is in the range of 20 million to $30 million. This would represent another record year and underscores our belief in the momentum of our expanded sales organization. Our client retention rates during the quarter and for the full year 2004 were in line with our expectations, representing the strength of our operations and customer satisfaction.

Turning to our Hospital Services division, we achieved new business sold of $5 million in the fourth quarter, compared to $6 million in the fourth quarter of last year. For the full year 2004, the division had record new business sold of $32 million compared to $25 million in the prior year, which represents an increase of nearly 30 percent. Sales of our resource management products were strong in the fourth quarter driven by new functionality we introduced earlier this year. This was offset during the quarter by continued slower sales of certain revenue-cycle management products, primarily due to the industry's HIPAA conversion period. With the majority of HIPAA conversions behind us, we expect demand for claims management and associated products, such as denial management and secondary billing, may increase during 2005 among hospitals that have been reluctant to implement these solutions during the HIPAA conversion process. However, given that we have been expecting this increase in demand for some time, our projections in this area are cautious.

In our press release this morning, we discussed that we have initiated a project with IBM to substantially enhance our physician claims clearing house and its functionality during 2005. I'd like to spend a few minutes discussing this initiative. We will be replacing our current physician claims clearing house infrastructure that supports our physician Physician Services Division, and we will be building the technological foundation to change the way physician receivables are processed in the future. HIPAA and other healthcare initiatives will require new ways to transmit and receive electronic healthcare information and expand what both providers and payers must provide electronically. This increased level of electronic information will enable a higher level of automation during the settlement process. Today, the majority of electronic transactions are transmitted by a batch between providers and pairs . In the future, there will be the opportunity to process more transactions in realtime, ultimately achieving a realtime processing environment that will allow for the rapid settlement of receivables, which will improve cash flow for providers and lower cost for pairs. Pairs are currently investing in their infrastructure to increase realtime transactions.

As patients assume a greater proportion of their healthcare costs, using for example healthcare spending accounts, patients will demand more realtime information about their healthcare treatment, including its cost, before physicians and hospitals provide treatment. We've already seen the demand for more information in the state of California where legislation went into effect during 2004 allowing patients, upon demand, to have access to hospital charge master information. In addition, hospitals are now required to compile a list of charges for 25 of the most commonly charged procedures and services and make the list available to patients on request. Once implemented, the upgrade and enhancement of our physician claims clearing house will provide immediate benefits for our Physician Services Division, including claim level reconciliation and denial management, which will improve workflow efficiencies. This will improve our cost structure, as well as improve cash flow for our customers in future years. The division will also be able to take advantage of realtime transaction processing as the industry evolves. Technological information will continue to be a differentiator for our outsource services in the marketplace. This investment in our technology infrastructure is an important step forward, enabling us to leverage the changes in healthcare reimbursement to further differentiate our solutions, and I look forward to sharing with you our progress throughout 2005.

I'd now like to turn it over to Chris Perkins to discuss our financial results for the fourth quarter.

Chris. Thanks, Phil. First, reviewing our consolidated results, revenue was 89.4 million as compared to 83.2 million in the fourth quarter of 2003. Operating income was 8.5 million or 9 percent - - .6 percent of revenue as compared to fourth quarter 2003 operating income, excluding restructuring expenses, of 9.8 million or 11.8 percent of revenue. During the fourth quarter, we recorded a non-cash tax benefit of $28.1 million related to the partial release of our deferred tax asset valuation allowance. Income from continuing operations for the fourth quarter, excluding the tax benefit, was 7.7 million or 24 cents per share on a fully diluted basis, compared to fourth quarter 2003 income from operations, excluding restructuring expenses, of 8.5 million or .25 cents per share on a fully diluted basis.

As discussed in our January 18th press release, during the fourth quarter, we experienced a technical problem in our physician claims clearing house that resulted in a revenue delay of approximately 1.5 million in the Physician Services division, which had a direct impact on our bottom line. This revenue delay lowered our consolidated operating margin by approximately $1.5 million or 150 basis points and lowered our earnings per share by approximately .05 cents during the fourth quarter. The delay is a timing issue and we expect to recognize the delayed revenue during the first quarter of 2005.

