麥卡遜 (MCK) 2005 Q1 法說會逐字稿

Good morning, 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 will turn the meeting on to Mr. Phil Pead, Chairman, President, and CEO of Per-Se Technologies. Sir, you may begin.

Thank you, Operator. Good morning and thank you are for joining us on this call to discuss our first quarter 2005 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 the and assumptions on which such expectation are based. As with all things, actual results may differ materially from those projected in the forward-looking statements . Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is found in our press release issued this morning, and in our SEC filings, including the form 10-K for the year ended December 31, 2004. 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 year, Per-Se Technologies celebrates our 20th anniversary. While the Company has undergone many changes in the last 20 years, our vision remains the same -- To enable every healthcare provider to achieve their income potential. Today, we are providing connective healthcare solutions that improve the timing and quality of reimbursements to improve cash flow, to over 18,000 physicians and 2000 hospitals.

Our Physician Services division provides outsourced revenue cycle management services to hospital-affiliated physician groups, primarily in the specialties of anesthesiology, pathology, radiology, and emergency medicine; and to physicians practicing in academic teaching hospitals. Our physician clients range in size from groups of approximately eight physicians to groups of over 500 physicians. Because we have become the administrative back office for our physician clients, the efficiency and effectiveness of our services allows them to focus on patient care. The growing complexity of regulations, and the continuing downward pressure on reimbursement has caused physician groups to increasingly consider outsourcing their reimbursement services to Per-Se over the last couple of years. We predict this trend towards outsourcing will continue as physician groups look for ways to improve their cash flow.

In our Hospital Services division, we provide revenue cycle management products and services, and are the largest provider of resource management solutions to hospitals. Our revenue cycle management solutions are integrated into our electronic clearing house which is the industry's third largest, and processes more than 320 million transactions annually. Our revenue cycle management products are uniquely provider focused, and provide functionality to help hospitals improve their financial performance. Our resource management solutions also help hospitals improve their bottom line by increasing productivity, and lowering costs related to their personnel, a hospital's largest expense, as well as to their operating room, a hospital's most profitable area.

The enhancements we have made to our business over the last few years and the products and process innovations we will continue to implement in the future will insure that we continue delivering on our promise to our clients, and our our promise to shareholders, as we look to deliver earnings per share growth in excess of 20% on an annual basis.

Turning to our first quarter, we had a record first quarter financial performance. Revenue increased 9% on a consolidated basis, from the first quarter of last year. Operating income increased 40%, and income from continuing operations increased more than 70% versus comparable non-GAAP measures. In addition, we generated $13 million in cash flow from continuing operations in a quarter which is historically been a use of cash, due to seasonality. Our Physicians Services division achieved net new business sold during the first quarter of $5 million, compared to $12 million in the first quarter of 2004. Net new business sold in the current year quarter was our second strongest first quarter performance. Our strongest performance was the record business signed in the first quarter of last year.

Client retention during the quarter was in line with our expectations. Our pipeline of new business opportunities continues to grow across all specialties, as we execute on our our sales plan. We are on track towards achieving our stated 2005 net new business sold target of $20 to $30 million, which would represent our second consecutive record performance for the division. In our Hospital Services division, we achieved new business sold of $6 million in the first quarter, compared to $7 million in the first quarter of last year.

We had better than forecasted resource management software sales that resulted in revenue recognized during the quarter. We also experienced an increase in demand for some of our revenue cycle management products in the quarter, now that hospitals have significantly addressed HIPAA. For example, first quarter 2005 sales of our denial management and cash posting products were more than double sales in the second half of 2004.

We continue to work on our physician claims clearinghouse project. Once implemented, the upgrade and enhancement of our infrastructure, will provide immediate benefits for our Physician Services division, including claim level reconciliation and denial management,which will improve work flow efficiencies. This will improve our cost structure as well as improved cash flow for our customers in future years. We expect to complete the enhancements by the end of 2005. I would now like to turn it over to Chris Perkins to discuss our financial results for the first quarter. Chris?

