麥卡遜 (MCK) 2005 Q2 法說會逐字稿

Good morning, and thank you for standing by. [OPERATOR INSTRUCTIONS] I’d like to turn the meeting over to Mr. Phil Pead, Chairman, President and CEO. Sir, you may begin.

Good morning, and thank you for joining us on this call to discuss our second quarter 2005 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 on 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 assumptions 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 and the form 10-Q for the quarter ended March 31, 2005. 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.

Our consolidated second quarter performance again demonstrated revenue and earnings growth as well as continued strong operating cash flow. We are continuing to see a strong demand for our Physicians outsourced receivable services, and our expanded sales force is having their best year-to-date performance. Our Physician Services division achieved net new business sold during the quarter of $10 million compared to $2 million in the second quarter of last year. Net new business sold in the current-year quarter was our second strongest performance on record. Our pipeline of new business opportunities continues to grow across all specialties as we execute on our sales plan. With over $14 million of net new business sold on a year-to-date basis, we are on track to achieving our stated 2005 net new business sold target of $20 to $30 million, a level that will represent another record year for the division.

In our Hospital Services division, we achieved new business sold of $3 million in the second quarter compared to $15 million in the second quarter of last year. You may remember that we had a large five-year contract for print and mail services in the prior-year quarter. On a year-to-date basis, new business sold is approximately $9 million for the Hospital Services division, and we do expect to achieve our full-year 2005 target of $20 to $25 million.

As we discussed in our release this morning, we have modified the timing for the completion of our physician claims clearinghouse enhancement project. Originally, we had targeted the project to be completed by the end of 2005 with the implementation in early 2006. We now forecast the project will be completed in mid 2006 and implemented during the latter part of 2006. Although we have delayed the completion, the overall project costs will stay the same. Although the entire project is expected to be completed by the middle of next year, a portion of the project that relates to claim reconciliation will be completed by the end of this year. The Physician Services division will begin to see workflow efficiencies from this portion of the project in 2006. The change in the timing of the completion of this project is due to a needed design change, which will allow us to meet our original objective of processing larger volumes of claims at faster transaction speeds. Transaction platforms typically have a very long life, so the requirement that we are able to process transaction volumes that represent a significant increase over our current levels and be able to process these volumes at high speeds is very important. Once the entire project is implemented, the operating enhancement of our infrastructure will provide further benefits for our Physician Services division. This will improve our cost structure as well as improve cash flow for our customers in future years.

I would now like to turn it over to Chris Perkins to discuss our financial results for the second quarter.

First, reviewing our consolidated results, revenue was $93.3 million as compared to $88.1 million in the second quarter of 2004. Operating income was $8.9 million, or 9.5% of revenue, as compared to second quarter 2004 operating income of $8.8 million, or 10% of revenue. Income from continuing operations for the second quarter was $7.5 million, or $0.23 per share on a diluted basis, compared to second quarter 2004 income from continuing operations of $7 million, or $0.21 per share on a diluted basis. On a year-to-date basis, we had consolidated revenue growth of 7%, operating margins of 10.6% compared to 9.6% in the first half of 2004, and income from continuing operations of $17 million, or $0.52 per diluted share, compared to $12.6 million, or $0.37 per diluted share in 2004. These prior-year operating income and income from continuing operations numbers exclude expenses related to debt refinancing of approximately $5.9 million as well as expenses related to additional procedures requested by our external auditors in 2004 of approximately $2.5 million in the second quarter and $6.5 million on a year-to-date basis.

In the Physician Services division, revenue was $69.1 million in the quarter compared to $66.1 million in the second quarter of last year. Operating income for the division was $7.5 million, or 10.8% of revenue, for the quarter compared to $7.1 million, or 10.8% of revenue in the prior-year quarter. As you may remember, our Physician Services division is comprised of two lines of business. Our Business Process Outsourcing business, which represents more than 95% of the division’s revenue, and our Physician Practice Management system, MedAxxis. Our Business Process Outsourcing business experienced good revenue growth and margin expansion in the current year. As we have stated in the past, the Outsourcing business produces strong operating margin on incremental revenue, and this leverage is reflected in the margin expansion. In our Physician Practice Management business, we are in the final stages of converting our customers to our new platform, which we expect to be completed before the end of 2005. It is not unusual to experience some level of customer loss whenever a legacy solution is replaced. As a result, second quarter revenues from our PPM segment decreased approximately $500,000 compared to the prior year. During this conversion period, we continue to carry duplicate costs between our legacy and our new platforms, which contributed to a decrease in operating income for the PPM segment of approximately $1 million when compared to the second quarter of 2004. We expect these variances to improve in the third and fourth quarters, and this business will provide positive contribution in 2006 after the conversion is completed.