In the Physician Services division, revenue was $65.2 million in the quarter as compared to 61.6 million in the fourth quarter of last year. Operating income for the division was 7.3 million or 11.2 percent of revenue for the quarter compared to 6.8 million or 11 percent of revenue in the prior year quarter. Also, there were two less business days in the fourth quarter compared to the third quarter of 2004. 1.5 million of delayed revenue during the fourth quarter lowered our fourth quarter revenue growth in the division by 2.4 percent and lowered the division's fourth quarter operating margins by approximately 200 basis points.

In our Hospital Services division, revenue for the fourth quarter was $27.6 million as compared to 24.9 million in the prior year period. Operating income in the division was $4.7 million or 17.1 percent of revenue for the quarter compared to operating income, excluding restructuring expenses, of $6.7 million or 26.7 percent of revenue in the fourth quarter of 2003. As expected, margins in the quarter were impacted by a higher mix of print-and- mail revenue. This was primarily related to a large print-and-mail customer contract signed in the second quarter of 2004 which had margins significantly lower than the normal profitability level of print-and-mail contracts. As discussed last quarter, as part of the transaction in signing the customer, we acquired substantially all of the production assets and personnel of the customer's hospital and physician patient statement and paper claims print-and-mail business. In December, we completed the consolidation of this operation into our existing print-and-mail facility located in Lawrenceville, Georgia, which is expected to improve margins for this contract. Also, as discussed in previous quarters, during the fourth quarter of 2003 in the first half of 2004, margins were positively impacted by previously unbilled maintenance for certain software customers that was being recognized upon receipt of payment.

Moving to the balance sheet, our cash position at December 31st, 2004, is approximately $42.4 million. Our strong cash position is primarily due to good cash-flow generation from our operations in the current year, lower interest payments, and the cash settlement with Lloyd's. Cash flow from continuing operations for 2004 was $48.9 million or $1.48 per fully diluted share, compared to 28.5 million or 87 cents for fully diluted share for 2003. Current year cash flow included $6.3 million in cash spent associated with the additional procedures, as well as the $16.2 million cash received associated to our settlement with Lloyd's. For accounts receivable, our day sales outstanding by division at the end of the fourth quarter were 47 days outstanding for Physician Services and 57 days outstanding for Hospital Services. In the release this morning, we discussed the non-cash tax benefit we recognized during the fourth quarter of $28.1 million or 86 cents per fully diluted share.

By way of background, as of December 31st, 2004, we have net operating loss carried forward for income tax purposes of approximately $390 million. This NOL at various - - expire. These NOLs expire at various dates between 2005 and 2024. In accordance with GAAP, our deferred tax asset has been fully reserved since 1998 due to our history of operating losses. As we have now been profitable for the last three years, the deferred tax asset was reviewed during the fourth quarter to determine the amount of valuation allowance that should be released. For 2005, we expect that our GAAP tax provision rate will remain at our tax paying rate. We will continue to evaluate the appropriateness of the remaining valuation allowance in future periods.

As Phil mentioned, we'll be making enhancements to our physicians claims' clearinghouse during 2005. In 2005, we expect to incur capital expenditures and capitalize software development costs of approximately $5 million associated with the project, as well as approximately $2 million in expense that will be reflected in our 2005 income statements. This expense includes the amortization expense of approximately $1 million related to the enhancement investment. The total cash flow use for 2005 is estimated to be approximately $6 million. The enhancement is expected to be completed by the end of 2005 with all costs being incurred during the year. As Phil mentioned, we expect to realize meaningful performance improvements and cost benefits from this initiative in future years.

Thank you, Chris. In our release this morning, we updated our 2005 full year expectations and provided guidance for the first and second quarter of the coming year. For the full year 2005, we expect consolidated revenue growth of approximately 6.5 percent to 7.5 percent and consolidated operating margins of approximately 11 percent to 12 percent. We expect fully diluted earnings per share from continuing operations of $1.05 to $1.15, which includes an approximately 5 cent impact from our physician claims clearinghouse investment. Excluding these costs, we would expect 2005 consolidated operating margins of 11.5 percent to 12.5 percent and fully diluted earnings per share from continuing operations of between $1.10 and $1.20.

