Koninklijke Philips NV (PHG) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Lifeline System First Quarter Results Conference Call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Mr. Ron Feinstein. Sir, the floor is yours.

Thank you and good morning everyone. Thank you all for joining Lifeline Systems First Quarter 2003 Conference Call, which is now being made available on Web cast as well as the traditional dial-in service. With me this morning are Dennis Hurley, our Senior Vice-President and Chief Financial Officer and Mark Beucler, Vice-President of Finance and Corporate Controller and soon to be elected new CFO of our company. As you already know, if you saw our April 7th press release on Lifeline's CFO succession plan, Dennis Hurley will be retiring later this year after a stellar eight year leadership position where our net income increased four-fold and our market cap went from $29 million to over $150 million - a five-fold increase.

While his retirement has been his plan for a few years, we expect to retain his services and experiences on selected projects while he retreats to his home and his family. Lifeline and I, personally, are most appreciative of the tremendous value he has added to our company and as was also indicted, in that same announcement, we're very fortunate to have found a very valuable successor in Mark Beucler, who is abundantly qualified to fill Dennis' shoes. Our outgoing and incoming CFOs will review the Q1 financials then I will make additional comments on this year followed by Q&A session. Dennis Hurley as Senior Vice-President, the floor is first yours.

Thanks Ron, and thank you for those very kind words. Good morning. I would like to remind everyone that the matters that we are discussing include predictions, estimates, expectations and other forward-looking statements. The statements is subject to risks and uncertainties that could cause actual results to differ materially. You should refer to our recent SEC fillings and public announcements for a detailed list of the risk factors. I'll first comment on the company's results of operations for the first quarter then I'll turn the call over to our VP of Finance and Corporate Controller, Mark Beucler, for observations on balance sheet results and cash flow.

Lifeline had another strong quarter of continued growth and revenue and net income. Total revenue for the quarter increased 8% to $27 million compared with $25 million in Q1 2002. On the net income side, first quarter results reflected a 20% improvement to $1.8 million from $1.5 million we reported one year ago. Earnings per share - diluted - was 27 cents versus 23 cents for the first quarter of 2002. Lifeline service revenue for the quarter increased 16% to $21 million. Service revenue now represents 80% of total revenue versus 74% last year. As expected, product revenue for the quarter decreased 18% to $5.1 million from $6.2 million for the same period in 2002 reflecting a transition of healthcare channel sales to our full service recurring revenue model. Our senior living business grew by 24% to three-quarters of a million dollars in the quarter. Subscribers grew from 349,000 to 369,000 or 6% from the first quarter of 2002.

Now, turning to margins, our service business continued to see improvement from process and productivity enhancement. Our service margins are up to 45% for Q1 versus 42% for the same period of last year. We expect to achieve further gains and service margins in the future as well. On the product side, margins for the quarter are 69% even with Q1, 2002 reflecting our goal of controlling cost by bringing hardware assembly off in-house.

Our SG&A expenses are equal to Q1 in 2002 at 37%. Included within SG&A are costs associated with the launch of our direct marketing initiative, which accounts for slightly over one point of our SG&A costs during the quarter.

Finally, our effective tax rate for the quarter was 40%, equal to Q1 in 2002. I will now turn the call over to Mark.

Thank you, Dennis. Good morning. Our balance sheet at March 31st, 2003 remains strong. We had cash and cash equivalence totaling $11.9 million and no debt. This compares with cash and cash equivalence of $7.2 million and capital release and debt obligations of $6.7 million last year. Much of the ongoing improvement in cash flow is due to strong earnings and continued efficiency gains in accounts receivables. Days sales outstanding, or DSOs, at March 31st, 2003 were at 36 days, down from 41 days last year. In addition to maintaining DSOs, we expect to continue to reduce our billing and collection processing cost in 2003. We spent $3.1 million in capital for the quarter - approximately $1.5 million related to the development of our new second monitoring site -- $800,000 related to the funding of our service model whereby we provide equipment to our community hospital affiliates and their consumers and depreciate the equipment over five years. The remaining Capex was spent on technology and software development. So in 2003, we are estimating Capex in the vicinity of $10 to $11 million. That concludes Dennis and my review of the financial results. We'll be happy to answer any questions you may have during the Q&A session. I will now turn the call back to Ron.

Thank you, Mark. As we move through 2003, our goals are to continue growing our service margin rate and our service revenue. We will continue to pursue enhancements to our customer service and pursue subscriber growth and new hardware sales in the senior living market segment. Our first quarter demonstrated impressive growth in service margins as well as the continued strengthening of our balance sheet. We also experienced strong performance by our Canadian subsidiary with their new Montreal call center and their new computer telephony platform. We made smooth and significant progress on the development of our second U.S. site where we expect to deliver that operation early and under-budget this year. Our new consumer call center for closing in-bound leads is already up and running in the new facility. We have begun to build an order back-log in our new senior living division. And finally, we're beginning to invest in a variety of new initiatives to stimulate new subscriber growth across our company.

