麥卡遜 (MCK) 2006 Q1 法說會逐字稿

Welcome, and thank you for standing by. [Operator Instructions]

Now I will turn the meeting over to Mr. Phil Pead, Chairman, President and Chief Executive Officer of Per-Se Technologies.

Sir, you may begin.

Thank you, and good morning. And thank you for joining us to discuss Per-Se Technologies’ first quarter financial results.

Hosting this call with me today is Chris Perkins, our Chief Operating Officer. Also joining us is Steve Scheppmann, Per-Se’s new Chief Financial Officer, who joined our team on May 1st.

Since 2000, Steve was the CFO of NOVA Information Systems in Atlanta. This leading payments-processing company manages approximately $1 billion in revenue. NOVA was a publicly traded company prior to being acquired by US Bancorp in 2001. Prior to NOVA, Steve served as CFO for Larson-Juhl for 12 years and also spent 10 years in public accounting.

Steve has a strong finance and accounting background. And with his transaction-processing experience, he is a valuable addition to our company, and we welcome him to our executive team.

Before we begin our review of the first quarter, 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 10-K for the year ended December 31st, 2005.

Also, in accordance with Regulation G, please refer to this morning’s press release for the reconciliation of non-GAAP financial measures discussed in this call to their most directly comparable GAAP financial measures.

Per-Se Technologies is a leader in strategic market segments that focus on the financial success of healthcare providers. Our revenue cycle services and solutions are used by over 120,000 physicians, over 50,000 pharmacies and approximately 3,000 hospitals. Due to the strength of our operations, our first quarter results exceeded our expectations for adjusted earnings and cash flow. Also, we repaid $50 million of our acquisition debt through April, delivering on one of our stated objectives for 2006.

We earned $0.24 per diluted share on an adjusted basis in the first quarter, compared to our guidance of $0.17 to $0.20 per share. We also generated adjusted operating cash flow of $45 million in the period, which is three times greater than the first quarter of 2005.

In our Physician Solutions division, our outsourcing business exceeded our expectations during the quarter, with revenue growth driven by record levels of net new business sold during 2005. We had net new business sold of $3 million in the first quarter, which was in line with our expectations.

Given our robust new business pipeline and customer service, we continue to expect to achieve our full-year guidance for net new business sold in the range of $25 million to $35 million. This would represent an increase of up to 40% over our record 2005 performance.

We announced last week that we won our third consecutive NorthFace ScoreBoard Award for our commitment to customer service in our physician outsourcing business. More than 165 businesses were competitively judged for their highest service-level scores from surveyed customers. This award is a testament to the talented Per-Se employees across the country who are dedicated to delivering value that exceeds our clients’ expectations. Client service and retention is a relentless focus for our company, and we are very proud of this recognition.

In our Hospital division, both our revenue cycle and resource management operations met our expectations in the first quarter. We are making progress in converting clients to our ePremis® revenue cycle solution, which results in annualized incremental revenue improvement. With $7 million in new business sold in Q1 and the opportunity to leverage our solutions across our expanded hospital customer base, we continue to expect to achieve our new business sold target of $20 million to $30 million this year.

We’re actively working to extend our outsourcing business model to hospitals, and we are seeing some early success in building our sales pipeline. We recently won a couple of outsourcing contracts including one with a large university and teaching hospital based in the Mid-Atlantic region.

Within our Pharmacy Solutions division, both our network and systems businesses performed well and exceeded our expectations in the quarter. We had new business sold of approximately $6 million, and we expect to achieve our new business sold target of $25 million to $35 million this year.

We continue to gain traction in the pharmacy systems market, with a growing sales pipeline for our new solutions as well as solid sales to independent and mail-order pharmacies, where we continue to provide value for our customers through the combination of enhanced systems and realtime network services.