For the first two quarters of 2005, the Company expects fully diluted earnings per share from continuing operations of 21 cents to 23 cents in the first quarter and 23 cents to 26 cents in the second quarter. This guidance includes costs related to the clearinghouse enhancement of 1 cent per fully diluted share in the first quarter and 2 cents per fully diluted share in the second quarter. The Company will provide guidance for the third and fourth quarters of 2005 in its first and second quarter earnings releases respectively. Our consolidated guidance, excludes the impact of any potential future adjustment to the deferred tax asset valuation allowance. It also excludes the impact of adopting statement of financial accounting standard number 123-R, which requires the expensing of stock options and other stock-based compensation beginning July 1st, 2005.

In the Physician Services division, we expect revenue growth for the full year 2005 to be 6 percent to 6.5 percent over 2004 revenue and operating margins to be in the range of 12 percent to 13 percent. We expect to achieve net new business sold during 2005 of between 20 million and $30 million. In each quarter of 2005, revenue growth and operating margins are expected to show year-over-year improvement.

For the Hospital Services division, the Company expects revenue growth of 8 percent to 10 percent over 2004 revenue and operating margins of 20 percent to 20.5 percent. Our operating margin expectations include the approximately $2 million in expense during 2005, related to the physician claims clearing house enhancement. Excluding these costs, operating margins for the division would be between 22 and 22.5 percent. We expect to achieve new business sold in the Hospital Services division of between 20 and $25 million during 2005. Revenue growth of the prior year is expected to be consistent in each quarter, and operating margins will be the lowest in the first quarter and improve sequentially each quarter thereafter. We expect to generate cash flow from continuing operations for the full year 2005 of approximately $47 million or over $1.40 per fully diluted share, which includes the impact of the physician claims clearing house investment.

2005 will be an exciting year for our Company. We expect another year of record net new sales in our Physician Services division driven by our expanded and more seasoned sales force and the increasing demand for outsourcing. The investments we are making in new technologies will not only create greater efficiencies but also will enable us to further strengthen our market-leading position in revenue cycle management solutions. As we communicated in our press release this morning, we are confident that our business model and strong market position will produce accelerating revenue growth and margin expansion over the next several years that will drive earnings per share growth in excess of 20 percent on an annual basis. That completes my comments, operator. I would like to open it up now for questions. Thank you.

Thank you. At this time we'll begin the question-and-answer session. If you'd like to ask a question, please press star 1. You will be prompted to record your name. (Operator instructions) Our first question comes from Sean Jackson, Avondale Partners.

Hi. Good morning, guys. Chris, you talk about the -- what actually was the tax-paying rate in the fourth quarter?

The tax-paying rate in the fourth quarter, we actually had a small benefit , about $300,000 tax benefit in the fourth quarter of '04

Okay. So and -- assumed in your, in your assumption of the guidance, what is the tax-paying rate for '05?

It will be at or less than 5 percent for 2005. And that is consistent with what will show up in our, our GAAP tax provision.

Okay. All right. Thanks. And, you know, when you talk about the net new business for the Physician Services side, are there any, you know, larger contracts assumed in that, or do you just expect just, you know, to reap benefits of the increased activity?

No. We're looking at a fairly even performance for the year, Sean. We try not to include any large opportunities that we're working just because of the nature of those kinds of deals. So we are looking for balanced approach really throughout 2005.

Okay. And just on your quarterly guidance for '05, what assumptions are you making? Because, you know, it looks like it's more back-end loaded in '05. Any new assumptions you're making to get to that extra growth in the latter half of the year?

Yeah, Sean. We typically, as you recall from previous years, Q1 is typically our lowest quarter from a seasonal basis, both in the Physician Services division and our Hospital Services division. As we mentioned, we are including in our first quarter the timing delayed revenue from Q4 that is being included in our Q1 guidance. We expect to see, as we are selling - - achieving net new business sold on a quarterly basis, to see that that will see some improvement in our growth rates in the back half of the year, but we are going to be showing improved consolidated revenue growth quarter-over-quarter versus prior year.