Let me talk more specifically about our first quarter experience - our service margins are realizing significant gains as a result of productivity and process improvements in and around the call center. Shifts in product mix where we are providing more of our hospital programs value-added services, like billing installation and equipment ownership and so-forth, and therefore capturing a larger portion of the subscriber's revenue dollar and there is selective pricing strategies to improve the enrollment profitability of our subscribers. On the customer service side of the house, our call center platforms are performing better every day, faster and more efficiently, no loss of caring to our subscribers. Our new automation strategy for our hospitals is picking up momentum as we implement our Web-based connectivity to improve the management of their programs. This technology will not only improve service but later reduce our operating cost further enhancing our service margins.

Our greatest challenge in the first quarter was beginning to invest in new subscriber growth initiatives to yield pay back later this year and into 2004. We have begun a number of new moves, which will take time but clearly have the opportunity for significant future payoff. We've incorporated a new development center in our second site and are bringing in our top 200 growth oriented programs in groups of 25 to 30 for intensive two-day workshops on personal development, motivation and refinement of their market development business plans. These programs are the best of our large key accounts and aspire to develop marketing strategies to grow subscribers in excess of 15% per year. Next, we're investing in a two-year strategic plan to become a confident, successful direct marketer on behalf of our healthcare channel. Our goals are to increase market penetration, build awareness of our service on a much broader scale and drive growth through existing channels of distribution.

We're in the process of identifying and capturing new referral sources, gaining acceptance of this strategy by our current channel partners and ultimately generating real growth. We'll be utilizing e-mail, regular mail and outbound telemarketing techniques to reach our key target audiences of professional healthcare clinicians. We intend to build relationships using promotional incentives for the consumer and educational opportunities for our clinicians and we're integrating these campaigns with field sales face-to-face presentations. We're cleaning, purging and rebuilding our database with a goal well in excess of 125,000 clinicians and community representatives by this time next year. Targeting and researching the right audience will take time and money. We'll be rolling out our new channel strategies beyond senior living in the second half of this year. Examples include our national accounts effort like the Visiting Nurse Association of America and the American Red Cross.

Two new and exciting initiatives focusing on the 70 million baby-boomer population will expand an employer initiative similar to the offering we have had with IBM where Lifeline is an attractive part of the employer's elder care benefit to its workforce. Second, as the baby-boomer begins shopping on the web for solutions for mom, our visibility will be enhanced to steer them to us as a result of a new e-commerce strategy. Whenever you have a customer base that turns over at 50% per year and your primary channel of distribution - the community hospital - is under significant cost pressures from the health care system, it's important we not only invest aggressively in supporting their marketing thrust but that we simultaneously augment that with other strategies. We remain optimistic that we'll continue to develop new opportunities for market development, margin improvement and customer satisfaction and if you believe that the market trends that we're currently experiencing will continue or even accelerate, then Lifeline is well positioned, excuse me, to capitalize on its future. We believe the demographic trends of our older population will continue to grow and require more support for elders to remain at home.

We see the definition of the home expanding so the senior living market will also expand. We're experiencing the 70 plus million baby-boomers getting involved and needing to get involved with their parent's care plans. We see an ongoing scarcity of nurses and caregivers. The cost of healthcare for the elderly continues to rise and with it pressure on Medicare, Medicaid, home care and acute care. Solutions remain allusive for this segment of our society but in this stressed environment, Lifeline brings caring, peace of mind, independence and early intervention in an emergency. We truly are well positioned. Thank you and I will ask our conference operator to facilitate questions from our callers.

Thank you. The floor is now open for your questions. [OPERATOR INSTRUCTIONS] The first question is coming from Mitra Ramgopal. Your line is live.

Morning, guys. Just a couple of questions. Ron, could you comment in terms of subscriber growth, your outlook for 2003 - you did 6% in the first quarter and I know you talked about a number of initiatives - could you comment in terms of any potential acquisitions that would help the bulk of the subscriber growth and secondly if you can comment, also of the gross margins of the service revenue business - it's about 45% in the first quarter - what are your sense in terms of the outlook for the rest of the year?