Thank you, Phil. First, reviewing our consolidated results, revenue was $92 million, as compared to $84.6 million in the first quarter of 2004. Operating income was $10.9 million, or 11.8% of revenue; as compared to first quarter 2004 operating income of $7.8 million, or 9.2% of revenue. Income from continuing operations for the first quarter was $9.4 million, or $0.29 per share on a diluted basis; compared to first quarter 2004 income from continuing operations, of $5.5 million, or $0.16 per share on a diluted basis. These 2004 operating income and income from continuing operation numbers exclude $3.9 million of expenses related to the additional procedures requested by our external auditors in 2004.

In the Physician Services division, revenue was $67.2 million in the quarter, as compared to $63.2 million in the first quarter of last year. Operating income for the division was $8.6 million, or 12.8% of revenue for the quarter, compared to $6 million or 9.4% of revenue in the prior year quarter. The current year quarter included $1.5 million of revenue, and operating income that was delayed from the fourth quarter 2004, due to the timing of electronic claims transmission for the division. This delayed revenue was included in our previously issued guidance for the quarter.

In our Hospital Services division, revenue for the first quarter was $28.4 million, as compared to $24.8 million in the prior year period. Operating income in the division was $6.4 million, or 22.7% of revenue for the quarter, compared to operating income of $5.8 million, or 23.4 % of revenue in the first quarter of 2004. Current year quarter included approximately $300,000 of expenses related to our project to enhance our physician claims clearinghouse infrastructure. And, as Phil stated, the division had better than forecasted software revenue related to contracts signed during the quarter. This contributed to the stronger than forecasted operating income in the quarter.

Moving to our balance sheet, our cash position at March 31, 2005, is approximately $42.5 million, which is essentially in line with our year end cash position. Our record cash flow from operations offset cash spent in the quarter on our share of purchase, and investments and capital expenditures and capitalized software development. Cash flow from continuing operations from the first quarter was $13.2 million, or $0.40 per diluted share, compared to a use of cash of $696,000, or $0.02 per diluted share in the first quarter of last year. Cash flow per share is calculated by dividing cash flow from continuing operations, by waited average shares outstanding. Current year cash flow was driven by improved profitability and improved working capital.

For accounts receivable, our day sales outstanding by division at the end of the first quarter were 49 days outstanding for Physician Services, and 64 days outstanding for Hospital Services; which were both in line with the prior year period. As mentioned in the release this morning, we completed the share repurchase of 1 million shares in early April, and a total cost of $15.4 million.

Thank you, Chris. Also in our release this morning, we reiterated our full year 2005 earnings guidance of $1.05 to $1.15 per diluted share. We modified our second quarter earnings per share guidance to $0.21 to $0.24 per share, from $0.23 to $0.26 per share, due primarily to the timing of software revenue in the Hospital Services division, which was higher in the first quarter than previously forecast. We also provided third quarter earnings guidance of $0.25 to $0.28 per share. We continue to expect cash flow from continuing operations in excess of $47 million, or 1.47 per share -- $1.47 per share.

Given our record first quarter performance and our new business sold momentum, we are looking forward to a strong 2005. That completes my comments, Operator, I would like to open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question come from Sean Jackson, of Avondale Partners.

Good morning, guys. Chris, can you talk about the amount that you capitalized software costs during the quarter, and how did that compare with previous periods?

We did have a higher level of -- slightly higher level of capitalized software development costs. It was really attributable to our position claims clearinghouse enhancement project. The total amount of the capitalized costs were -- I don't have that right in front of me, probably in the $4 million range. I'm sorry, that was total amount of capital -- capitalized expenditures and capitalized development, probably about half of that was software development.

And how does that compare with previous periods?

It's slightly higher than we had in the in the previous quarter comparison for last year. And again, the increase in that is going to be related to the physician claims clearinghouse enhancement.

Okay. And a regarding the clearinghouse enhancement, when do you expect to get a benefit from that? When will that show up in the financials?

Well, our expectation, Sean, is that when it is completed at the end of this year, we should start to see improvements in 2006.

And Sean, just to get more specific with you, our capitalized software development was about $2.1 million in the first quarter, compared to about $1.2 million in the first quarter of last year.

Okay. Thanks. Thanks for all that. And regarding the -- you had, you said, some business that closed in the first quarter that closed kind of early. Was it one specific deal, or was it just a group of different deals?