Okay. Thanks. And just last - - the very last question. The net new business sold for the fourth quarter in Physician Services, you said that it was a little below plan; however, you gave a stat in the first quarter saying 50 percent of "something" was already booked.

Yeah. 50 percent of - - of what we basically missed in the fourth quarter, Shawn, has already been - - has been signed. So, to me, this was a - - really we need to do a better job of managing a sales cycle, and I think as our sales force matures, we'll get better at this; but we just missed the actual closing of those contracts by about 45 days. So 50 percent of that revenue that we were expecting, or the new sales we were expecting in Q4 have already been signed.

Okay. So 50 percent. So that's one of the stat right? 50 percent of the business you were expecting to close in Q4 has closed in Q1?

Correct.

Okay. Thank you.

Sandy Draper of Draper Research.

Thanks and good morning. A couple questions. I guess first following a little bit on that question, Phil. Can you just remind me, what was your '04 target for net new business sold in Physician Services?

In Q3, Sandy, we gave out a 24 to $28 million was our range for net new business sold for the year, and we came in at 19. And, primarily, as I, as I mentioned to Sean, you know, we had a - - we still have a lot of opportunities out there that as we get better, I think, at managing a sales cycle, again, it's, I think, more of an experience factor than anything else. I think we'll be able to predict the closings better, but that's what we had as our expectation for '05 - - '04, excuse me.

Okay. Great. And then when you look at the range of guidance for revenue growth, is that really dependant on more, do you think on the timing of the sales or, you know, where you think you're going to come in? I think you said 20 to 30 million was your target for this year, so is it more dependent on the timing of the deals, or is it, you know, to be at this high end of 7.5 percent growth, you have to be at the high end, or is it really more, if you sell it strongly in the first half, that's more important?

Yes. The critical quarters for us in the Physicians Business given the fact that, you know, there's a ramp up period before we can begin to recognize the revenue. The, the quarters that impact the revenue recognition the most are in Q4 and Q1. Obviously, Q3 is important, too, of the prior year, but Q4 and Q1; and then some portion of Q2 is also going to impact our revenue for '05. As we go through '05, Sandy, Q3 and Q4 have less of an impact on our overall revenue recognition for the division. So timing is important as to when these sales close. If we, as we expect, have a good Q1 and Q2, that will allow us, I think, to become more bullish on the second half of the year as it relates to growth rates.

Okay. And then, great. That's very helpful, Phil. Thanks. And one final question, I think for Chris. Looking at at the margins in the Physician Services, they were up nicely, sequentially even without the - - with the delay, you said that would add about 200 basis points. When you look at it, you know, what's driving that? Is there anything specifically that you can say, either cost at route[ph], or is there any one-time thing I'm forgetting about in prior quarters, or what's happening that you're seeing so much better margin in Physician Services?

Sure. The first three quarters did, as we talked about in the previous releases, were negatively impacted by the profitability on the UT contract. Including the third quarter was even more negatively impacted because of the deferral of revenue related to that contract. So Q4 was much more at their normal margin levels for that contract specifically, as well as, you know, we did have, even excluding the 1.5 million of revenue delay, we did have reasonable growth in the division over the prior year quarter, and again on a days' - - business days' end of quarter, we've seen good growth. And that, that increased revenue is contributing positively to our margins.

Okay. Great. And then one final question and then I'll jump back in the queue. It looks like - - am I missing something? Did you sort of reclassify the P&L a little bit with the cost-of-goods in SG&A versus the old items?

Yes, we did. That is - - we did make a change where we were presenting revenue cost of sales and services and basically SG&A. And that is something that we've done to, basically, in our effort to get more in line with the guidelines of SEC reporting related to Regulation SX.

Okay. If you - -

It was really just an improvement in enhancement to our, our financial reporting.

Great. And when would you expect we could get other, other quarter for '03 and '04 that we don't have in the press release on, in - - on the same basis?

When we release our 10-K, file our 10-K, that information will be available.

Okay. Great. Thanks.

Thank you. (Operator instructions). At this time we have no further questions.

Thank you, operator. And thank you all for participating in this call. We look forward to speaking with you next time.