Well, Mitra, thank you for those three questions. Let me work backwards with the gross margin question first. Here we are at the end of the first quarter with 80% of our business at 45% gross margin. If we look back just a moment ago, it was about 50% of our business at 33% margin so we're delighted with the progress we're making and as I've said before, we're not done yet. We have a queue of projects - process improvement projects - that our engineers are working on which we believe will show up-side opportunities of that 45% gross margin. I think that in the past, I've said we aspired to maybe as high as 50% in the long-term. At this point what I can tell you is that the materiality of the projects that we see in front of us go out at least two to three years and we're going to continue to shoot to meet or possibly even exceed that target.

As far as acquisitions are concerned, we really don't talk specifically about acquisitions other than on a respective basis is - as you know, we've made small acquisitions fairly regularly over the years. We sense that the current environment is such that it may lead some of our competitors to expectations of valuation that perhaps are more realistic than in the past, which could open up more opportunities for us as we've seen some of what's happened in the economy and in the equity markets and in the venture capital markets. Some of the entrepreneurs may in fact want to cash in on their opportunities. Our balance sheet has never been better in terms of being able to capitalize on that. Our relationship with our lenders is in great shape so we do think that there is accretive opportunities in acquisitions but we'll have to wait for specifics until we have something concrete that we could reveal to you.

Thanks.

Now, the most complex question you asked and the reason I went in reverse order is the subscriber growth. This is something that's on all of our minds and we can see that while we've had the 6% year-over-year growth that, on a quarter-over-quarter, our growth rates have declined a bit and as we've examined it, what we are discovering is in addition to the start-up reallocation of resources on some of these new organic growth initiatives that as we have instituted some of our pricing strategies a couple of points of market share are beginning to move away from us as a result of their unwillingness to reach out to our new pricing strategies. Said in simple terms, we're going to divest ourselves and have been divesting ourselves of about 12 to 15,000 subscribers that are unprofitable and some of that has been blended in to the fourth quarter and the first quarter of this year.

I can think of one specific example where we've divested ourselves of about 6,000 Medicaid subscribers beginning later last year and still coming off of our system as a result of unprofitability so on a net basis versus a gross basis - I'm a little hesitate to give you hard numbers for the balance of this year knowing that we're continuing to move forward with some of our pricing strategy. Having said that, I do look for five or 6% organic growth on the new initiatives on a run-rate as we move through perhaps the third or, in particular, the fourth quarter of this year. On a net basis, it could be less than that as this de-marketing of some unprofitable subscribers and programs move through the system.

Thanks.

Thank you. The next question is coming from James Bartlett of Bartlett Investments.

Yes. You talked about a goal of I think it was 125,000 in your database by a year from now. You know, where is that now? And the second question, you talked about bringing people in, in teams and I believe you mentioned something about with a goal of 15% in subscriber growth. Could you expand on both of those?

Let me answer the first question and then ask you to re-clarify the second one. On the database, we're adding about five to 10,000 names per month in this new initiative for the direct marketing and concurrently we're purging about 2,500 to 5,000 per month as we're cleaning the database and in addition to this goal of 125,000, if we look out two years, and, of course, we're talking about a multi-year program here, we aspire to get up to double that up to around 250,000 in the database perhaps in the '05 timeframe so it's a gradual process. We're implementing software, for example, in our field sales force on their laptops to participate in this and help enroll the new referral sources. A lot of these systems take time to build. At this point, I would say that we probably have maybe 20 to 25,000 new names that are reliable because we did start the campaign in the first quarter. On the second subject, I wonder if you could just re-clarify your question.

Yes. Well, it wasn't clear to me. You were talking about bringing people in, in teams on these workshops.

Oh, I see, yes.

You mentioned something about - I had - something about -- with a goal of something of 15% ...

Yes, yes, OK. Thank you. We have implemented something that we call "academies." It's a learning experience. For example, today - yesterday and today - we have 30 programs from the Illinois, Missouri and Kansas area that are here with a rigorous agenda of development. These programs have come to us - brought a business plan with them that has a goal of growing their real subscriber growth at 15% or better on an annual basis and what we're doing with them here is we're working on the refinement and the alignment of that business plan and when this group leaves on April the 29th, another 30 are going to come in from another section of the country and this process actually has been going on - in beginning in the first week of March. These - when it's done - will represent between 200 and 250 programs and will represent over 60,000 new subscribers on a gross basis in 2003. That 60,000 subscribers represents not just incremental growth but the replacement of the base subscriber that deactivates. So, in effect, maybe they've had a - they represented 100,000 subscribers before they moved into 2003 - they're going to lose roughly 50,000 and replace those 50 plus grow in another 15% plus. I hope that answers your question.

Thank you.

Does that complete your complete your question, Mr. Bartlett?

Yes, it does. Thank you.

As a reminder for any further questions, that's one followed by four at this time, please. The next question is coming from Jeff Nixon (ph) of MCM. Your line is live.