In our Hospital Services division, revenue for the second quarter was $27.8 million as compared to $25.4 million in the prior-year period. Operating income in the division was $5.3 million, or 18.9% of revenue for the quarter, compared to operating income of $6.4 million, or 25% of revenue, in the second quarter of 2004. As we discussed in our first quarter call, we anticipate a decline in margins in the second quarter due to the timing of software contract signings that were recognized in the first quarter. The current-year quarter also included approximately $400,000 of expenses related to our project to enhance our physician claims clearinghouse infrastructure, which is managed and accounted for with our entire clearinghouse infrastructure in the Hospital Services division. Also, as we discussed last year, margins in the second quarter of 2004 were higher than normal because of back-billed maintenance revenue that was being recognized upon receipt of payment.

Moving to the balance sheet and cash flows, our cash position at June 30, 2005 is approximately $46.2 million versus $42.5 million at the end of the first quarter. The second quarter included a use of cash of approximately $5.5 million related to the completion of our 1 million share repurchase. As you may recall, we completed the repurchase of 1 million shares in early April at a total cost of $15.4 million. Cash flow from continuing operations for the first six months of 2005 was $22.6 million, or $0.70 per diluted share, compared to $10.5 million, or $0.31 per diluted share, in the first six months of last year. Cash flow per share is calculated by dividing cash flow from continuing operations by the weighted average shares outstanding. Current-year cash flow was driven by improved profitability and improved working capital. Cash flow in the prior year included a use of cash of approximately $6 million, or $0.18 per diluted share, related to the additional procedures. For accounts receivable, our day sales outstanding by division at the end of the second quarter were 48 days outstanding for Physician Services and 68 days outstanding for Hospital Services, which were essentially in line with the prior-year period.

Also, as mentioned in our release this morning, we anticipated an increase in our weighted average shares outstanding in the remainder of 2005. Given the increase in our stock price over the last few months, we are now forecasting weighted average shares outstanding to be approximately 34 million shares in the third and fourth quarter of 2005. This increase in projected diluted shares outstanding relates to common share equivalents added for the convertible debentures in stock options. This increase in share count impacts earnings per diluted share in the second half of the year by approximately $0.03 compared to our previous forecast.

In our release this morning, we tightened our full-year 2005 earnings guidance to $1.07 to $1.12 per diluted share versus our previous guidance of $1.05 to $1.15 per diluted share. We modified our third quarter EPS guidance to $0.25 to $0.27 per diluted share and our fourth quarter EBS guidance to $0.30 to $0.33 per diluted share. We continue to expect cash flow from continuing operations in excess of $47 million. With a strong first half performance behind us, we are on course to achieve our full-year 2005 targets and look forward to an even stronger 2006.

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

[OPERATOR INSTRUCTIONS] Steve Halper; Thomas Weisel Partners.

Where would the share count be for Q3/Q4 if the stock stayed where it’s at this morning at $19 and change?

Yes, Steve. It would be between 32.5 and 33 million shares outstanding. Did that answer your question, Steve?

Sean Jackson; Avondale Partners.

On the net new business sold for the Physician Services, the $10 million, were any big deals in there of any significance, or was it pretty evenly distributed?

No, Sean. We did have the Arden Lovelace contract that we signed in the second quarter, which was a nice-sized deal for us. It represented over 300 physicians. And, there was a good mix of business across all specialties, excluding that contract.

Okay. Approximately how much of it was that one contract?

Well, we don’t specifically value individual contracts, Sean. I can tell you that the performance across all our specialties was excellent. The backlog or pipeline for new business in Q3 -- The opportunities that we’re looking at for Q3 and Q4 are very strong. The performance in Q2 was excellent; I can tell you that. We had a very, very strong Q2.

Okay. And, the benefits that you expect to see from the investment in the clearinghouse - where should we see that financially? Is it just going to be on the cost side, or can you somehow derive additional revenue from that? Can you explain that a little bit?

