麥卡遜 (MCK) 2005 Q4 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. I would now like to turn the meeting over to your host for today's conference, Mr. Philip Pead, Chairman, President and Chief Executive Officer of Per-Se Technologies. Sir, you may begin.

Good morning. Thank you for joining us to discuss Per-Se Technology's fourth quarter and yearend 2005 financial results. Hosting this call with me today is Chris Perkins, our Chief Operating Officer and Interim CFO.

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 respect to future results and the assumptions on which such expectations are based.

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 10K for the year ended December 31st, 2004 and the Form 10Q for the quarter ended September 30th, 2005.

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

Per-Se Technology is embarking on an expanded path for growth in 2006. Our financial results and operating successes over the past year have established a strong platform for our future success. Our acquisition of NDCHealth Corporation, which was completed in early January, provides significant new opportunities for Per-Se going forward.

In our release this morning, we increased our 2006 EPS guidance and significantly raised our cash flow expectations for the year with cash flow from continuing operations expected to more than double over 2005 levels. We closed out 2005 with another quarter of good performance in both our physician and hospital businesses. We earned $0.27 per diluted share in the fourth quarter and our full year EPS of $1.08 represents a more-than 25% increase over 2004.

Turning to our Physicians Solution division, performance was driven by record levels of net new business sold by our hospital-based outsourcing business throughout 2004 and 2005. For the year, this division generated net new business sold of $25 million compared to 19 million in 2004, an increase of over 30%. We expect net new business sold for 2006 to be in the range of $25 to $35 million and with the strong momentum in our sales organization, I am confident we can achieve our 2006 target, which would represent an increase of up to 40% over our record 2005 performance.

In December, we acquired a privately-held hospital revenue cycle management outsourcing firm named Integra Solutions. Integra offers a full suite of services targeted towards improving a hospital's revenue-cycle performance, including consulting and outsource-charge auditing, and accounts receivable services. The addition of Integra Solutions and domain expertise is a key component of our outsourcing growth strategy in the hospital market.

On January 6 of this year, we completed our acquisition of NDCHealth, which brought market-leading physician, hospital, and pharmacy solution businesses to Per-Se. The added breadth and depth of our combined operations will enhance our competitive position in the industry and further our goal to help health care providers be financially successful. Also, our 2006 EPS and cash flow guidance confirms that the transaction continues to meet our expectations. The NDC physician and hospital businesses strengthen our position in those distinct provider segments by providing revenue cycle management solutions to approximately 1,800 hospitals and health care organizations.

The physician practice management software that was acquired is used by more than 100,000 medical professionals and about 65,000 small office practices. This firmly positions us as a market leader in the physician and hospital verticals. We intend to leverage our combined operations to deliver strong growth.

The Pharmacy Solutions business is the market leader in pharmacy network services and systems in the United States and is a new business segment for Per-Se. The Per-Se intelligent network processes more than six billion pharmacy transaction annually with electronic connectivity to approximately 90% of the retail pharmacy stores and supports a systems install base of more than 20% of all US pharmacies. In addition to processing pharmacy claims in real time, the network enables pharmacies as well as other health care providers to ensure that all claims are validated for optimal reimbursement. Data captured during network processing enables Per-Se to offer information to retail pharmacies to assess their competitive performance and plan strategically. Additionally, our pharmacy network services business became the exclusive provider of electronic connectivity for retail pharmacies to check for and validate seniors primary and supplemental coverage eligibility under the new Medicare Part D prescription benefit program that started January 1, 2006. We also are the exclusive contractor to the census for Medicare and Medicaid services for calculating beneficiaries true out-of-pocket costs or troop, as part of the Medicare Part D program.

With regard to pharmacy systems, we believe that Enterprise Rx is nearing the end of its primary development cycle and is expected to reach general availability in 2006. We will monitor this progress closely. We expect to be able to communicate additional momentum in the months ahead as our customers begin their implementation and rollout of this important solution. Enterprise Rx offers capabilities needed by retail pharmacies including the ability to centrally manage inventory in real time, centrally fill prescriptions to balance workloads, maintain centralized patient files, and provide immediate access to data on any pharmacy across the enterprise to improve productivity. We are also pleased with the performance of other pharmacy system solutions that we offer, which continue to provide value for our customers.