Good morning. Just so I understand the sharp uptake and cost of sales on services from, you know, kind of round about 11 the last three quarters up to almost 12, what are the reasons for that and I know that you have new call centers, new direct marketing but are we - is that going to continue to kind of like start ramping up now or what is the kind of the outlook for that number?

Jeff, just in terms of clarification, were you talking about the service ...

Yes. The service cost in sales. Yes. The 11, it was running around 11 and now it was almost 12 million this last quarter.

OK. The - in terms of the overall cost, we certainly have, you know, new costs associated with the new call center as well as on some of our new initiatives. That being said, we have seen our overall gross service margins increase, you know, continually and as we have indicated earlier, they've gone from 42% in prior quarter - prior year, last year's first quarter to 45%. We anticipate that the overall dollars - absolute dollars of cost will continue to be increased as the revenue increases but that the margin percents will also continue to increase as long as indicated.

The absolute - I mean, your margins has gone up - the service margins has gone up sequentially every quarter for the last, almost, two years until this quarter regardless of the top-line number. I guess, I - what I'm trying to understand is I know that we have the extra call centers and the extra direct marketing expenses. Is the 11.9 like a full quarter of all of those costs or are we going to go up? Where is that going to settle out?

Yes. I think that - what you will see is that the majority of the absolute dollar increases is coming from the new call center but even with that, we anticipate that you will still continue to see the margins improve sequentially quarter-over-quarter.

But, Jeff, let me just help with one specific on that. I think in the first quarter, Mark, correct me if I'm wrong, we may have spent around $300,000 on direct marketing.

Approximately.

We're projecting about a $2 million initiative this year on direct marketing so what you can see is that there will be a seasonality or a ramp up to this as the year progresses.

OK. And the call - OK. So that's going to ramp up a little bit and the call center cost, was that a full quarter of the call - of the call center?

No. That was - that's really - you know, that was really a reduced amount. We're going to see that expand in terms of the overall cost but, as indicated earlier, it is not - you will still continue to see an increase in terms of the overall gross margin percent.

Yes. OK, great. Thanks, guys.

Just one clarification ...

Yes.

... in terms of the overall cost associated with the direct marketing, where you will see that - that is in the overall SG&A expenses and as we look at SG&A, that was one of the reasons why, you know, our SG&A expense is around 37% which was comparable with last year but those direct marketing was about 1% of that.

OK. OK. Great. Thank you.

The next question is a follow-up coming from James Bartlett of Bartlett Investments. Your line is live.

Yes. Could you expand more on this - of the national accounts program that you mentioned as a renewed focus on that with the Red Cross and the Visiting Nurse Association?

Well, I will. The - and I'll do it by illustration - and let's take the Red Cross as an example. The Red Cross is our largest customer. They're growing in excess of 15% per year. We have some wonderful partnerships. Last night at this academy, we gave an award to the Saint Louis chapter for growing their subscriber account, I think, by about 30 or 40% to around 1,500 subscribers and it hasn't been a program for very many years. The program manager's doing a terrific job. We're opening up a new Red Cross chapter in Indianapolis that will compliment one that's in Bloomington, Indiana. I can go across the country and give you specifics about the chapters.

What's important is that as the Red Cross headquarters in Falls Church, Virginia, that we have a marketing and a business plan that is being disseminated not only on a decentralized basis between our field sales force and that person in Bloomington or Indianapolis or Saint Louis but on a centralized basis in Falls Church and the reason that's the case is because these national accounts whether it's the Red Cross or whether it's the Visiting Nurse Association, there is tremendous pressure because of the economy, because of the healthcare system, because of the weakness of the United Way Campaigns, because of reimbursement on perspective pay for home care.

We try and bring clarity on a national or a central basis simultaneously with what's going on - on a decentralized basis within the community so that the messaging is in alignment between what we're doing at the field level and what the employees of this field branch are hearing from their headquarters and the more alignment we get, the more branches we can open and the more expansion that we can develop and if we just do it on a decentralized basis, as we've done it historically, it's very sub-optimal. So we've dedicated new people to a national accounts effort who will be spending time in the VNA headquarters in Boston, spending time in the Falls Church headquarters in Virginia and we have a couple of other national accounts we'll be bringing on in the next six months, which will also benefit from that. This is very different from the one-community-hospital-all-the-time model that has what's - been what's grown this business historically. Jim, I hope that answers the question.

Thank you.

Thank you. There are no further questions at this time. Mr. Feinstein?

Well, thank you very much. I thought we would wait a moment to see if there were any others. That concludes our conference call for the first quarter and we appreciate everyone's time today. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.