Let me talk about the opportunity in the marketplace, and then I’ll ask Chris to talk about the cost side. One of the drivers for this, Sean, is (1) the opportunity for us to move into a real-time environment in healthcare. I think it’s going to be a real one. When that’s going to happen, we’re not sure, but we’re seeing more and more of this pickup on the health savings accounts with the high deductible health plans. More and more companies are signing up for that kind of a health coverage for their employees in a way that they believe will reduce their costs. In order for you to really drive health savings account, you’re going to need to adjudicate claims in a much more real-time environment. So, we’re looking at the future here and saying that if that does become a model that most people start to adopt, we want to be there processing claims in a real-time manner. We’re working with some payers to achieve that. That’s the longer-term goal. Near term, it’s just looking for some more efficiencies as we drive our revenue cycle management outsourcing services and our Physicians business. I think Chris will tell you that we’ll give you some guidance on what we anticipate those cost savings to be for 2006 in our earnings release at the end of the year.

That’s right, Sean. We haven’t given any specific guidance on the expected cost benefits related to that, but that would be part of our 2006 guidance that we do later during the year.

And, just lastly, on the tax rate assumptions going forward, what are they the rest of the year and even into ’06?

Yes. I think our tax provision will continue to be low. Again, as you recall last year in the fourth quarter, we had a reduction to the valuation allowance in our deferred tax asset that had a non-cash tax benefit that was significant in the fourth quarter. Excluding any further potential adjustments to the valuation allowance, we would still be expecting to pay at the less than 5% tax rate. I think that’s generally a good number to expect on a going-forward basis.

Steve Halper; Thomas Weisel Partners.

Given the considerable free cash flow that the Company generates, have you thought about kind of an ongoing share buyback program to offset the increasing option impact?

Yes, Steve. We’ll continue to evaluate what’s the best use of capital - use of our cash that we’ve generated in the business. We continue to review that on a regular basis. I think we’ll continue to evaluate whatever the opportunities are that bring the maximum or best value to our shareholders. That would be something that we’d be continually evaluating. But, we do not have an additional share repurchase program in place.

And, could you just give us an update on what’s going on in the claims clearinghouse business and your position competitively and what you’re seeing out there in the marketplace?

Sure, Steve. First of all, I think that if you look at our transaction volume, it has continued to increase quarter-over-quarter, year-over-year, which is positive. We are seeing a mix of opportunities for us. As you remember, the model that we have is really not a rebate model. Ours is a create value for the provider and charge the provider for the reports and services that we offer. We are seeing an erosion on the rebate side, and I think we’re going to continue to see that as payers pull back from the kinds of rebates they were offering per transaction in previous years. If you remember, their goal was really to offer those rebates as a result of a reduction in paper. As that has remained flat over the years, their view is that they should reduce that rebate until they see the volume of paper being reduced. So, we expect that to continue to put pressure on the rebate transaction pricing. It is a relatively small part of our overall revenue for the group, but clearly that’s going to have some impact in the future. Where we’re seeing some opportunities is in our denial management area. That’s where our transaction volume, as well as print and mail services, is increasing. I would say overall the market for specific areas within the revenue cycle is positive, Steve. But, it’s probably flat from a pricing perspective.

And, just flipping over to Physician Services, it appears as though you’ve made good strides in your sales force. Can you talk to how well that sales force continues to mature, and is the productivity continuing to increase?

If you look at the year-to-date performance at $14 million, it’s their best first half of the year to date - certainly on record. Their performance in Q2 and Q1 is, again, from a productivity perspective, excellent. The opportunities that we’re working for the back half of the year, again, across all specialties are very positive. It’s probably one of the biggest pipelines we’ve looked at. I’m optimistic that we will be in the upper end of our range, between $20 and $30 million, as we close out the year.

Are you working on any other Lovelace-type deals in terms of size? Are there more out there? And, does your $20 to $30 million include large deals?

No; it does not. But, we are working a number of opportunities that represent at least the number of physicians that we signed with the Lovelace deal. I think the receptivity in the marketplace -- When we signed University of Texas last year, from a faculty plan perspective towards outsourcing, it’s been very positive, Steve. We’re seeing a lot of those kinds of opportunities present themselves. But, as I said before, they are a strategic sale. The do take a long time to work through a sales process. So, we have kept them out of our forecast for the $20 to $30 million.

Sure. So, the $20 to $30 million is achievable, even without any big deals, based on your pipeline analysis.

Based on our year-to-date performance and our pipeline for Q3 and Q4, that is correct.

Michael Hahn; Burnmar Company [ph].

Thank you. My question has been answered.

[OPERATOR INSTRUCTIONS] Sir, at this time, you have no further questions.

Okay. Thank you all for participating. I look forward to speaking to you next time. Thanks.