Overall we are very excited about our prospects for growth in 2006 and the longer term. We understand what it takes to execute on our business plans and deliver financial and operating results that our shareholders expect. Our ability to maintain our focus on the highest priorities will dictate the level of success we achieve this year.

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

Thank you, Phil. On a consolidated basis, fourth quarter revenue increased 4.4% to 93.4 million compared to 89.4 million in the fourth quarter of 2004. Operating income was $10.4 million, or 11.2% of revenue, as compared to fourth quarter 2004 operating income of $8.5 million or 9.6% of revenue. Income from continuing operations was $9.3 million or $0.27 per share on a diluted basis compared to fourth quarter 2004 income from continuing operations of $7.7 million or $0.24 on a diluted basis.

On a full year basis, we had consolidated revenue growth of 5.6% and operating margin of 11%. Income from continuing operations was $36.1 million or $1.08 per diluted share compared to $28.5 million or $0.86 per diluted share in 2004. This 2005 operating income and income from continuing operations exclude fourth quarter acquisition-related expenses of $74,000 and a non-cash tax benefit of $2.2 million. The 2004 income from continuing operations exclude the fourth quarter non-cash tax benefit of $28.1 million; a gain on a litigation settlement of $1.5 million; $6.3 million in additional accounting procedure expenses; $1 million in corporate relocation costs; and 5.9 million in debt refinancing costs.

In the Physicians Solutions division, revenue was $68.5 million in the quarter as compared to $65.2 million in the fourth quarter last year. As we mentioned in our last quarterly call, this fourth quarter reflects a three-day decrease in the number of business days from the sequential third quarter. Revenue per business day increased on a sequential basis in the fourth quarter. Operating income for the division was $6.9 million or 10.1% of revenue compared to $7.3 million or 11.2% of revenue in the prior year's fourth quarter. Our physician outsourcing business performed well in the quarter achieving revenue growth of 6.5% with margins increasing approximately 70 basis points compared to the fourth quarter of 2004.

Our revenue growth and operating margins for the division were negatively impacted by our office-based PPM solutions business. The customer conversion to MedAxxis, our web-based physician practice management product, was completed in December 2005. We will see immediate improvement in the business' profitability in 2006. In addition, we expect the combination of MedAxxis with [Lie-Tech] and [Medisoft] to shrink-wrap the PPM software products acquireded in NDCHealth will provide positive revenue and profit contribution in 2006.

In our Hospital Solutions division, revenue for the fourth quarter was $28.3 million as compared to $27.6 million in the prior year period. Operating income in the division was $6.5 million, or 23.1% of revenue, for the quarter compared to operating income of $4.7 million, or 17.1% of revenue, in the fourth quarter of 2004. The year-over-year margin expansion was related to product mix towards higher-margin products and services and cost improvement actions.

Moving to the balance sheet and cash flows, our cash position at December 31, 2005 was approximately $61.2 million versus $41.4 million at the end of 2004. Cash flow from continuing operations for the year was $48.8 million compared to $48.9 million in 2004. Cash flow in 2004 included one-time items that net to positive cash flow of approximately $10 million including cash received for a litigation settlement of a positive $16.2 million offset by a use of cash of approximately $6.3 million related to the additional accounting procedures. Excluding the net positive $10 million, our cash flow from continuing operations increased 27% in 2005. In 2005, capital expenditures and capitalized development costs totaled $14.2 million compared to $13 million in 2004.

For accounts receivable, our day sales outstanding by division at the end of the fourth quarter were 48 days outstanding for Physicians Solutions consistent with the previous year, and 65 days outstanding for Hospital Solutions, an eight-day increase from a year ago.

Turning to our 2006 financial guidance, in our announcement this morning, we raised our full year EPS guidance to a range $1.30 to $1.40 for 2006, which excludes acquisition, transition, and integration costs, an in-process R&D write-off expense, as well as stock-based compensation expense. This would represent a 20% to 30% increase over our 2005 results. And we'll again deliver on our commitment to grow earnings per share by 20% per year. Our year-over-year growth expectations are based on unaudited pro forma 2005 income statement information prepared by management that includes the businesses acquired as part of the NDCHealth transaction. The expected 2006 and the pro forma 2005 financial information reflect adjustments for elimination of inter-company revenues between Per-Se and NDCHealth, and application of purchase accounting adjustments to both periods. Some elements of the primarily purchase accounting assessments under SFAS 141 guidelines included approximately $300 million of the NDCHealth purchase price was allocated to finite, lived, intangible assets including customer lists, developed technology, and other items. This includes approximately $13 million allocated to in-process R&D, which will be expensed in the first quarter. It included the valuation of NDCHealth fixed assets and other non-current assets and a reduction of approximately $8 million in NDCHealth deferred revenues that existed at the closing date and would have been expected to be recognized as revenue in 2006 absent the acquisition.