Our realtime pharmacy network experienced strong transaction volume in the quarter, driven in part by Medicare Part D. While transaction volume is not a direct indicator of revenue growth, we processed over two billion prescription-related transactions in the quarter, which is a 33% increase over the same period in 2005.

We are seeing increased market interest in EnterpriseRx(TM), our next-generation technology solution for chain pharmacies. In mid-March, we announced that EnterpriseRx(TM) was live in Schnucks, a Midwest grocery chain. And we are working together to implement the solution in all 99 Schnucks Pharmacy locations this year.

I’m also pleased to announce that we now have a second customer [live], BJC HealthCare, a large and prestigious nonprofit healthcare organization based in St. Louis, which is working to implement EnterpriseRx(TM) in their remaining locations over the course of this year.

The integration of the acquired NDCHealth businesses is proceeding very well. As we have previously stated, these are both complementary and strategic additions to Per-Se. And the response to the combined businesses by our customers and employees has been very positive.

The market leadership of our respective business segments positions us to take advantage of a positive climate for our products and services. In our Physician Solutions division, we continue to see a growth in the demand for outsourced receivables services. In Hospital Solutions, we’re seeing early success in our outsourcing services and continue to experience positive results from our ePremis® conversions.

Finally, our Pharmacy Solutions division has seen very strong growth in our network business, and we’re also optimistic about the early success we have had in our EnterpriseRx(TM) implementations.

I’d now like to turn it over to Chris Perkins to discuss our first quarter financial and operating performance.

Chris?

Thank you, Phil.

Our first quarter results include the acquisition of NDCHealth, which was completed on January 6. My review of our first quarter will also include discussion of certain operating income, earnings and cash flow results and trends on an adjusted basis. The reconciliation of the non-GAAP measures are included in our press release and on our website.

The following items were excluded from our adjusted operating income and adjusted income from continuing operation numbers, and our guidance and the first quarter results -- noncash stock compensation expense of approximately $900,000, a noncash expense of $13.3 million from the writeoff of in-process R&D related to the NDCHealth acquisition; a noncash tax benefit of $1.5 million related to the partial release of our deferred tax asset valuation allowance; and transition- and integration-related expenses of approximately $4.1 million related to the NDCHealth acquisition.

On a consolidated basis, first quarter revenue increased 59% over last year to $146.2 million, which was driven by the acquisition of NDCHealth and from organic growth. Adjusted operating income increased 71% to $18.5 million, or 12.7% of revenue; as compared to first quarter 2005 operating income of $10.9 million, or 11.8% of revenue. Adjusted cash flow from continuing operations in the first quarter was $44.7 million, compared to $13.2 million in the same period in 2005.

During this year’s first quarter, we used $21.6 million in operating cash related to the NDCHealth acquisition and the transition and integration. Including the impact of our higher GAAP tax provision rate, which I’ll discuss in a moment, our adjusted income from continuing operations was $6.3 million, or $0.15 per diluted share. Using our tax-paying provision rate, which was the basis of our previous guidance, adjusted income from continuing operations was $10.2 million, or $0.24 per share on a diluted basis.

During the first quarter of 2006, the asset valuations for GAAP purposes were completed for the acquired NDCHealth business and resulted in an increase in the GAAP acquired asset values as compared to the historical basis for income tax purposes. This difference between the GAAP basis and the historical tax basis of the acquired assets generated a net deferred tax liability from the transaction.

Historically, the Company has had a deferred tax asset that was created by the Company’s net operating loss carryforwards, which was largely offset by a corresponding valuation allowance.

In accordance with GAAP accounting, the deferred tax liability was then offset against the Company’s valuation allowance on its deferred tax asset. As part of this accounting for the NDCHealth transaction, the Company’s valuation allowance on its deferred tax asset that could have offset GAAP tax expense in the future was used in its entirety. As a result, the Company’s income tax provision for 2006 will be recorded using an effective tax rate of approximately 40%. The net deferred tax liability was higher than our original projections, which essentially used more of our deferred tax asset valuation allowance than we had originally anticipated.

