Koninklijke Philips NV (PHG) 2003 Q4 法說會逐字稿

Good day and welcome everyone to the Lifeline Systems, Inc. Fourth Quarter and Year-End 2003 Results Conference Call. Today's call is being recorded. With us is the President and Chief Executive Officer, Mr. Ronald Feinstein, and Vice President, Finance, Chief Financial Officer and Treasurer, Mr. Mark Beucler. At this time, I would like to turn the call over to Mr. Ronald Feinstein. Please go ahead, sir.

Thanks, Sheila. Thank you all for joining Lifeline Systems' Fourth Quarter and Fiscal 2003 Conference Call, and good morning. Mark will begin by discussing our financial results, after which I'll bring you up to date on our operations. Then, we'll take questions. Mark?

Thanks Ron, and good morning. I'd like to remind everyone that the matters that we are discussing include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to our recent SEC filings and public announcements for a detailed list of risk factors.

As you saw in our earnings release earlier this morning, Lifeline wrapped up the year with strong fourth quarter top line and bottom line results. For the quarter, total revenues increased 15% to 31.4 million, up from 27.3 million in the fourth quarter of 2002. Fourth quarter net income of 3.1 million, or 22 cents per diluted share, was 18% ahead of last year's fourth quarter income of 2.6 million, or 20 cents per diluted share.

During 2003, each quarter produced higher year-over-year revenues and net income, culminating in strong top and bottom line results that represent double-digit year-over-year gains. For fiscal year 2003, Lifeline's total revenues were 116.2 million, 11% ahead of last year's revenues of 105 million. Net income was 10.3 million, or 76 cents per diluted share, a 26% increase from 8.1 million, or 60 cents per diluted share in fiscal 2002. The 2003 net income figure includes a one-time benefit of $420,000, which represents a settlement with a former supplier.

The composition of Lifeline's revenues for the quarter and the year reflect several positive trends. As you are aware, our business model calls for a gradual shift in the mix of our revenues. Lifeline's recurring service revenues are increasing, offsetting gradual decreases in our traditional product sales. You can see evidence of this transition in our numbers. Our service revenues, which rose 16% for the fourth quarter to 23.8 million, accounted for 76% of total fourth quarter 2003 revenues. For the full year 2003, service revenues were up 16% to 90.7 million, comprising 78% of total revenues.

For the year, 2003 product revenues declined 6% to 24.2 million, accounting for 21% of total revenues, compared to 2002 product revenues of 25.6 million, or 24% of 2002 total revenues. We continue to grow our Senior Living Equipment business and are hopeful that in the next year or so, it could offset the decline in our traditional healthcare product revenues.

Lifeline's total gross margin continue to improve both in the fourth quarter and for the year. Our total gross margin for the fourth quarter was 53%, up from 51% a year earlier. And for the full year 2003, it was 52%, up from 50% in 2002. Our service gross margin showed strong growth for the 2003 fourth quarter, increasing to 48% from 46% in the fourth quarter of last year. For all of 2003, service gross margin increased 47% from 44% in 2002. Our product gross margin rose to 67% in the fourth quarter of 2003 from 66% in the fourth quarter of 2002, but was essentially unchanged at 68% for both full-year periods.

Lifeline's SG&A expenses as a percentage of revenues were essentially flat at 35% in both fourth quarters and 36% for both full-year periods. As we've discussed previously, our 2003 SG&A includes incremental expenses associated with our new direct marketing program, opening our Clarks Hill second monitoring site, our investment in the Senior Living sales and marketing initiative, and the cost related to integrating the March Networks acquisition.

Lifeline's liquidity metrics continue to improve. The company ended the year with a cash position of $21.4 million with no debt and working capital of 33.4 million. By comparison, at year-end 2002 Lifeline had a cash position of 11.1 million and working capital of 19.5 million.

The company's days sales outstanding improved to 35 days at the end of 2003 from 38 days a year earlier, and to put this in perspective, 46 days two years ago. Our ability to sustain improvement in our DSOs further documents our commitment to quality and service excellence as well as the fact that our strategic investment in cash management software and technology is paying off.