We expect consolidated 2006 revenue to be in the range of $625 million to $635 million, which would be 8% to 10% growth over unaudited 2005 pro forma revenue. EBITDA for 2006, excluding acquisition, transition, and integration costs, the in-process R&D write-off, and stock-based compensation expense, is expected to be in the range of $142 to $147 million. Consolidated operating income margins for 2006, excluding acquisition-related costs and stock-based compensation expense, are expected to be between 14.5% and 15%, versus pro forma 2005 margins of 7.2%.

We are forecasting that our diluted shares outstanding will increase to approximately 43 to 44 million due to the issuance of 8.3 million shares as part of the NDCHealth transaction. As we discussed when we announced the NDCHealth acquisition, this transaction is significantly accretive from a cash flow per share perspective. We expect full year 2006 adjusted cash flow from continuing operations to be in the range of 100 to 110 million, excluding acquisition-related costs or $2.30 to $2.50 per share compared to approximately $49 million or $1.47 per share in 2005. Cash flow per share is calculated by dividing cash flow from continuing operations by the weighted average shares outstanding.

Capital expenditures and capitalized software development costs for the year are expected to be between $40 million and $42 million. For the first two quarters of 2006, the Company expects adjusted diluted earnings per share from continuing operations of $0.17 to $0.20 in the first quarter and $0.30 to $0.33 in the second quarter. This guidance excludes expected transition and integration costs related to the NDCHealth merger, the in-process R&D write-off expense, any further partial release of the Company's deferred tax asset valuation allowance, and stock-based compensation expense.

By segment, the Company is forecasting revenue for the Physician Solutions division of between $325 million and $330 million, or 6.5% to 7.5% growth over pro forma 2005. Operating margins are forecast to be in the range of 15% to 16% for the full year 2006. For the Hospital Solutions division, the Company forecasts full year revenue for the division of $180 million to $185 million, or 10.5% to 11.5% growth over pro forma 2005. Operating margins are expected to be between 24% and 25%. The Company expects to achieve new business sold of $20 million to $30 million, compared to approximately $14 million in 2005. The Pharmacy Solutions division is expected to deliver revenue of $130 million to $135 million, or 10% to 12% growth over pro forma 2005 revenue, with operating margins of 19% to 20% for the full year 2006. The Company expects to achieve new business sold during 2006 in the Pharmacy Solutions division of $25 million to $35 million.

We are pleased with the progress of our integration activities and are confident that we will achieve the high-end of our $15 million to $20 million range of corporate overhead synergies for the combined business. We are continuing to asses further operational synergies of the combined businesses as well. Our expected depreciation and amortization expense for 2006 is 51 million to 52 million and net interest expense is expect to be $33 million to $34 million. We expect our income tax provision to be in the range of 3% to 4% or $2 million to $3 million, excluding any non-cash tax benefit related to a partial release of our deferred tax valuation allowance during 2006. We expect to record a non-cash tax benefit in the first quarter of 2006 that will be based on projections of the amount of additional pre-tax income, including the NDCHealth businesses acquired in January, which could be offset by the Company's net operating loss carry-forwards in the next two years.

As covered in our press release, we expect to incur certain costs in 2006 related to the NDCHealth acquisition. We expect to incur transition and integration costs of $18 million to $20 million of which $10 million to $12 million will be reflected in our 2006 income statement, with most of these costs to be incurred in the first and second quarters. These costs are related to financial systems conversion, external consultants and temporary staff costs, severance and other costs incurred in connection with the integration. Additionally, we will use approximately $15 million to $17 million of cash to fund certain liabilities related to the NDCHealth transaction, including funding certain benefit plan liabilities, tax liabilities and working capital adjustments related to the sale of NDC's pharmaceutical information management business. These cash payments were anticipated and were accrued in the opening balance sheet of the acquired NDC business in connection with the merger. We also expect to incur non-cash expenses during the first quarter related to the write-off of in-process R&D as part of the acquisition that, based on our preliminary estimates, will be approximately $13 million.