It was more than one deal, but there was a couple of deals that allowed our software revenue to be recognized in the first quarter. Again, when we had previously recognized -- previously forecasted, that revenue was going to be recognized in the second quarter. So it was a -- it was a few items. It wasn't related to one single contract.

Okay. All right, thank you.

Thank you

Our next question come from Mr. Sandy Draper, of Draper Research.

Thanks, and good morning, Phil and Chris. A couple of questions. One, first, in terms of looking at the target in Physician Services of $20 to $30 million in net new business sold, if you look at those numbers -- how much in terms of delivering the upper end of your revenue guidance or potentially better -- is that really going to be reflected of the timing? Could you do $20 to $25 million, but it's early in the year? You are at the upper end, or do you have to do $30 million to be at the upper end of the guidance? Or how should we be thinking about that range, relative to your 6.5% to 7.5% range in terms of revenue guidance?

Sandy, it -- basically, as we talked about before as far as our revenue model, the sales that we get, new business that we sell in the first half of the year has the ability to impact our revenue in the current fiscal year. So, I guess I would say that we expect that our performance in the second quarter, as far as new sales, will contribute to our full year revenue projection. In the back half of the year, it has a much less ability to impact our current year revenue.

Okay. So if you end up doing $30 million, but it's because you have a really big third or fourth quarter, that's really an '06 impact, not '05?

That's correct.

And I don't know if you can back this out, but going apples to apples, on net new business sold in that division - the $5 million; if you back out the Texas deal last year, would you have been up slightly -- slightly up? I can't remember, you said you were $12 million, I can't remember if you broke out what the Texas deal was.

We would have been up, Sandy.

Okay. And then the final question is, obviously, with the strong cash flows that you guys saw, you were able to share repurchase. Phil, do you think the board is -- that's something the board will continually evaluate if cash flow continues to come in strong? Obviously, the balance sheet is good -- would you expect that there's a potential for future repurchases, if we continue to see strong cash flow?

I think, Sandy, we continue to evaluate those stock repurchase acquisitions, and other uses of cash that ultimately will return the appropriate amount of shareholder value, so, yes, we would absolutely continue to consider our options.

And the final question - on the acquisition front, how would you characterize what you are seeing are opportunities today, versus 6 months or 12 months ago. Are there things becoming more interesting out there? Is it still about the same? Obviously, it hasn't been a heavy acquisition mode for you guys, but admittedly, you've been focused on internal operations.

As we said in the past, our goal is, obviously, to continue to grow our top line, grow our revenue in the Physician Services division; and we're looking at that very much from an organic strategy. For our Hospital Services, we've said in the past that there are strategic opportunities out there for us to acquire, some gaps in our offering, and we continue to look at that, Sandy. I think it's still -- I think it's probably more interesting today than it was a year ago. But we continue to look at that as some options for us.

Okay. Great. Thank you.

Our next question comes from Mr. Steve Halper, of Weisel Partners

Among your provider customers in Physicians Services, what is their mix of Medicare reimbursement? And do you have any exposure to any potential changes in fees from the federal government -- reimbursement from the federal government?

I think that's always an issue, Steve. I can't give you the exact break-out for Medicare, but, I think that as we've gone over the last three years, there's been some moderate increase in some of the specialties reimbursement, and then some decline in other specialties. So, I would say that it's probably been a fairly consistent reimbursement over the last three years. But clearly, that's our strength, Steve. I think that as physician groups face more reimbursement pressure, the opportunity for them to outsource to us becomes greater as they look to ways to improve their income.

Right, but isn't there, on the table a projected reduction? In physician payments -- ?

There is --

-- which Congress is trying to reverse?

Yes, there is. And what we find, whenever there are any kind of meaningful changes to government reimbursements, we are finding corresponding offset, either with procedure volume, or different ways for our physician groups to improve their income. For example, we are seeing somewhat of an increase in some of the mergers with other physician groups; a larger propensity for radiologists, for example, to focus on imaging centers. So there are -- there are different offsets, that the entrepreneurial positions, with our assistance, help to maintain or increase their income.

Okay. And just kind of a bigger picture question. As your volume grows on the Physician Services line -- what are the key leverage points in your business so that you can continue to expand the margins?