The change in the Company’s GAAP tax provision rate has no impact on the Company’s tax-paying rate or its cash flow. The Company continues to have substantial federal net operating loss carryforward that it will utilize to offset cash taxes payable for future periods. As of December 31st, 2005, the Company had approximately $375 million of federal net operating loss carryforwards.

Turning to our segments -- in the Physician Solutions division, revenue was $77.3 million in the quarter, compared to $67.2 million a year ago. Adjusted operating income for the division was $10.3 million, or 13.3% of revenue; compared to $8.6 million, or 12.8% of revenue in the prior-year’s first quarter.

Revenue growth was attributable to our acquisition of NDCHealth as well as organic growth in our physician outsourcing business of approximately 5%. Margin expansion during the quarter is due to revenue growth as well as the addition of the NDCHealth Physicians business, which was operated at a higher [margins] than Per-Se segments.

In our Hospital Solutions division, revenue for the first quarter was $43.5 million, compared to $28.4 million in the prior-year quarter. Adjusted operating income was $10.6 million, or 24.3% of revenue; compared to operating income of $6.4 million, or 22.7% of revenue in the first quarter of 2005.

Revenue growth and margin expansion was primarily attributable to the acquisition of the NDCHealth Hospital business, which historically had higher operating margins than Per-Se’s Hospital business. We continue to see opportunities for revenue growth through the cross-selling of our expanded product family into our combined customer base, which should also drive margin expansion.

In our Pharmacy Solutions division, revenue was $29.4 million. Adjusted operating income in the division was $4.2 million, or 14.3% of revenue. Our Pharmacy business is new, as a result of the NDCHealth acquisition.

Our cash position at March 31st, 2006 was approximately $36 million, versus $61 million at the end of 2005. In the first quarter, we retired $40 million of our outstanding Term Loan B debt. And in April, we retired an additional $10 million.

Our financial guidance for 2006 now includes the revised GAAP tax provision rate and continues to exclude expected transaction and integration costs related to the NDCHealth acquisition, noncash stock-based compensation expense, the first quarter writeoff of in-process R&D related to the NDCHealth acquisition, and the first quarter tax benefit related to our release of our deferred tax asset valuation allowance.

We expect consolidated 2006 revenue to be in the range of $625 million to $635 million. Consolidated adjusted EBITDA for the full year 2006 is expected to be in the range of $142 million to $147 million, and consolidated adjusted operating income in the range of $90 million to $96 million, with margins expected to be between 14.5 and 15%.

We expect full-year 2006 adjustment cash flow from continuing operations to be in the range of $100 million to $110 million, excluding the acquisition-related costs; or $2.30 to $2.50 per share, which is an increase of 55 to 70% over 2005. Cash flow per share is calculated by dividing cash flow from continuing operations by the diluted weighted-average shares outstanding.

Capital expenditures and capitalized software development costs for the year are expected to be between $40 million and $42 million. Our adjusted EPS guidance for 2006 is now in the range of $0.81 to $0.87, which includes the increased tax provision rate. This guidance is consistent with our previous 2006 adjusted EPS guidance range of $1.30 to $1.40, with the only change being the increase in our GAAP tax provision rate.

On a quarterly basis, our adjusted EPS guidance for the second quarter is a range of $0.17 to $0.19. And for the third quarter, the range is $0.23 to $0.25, which includes the increased tax provision rate.

As Phil mentioned, our NDCHealth integration activities continue to proceed well, and we continue to be confident that our annualized corporate overhead synergies will be towards the high end of our range of $15 million to $20 million in 2006. These savings have been substantially achieved in the first quarter. And we are also continuing to assess further leverage opportunities that could be implemented in 2007.

Now I’ll turn it back to you, Phil.

Thank you, Chris.