The business will deliver significant positive cash flow. And we are confident that we will make meaningful reductions in our debt during 2006. I'll turn it back to you, Phil.

Thank you Chris. As Per-Se moved into 2006 following the NDCHealth acquisition, we positioned our operations to execute on our business plan and our core strategies. Our business model continues to demonstrate that we can achieve sustainable EPS and cash flow growth for our shareholders while remaining committed to addressing the needs of our customers. As we stated in our press release this morning, the NDCHealth transaction is clear strategic value, the integration is progressing well, and the merger is being well received by our customers and our employees. We are confident that the added breadth and depth of our combined operations will enhance our competitive position in the industry, create new business opportunities, and further our goal to help health care providers be financially successful.

At this time, Operator, I would like to open it up now for questions.

Thank you. (OPERATOR INSTRUCTIONS) Steven Halper of Thomas Weisel.

Good morning. Two separate questions. Number one, does the guidance reflect the integration expense that you just talked about? Number two, can you give us an update on Enterprise Rx and if any new contracts or new customers were signed in fourth quarter.

I'll answer the first one. The guidance of $1.30 to $1.40 does not include the integration expense of $10 million to $12 million.

Okay. And Enterprise?

On the Enterprise side, we'll be making some announcements in due course on both new customers and the implementation of the contracts that were announced last year.

Okay. Thanks.

Alexander Draper of JMP Securities.

Thanks. A couple quick questions. Chris, on the guidance, if you look at your first half guidance versus second half guidance – just based on the quarters – just in round numbers, it looks like you are at a much higher run rate in the back half of the year. Is that primarily due to the – you start to effect the synergies from the transition?

It's due to two things. As I mentioned previously, one of the elements related to the purchase accounting process under the guideline SFAS 141 is that we are going to be removing approximately $8 million of deferred revenue that existed within NDC at the time of the closing of the acquisition. With that deferred revenue that was expected to be recognized in 2006 on a normal basis, there is a greater impact of pulling out that revenue in the first part of the year – in primarily the first quarter.

Secondly, there is progression quarter-to-quarter during the first two quarters of the savings related to the integration.

So when we look at the back half of '06, there is nothing – I am not trying to get you to give guidance for '07 – but there is nothing to suggest that you would have the same type of drop-off in the first half of the year and steep ramp in the second half of the year? In '07 you are looking at more of a normalized run rate basis at the back half of the year?

That is correct.

Second – two more quick questions and then I'll jump back in the queue. In terms of CapEx, it's a relatively big number. Can you give us a sense? Is a lot of that going towards the NDC side? Because when I look at where your CapEx was, the number is a lot higher. What are the expenditures? Is that a one-time deal? Or do you expect to stay at that type of level?

I would say probably just over half of that is related to the NDC businesses that were acquired. There is a higher level of – still somewhat of a higher level related to the final development related to the Enterprise Rx solution.

Last question. Can you remind me what percentage for the practice management software business on an historical basis, about what percentage of either physicians solutions or total revenue that piece of the business represented?

If you look back on an historical basis, that physicians business was probably in the just over $30 million range – low 30 million.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Sean Jackson of Avondale Partners.

Good morning. Can you talk again about Enterprise Rx a little? Within your '06 guidance, is there any assumption as far as meaningful revenue coming out of there?

I'll talk about the revenue. There is some improvement in the revenue for the Enterprise Rx solution if we compare '06 to the pro forma 2005. It's not substantial, but it is a positive movement. We are expecting to be implementing some of those customers during the course of 2006.

Can you comment again on the number of pilots that you had and approximately the timeline of when those conversions will happen throughout '06?

If you remember, back towards the end of 2005 in the release for NDC, they mentioned that they had signed seven contracts for Enterprise Rx. Since that time, they have been in the process of implementing some of those contracts. In a very short space of time, we'll be able to talk about some of those implementations as they go live. Let me couch that by saying we are very pleased with the progress that is being made with that product. We are coming to the end of its primary development cycle. We expect to be able to share with you some of the successes of the implementation in the coming months.