Well, we still have some areas -- for example, the physician claims clearinghouse that we are in the process of building, will enable us to take advantage of greater efficiencies in our physicians division, particularly in the areas of the work flow, real time adjudication, denial management reporting, exception reporting. It allows us to be much more efficient in passing a claim from its inception to the payers. So we see that, just internally, a better use of technology, and a broader use of technology, will improve those margins. We're working on imaging to try and reduce the amount of paper flow in the Company between our providers and our payers. So we will continue, Steve, to work on these kinds of initiatives to improve efficiencies in our business.

We are also looking at, ultimately, down the road -- we're looking at billing platform consolidation. As we can build out the front end and back end, and as we said before, I think we expect that between 15% and 20% as an operating margin for Physician Services is a reasonable goal for us to get to.

Over what time frame?

I would say that would be over the next three or so years -- three to five years that we would be targeting to strive towards that and improve our leverage and margin in the business each year, going forward.

Thanks.

Our next question comes from Mr. John Ewing (ph) of PKI capital.

I was wondering, since you guys had strong cash flows in a quarter that you said was historically a burn period -- why guidance for the year wasn't up? -- cash flow guidance.

Why our cash flow guidance for the year wasn't up?

Yes,.

Basically, we expected a positive performance comparative to the prior year in the first quarter, and we did meet and slightly exceed our expectations there. Again, we expected to generate continued strong cash flow quarter-over-quarter for the rest of the year, and we just thought it was appropriate to keep with our cash flow guidance for the year, and keep delivering on that.

Okay. Thanks.

Our next question come from Mr. Chris Sasaoni, Eagle Asset Management.

Good morning, and congratulations on the quarter. I was wondering if you could give us an update on the development of your sales force; both in terms of size, maturity in the marketplace, and the leverage that you feel you are getting. And if you were to estimate on a scale of 0% to 100% in terms of their productivity, where are they along that pathway? And my second question was, it wasn't entirely clear to me what kind of leverage you believe that you can generate from this endorsement, from the American Hospital Association -- it's not clear how large that opportunity is.

Okay, Chris, let me give you a sense of the maturity and productivity of our sales organization. As I mentioned before, we have almost tripled the size of our sales for Physician Services organization, which, I think, is really where your question was. And over the last two and a half years, we have continued to train and build our value proposition because we have added so many salespeople. And I'm happy to report that the -- the longevity of a salesperson, once they reach that one year milestone -- they become truly productive at that point. Six months really gets them going, but after the tenure has been with us for a year or more, we start to see a much greater productivity level. And the number of salespeople, now, that we have over a year is significantly up from where it was. Because we, I think now, have got the right profile for a salesperson. Which was one of the things that I think we struggled with over the years -- what is the right profile for a salesperson. So, given now that we've had another strong quarter in net new sales, I'm very optimistic that the sales organization that we have in place for physicians will meet our range of $20 to $30 million in net new business for 2005.

As for endorsements by the AHA, or in fact, any medical association; what it does is it gives, obviously, the solutions that we settle in the marketplace, the credibility that goes along with that endorsement. We have others out there that we have enjoyed, and it gives the validation and gives the purchasing offices another check box. If you would like to say, okay, this has been endorsed or validated by another medical association, it just helps our sales process.

Is there anything that the American Hospital Association would do in terms of driving potential new business to you or not?

Well, I think that -- we attend various shows around the country, Chris. I think we -- we will probably get referrals through their network. We get invited to participate, as I say, in different conferences. So I think all that will represent a greater opportunity for us to meet prospects who may be interested in our solutions.

And one final question, can you just give us an update on the group that is targeting academic centers similar to the University of Texas? And also, an update on the University of Texas?

I don't understand the first part of your question.

You have -- as I understand it, you have a group that focuses -- either a group within Physician Services or completely separate group, that focuses on trying to land contracts with academic centers.

Yes, we are progressing nicely, I think, with our opportunities out there, Chris. There are a number that we are working, and we expect to close a few this year. As I mentioned, our range of $20 to $30 million did not necessarily include landing large deals when we gave guidance at the beginning of the year. And the University of Texas is going well. They have seen an increase in their reimbursement since we have provided services to them, and I'm very pleased with the progress we've made.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions.

Thank you, Operator. I appreciate everybody participating in the call, and look forward to speaking with you next time. Thanks again.