Our first quarter performance was a solid start for 2006. We’ve made good progress on integrating our NDCHealth acquisition, and we are beginning to execute on a number of expanded market opportunities. We expect to deliver strong earnings and cash flow growth throughout 2006, and we will continue to execute on our Connective Healthcare solution strategy for healthcare providers.

At this time, operator, I’d like to open it up now for questions.

[Operator Instructions] Mr. Steve Halper, of Thomas Weisel Partners.

Hi, good morning.

Could you expand a little bit on how BJC HealthCare is going to be using the EnterpriseRx(TM) product?

Not at this point, Steve. This is a new agreement for us. And we’re -- some of our customers are obviously restricting the amount of information that they wish to share with everybody. But I can tell you that this was a nice opportunity for us. And as we continue with the implementation, I’ll share more about it in subsequent calls.

Is this going to be more used in the hospital setting?

No, no. It’s in an outpatient setting, in a traditional retail setting. So it’s different from an inpatient setting.

So do you see that health system market as a whole different opportunity, away from the traditional drug retail pharmacy market? And what are you doing to market the application in that area?

Yes, that’s a good question, Steve. No, we don’t see it as a new market. We really see it as an additional market for us, together with -- as you would describe -- the more traditional retail-chain pharmacies. But there are a number of health systems out there that have both. And so we are addressing that market as well as the traditional retail-chain market.

Okay. So just to summarize -- so BJC -- they have some outpatient facilities, with a pharmacy component in there?

Correct.

Okay, thank you.

You’re welcome.

[Mr. Sandy Draper, of JMP Securities].

Thanks, good morning, and congratulations on a nice quarter.

Thanks, Sandy.

First, actually, Steve just actually hit on one of my questions. I guess a follow-up -- how do we think about -- when you give your pharmacy -- your net new business sold in the Pharmacy division, how should we think about the different components of EnterpriseRx(TM) versus the PharmacyRx(TM) and the other components? And if you sign a large EnterpriseRx(TM) deal, would all of that come in the quarter, or would that likely get spread out over time? Or just how should we be thinking about that metric?

Hey, Sandy.

What we would do -- if it’s related to a systems sale, the entire revenue related to that systems contract, and the license element of that, would be included in the new sale that we reported. If it’s for new network business or recurring revenue business, we would include the annualized value of revenue as a value for new sales, consistent with the way that we treat annualized value in our physicians outsourcing business.

Okay. So any time you got -- if you got an EnterpriseRx(TM) deal that had a software license in it, and someone was doing a term deal, then it would see a spike in that new business. Otherwise, if you’re signing the recurring revenue, you’ll see growth, but it won’t be a big jump.

That’s correct.

Okay.

We would just report the annualized value.

Okay. Thanks.

[Mr. Gene Mannheimer, of Caris & Company].

Yes, thank you. Nice quarter, gentlemen.

Thank you.

Just going back to EnterpriseRx(TM) -- are you -- can you tell us how many clients have contracted to purchase it so far? And what is the date for general availability?

We currently have about eight contracts that we have signed. So we’ve increased by one since the last announcement, Gene, that was made prior to our acquisition of NDCHealth. We still expect, based on the performance of the product and the development cycle that we’re on, to see general availability in 2006.

Okay.

Thanks, Phil. Nice job.

Thank you.

[Operator Instructions] Mr. [David Jackson] of [TKI Capital].

Yes, I was just wondering -- you had a stated objective of debt reduction. I was just wondering if you could give us -- elaborate a little bit -- give us maybe a target level for the year.

Yes. Initially, in our discussion in March, we had stated that we expected to reduce debt by over $50 million in 2006. As we stated in the release, we have reduced our debt by $50 million through April. We expect to continue to generate positive cash flow for the year. We have not made any specific discussion on further debt reduction. But we’ll evaluate using the cash flow we generate for debt reduction in the future.

Okay. Thank you.

At this time, there are no further questions.

Thank you all very much for joining us on the call. And look forward to talking to you next time.