Also, can you comment as far as the '06 growth expectations? Break that out between the legacy Per-Se business and the legacy NDC business.

I'll do that a little bit. On the physicians side, our physicians solutions business from the Per-Se perspective, is consistent with the overall growth targets that we have guided to for 2006. Again, our physicians outsource business is the primary element of that division. Hospital division – it's a little bit challenging to give a specific growth target as we've built our plans and our business plans based on the combined business. I guess I would say our base Per-Se business is expected to grow at a higher rate than it did in 2005. As we talked about in 2005, we saw a little loss of momentum on the new sales side in the hospital division, which we feel was impacted because of the pending NDC transaction.

Okay, alright. Thank you.

Sandy Draper of JMP Securities.

Yes. Just a couple quick follow-ups. Phil, could you comment or give any updates on the search for a CFO – replacing that position as Chris moves up to COO?

Yes, sure. It's progressing well. We have a short list of candidates that we are reviewing. Hopefully we will be in the process of finalizing that very shortly.

Okay, great. Just two other quick follow-up. Chris, when you were referring to the pro forma numbers, if I recall the last SEC filing pro forma numbers, I think were nine-month numbers. Will you be releasing a 2005 pro forma number? Or is that going to come out in the 10-K?

We will not be releasing a pro forma – official pro forma numbers for the combined businesses. That is not a requirement – that is not a final requirement. What we have done with the pro forma is, we have moved – shifted NDC back to a calendar-year basis versus their non-calendar fiscal year, looking at their historical performance. We did eliminate inter-company revenues in both periods between Per-Se and NDCHealth. We also pushed back some of the consistency of the purchase accounting adjustments to both periods.

So it is really just to give us a sense for how – what you are expecting the businesses to grow?

That's right. That was – our intention is to be able to provide a level of comparison. But it will not be audited or filed.

Will you give us that type of updated view as we go through the quarters just on a pro forma basis where the growth rates are so we can track that?

I think we can certainly from a revenue perspective. We will be working on our ability to do that from an income perspective as well.

Okay, great. One last question. Obviously a lot of free cash flow generation. Can you highlight the top two or three uses of that cash flow?

Yes. Again, you are right. We are very, very confident and positive on the cash flow generation of these combined businesses. I think we will make meaningful debt reduction in 2006 utilizing the cash that we have and the cash flow we expect to generate. I think that is going to be the primary focus of our business as we go through 2006 and have the opportunity to continue that through 2007. I expect that we can make debt reductions in 2006 of $50 million or more as we go through the year.

Is that factored into your interest expense guidance for – is that not really, because it depends on the timing of debt reduction?

It depends on the timing of the debt reduction. There is some expectation that we will be making reductions. But because of the timing of that, we have not factored that in entirely.

Okay, great. Thanks.

Eugene Mannheimer of Caris.

Good morning. Two questions. First one on physicians services revenue. It looks like the number came in, in Q4, a little bit lighter than what you had guided. Can you comment on that? Secondly, for modeling purposes, what type of share count will we be looking at in '06 post NDC?

Our physicians business – our physicians outsourcing business actually performed pretty well in line with our expectations. There were three fewer business days in Q4 compared to Q3. If you look at our outsourcing business, quarter-over-quarter compared to the prior year, revenue growth was about 6.5%. We saw good growth in revenue per business day. And we are pretty much in line with our expectations on revenue for the quarter. We were a little bit down on the year-over-year comparison looking at our practice management business on a revenue basis. That was primarily driven to the completion of the conversion that was completed in December.

For 2006, the guidance that we have on the share count is 43 million to 44 million shares. That includes the approximately 8.3 million shares related to the NDC transaction.

Thank you Chris.

Let me add also a comment to Chris' point. We were very pleased with our outsourcing business for 2005. We achieved record net new business for the second consecutive year. The challenges we had in the fourth quarter were the final stages of our conversion on the practice management solution, which is now complete. As we go into 2006, we'll see a positive impact from the completion of that conversion.

Very good. Thank you Phil.

There are no further questions at this time.

I appreciate everybody joining us for the call this morning and look forward to speaking to you soon. Thanks again.

This concludes today's conference call. Thank you for your participation.