Cap ex was 2.5 million for the fourth quarter of 2003 and 11.2 million for the full year. We expect that cap ex will be at a similar level in 2004.

Lastly, I wanted to mention the two-for-one stock split was completed on schedule in December following the requisite approval of shareholders for an increase in the authorized shares. Our Board took the action of approving the stock split largely because of its positive outlook for the future growth of the company and the desire to create an opportunity for more investors to own shares.

I will now turn the call back to Ron.

Thanks, Mark.

Two-thousand-and-three was a year of few surprises. We set out at the beginning of the year to continue achieving incremental process improvements and operating efficiencies by working our strategy of leveraging technology investments to improve customer service and grow our business organically. We accomplished many of our goals. We reaped the benefits of continuing to invest in our company and its people. Every day we become faster, more accurate, more readily accessible, and more caring. At the same time, we've achieved the impressive combination of growing revenues, improving quality, lowering cost, and increasing profit margins. What a wonderfully winning combination. Let me list a few of the key factors that have influenced these results, after which I'm going to devote my remaining comments to Lifeline's initiatives for 2004.

The first key factor influencing 2003's results is that we significantly improved the top line performance of our service segment, which was the result of a combination of refinements, the most telling one being that Lifeline increased the average lifetime revenue per subscriber to approximately $450. We're improving customer service with process improvements to reduce error, accelerate speed, and strengthen our focus on total quality management. We're using friendlier systems like our PeopleSoft billing systems and our new Care Partner Connect Channel Automation and relationship management platform, and of course, our comprehensive monitoring platform, Care System, which in Canada is called Care Master.

Along with increasing our base of centrally-monitored subscribers to more than 386,000, we've increased the average time the subscribers are on our service to nearly two years. We've implemented selected pricing strategies and worked with our channel partners to outsource more of the value chain to Lifeline. With these programs, Lifeline has continued to increase its average monthly revenue per subscriber, reaching $20.20 by the end of the fourth quarter versus $18.34 for the comparable period of 2002.

The next key factor influencing 2003 performance is the - is that we expanded the profitability and capability of our service segment by investing in our infrastructure and resources. This demonstrates the important role technology and process improvements play in positioning enhanced customer service as a value proposition. Replacing our legacy call center platform has been one of the primary contributors to the consistent improvement in Lifeline's service gross margin. By operating our new fully redundant call center at Parks Hill, we equipped the company with a disaster recovery capability unequaled in our industry. We're also using Clarks Hill for our Lifeline Academy training seminars which we're offering to our largest customers. And our academy graduates are consistently increasing their programs subscriber growth at a higher rate than the company average.

Our investments in the Lifeline team during 2003 included creating and filling new vice president general manager positions to head our Senior Living and Lifeline One Source Divisions, the latter being formerly known as Business Management Services. We filled a similar position overseeing our Government Services Division which will help ensure our compliance with HIPAA laws. In addition, we added to our Board two independent directors with strong backgrounds in eldercare, senior housing, healthcare, and disease management.

The total quality management culture that embodies Lifeline means that we are also looking for ways to improve customer satisfaction. TQM has helped lower subscriber churn rates, response times in our call centers, abandon rates in our customer sales telemarketing group, employee turnover, and days sales outstanding.

The third factor involves completing our first full year of direct marketing initiatives into the healthcare arena, and we're ahead of schedule in database management and sharpening our campaign fulfillment skills. During the fourth quarter, we added approximately 20,000 names to our referral database for a total year-end of 154,000. That exceeded our 2003 year-end goal of 125,000 names, but more importantly, we can point to approximately 12,000 new subscribers that we added in 2003 as a benefit of our direct marketing program.

We're driving growth by running more campaigns on behalf of hospitals, expanding our market penetration, and building a broader awareness of Lifeline's services. The reasons that direct marketing campaign is taking hold is because the resources of the local Lifeline hospitals are stretched to their limit every day. By transitioning these hospital programs to our direct marketing campaigns, we're not only lessening the workload for our hospital partners, but we're also increasing the likelihood that their patients will become subscribers.

We expect that the factors that contributed to 2003's success will continue to yield improved growth rates in 2004. But the opportunity for improvement is far from over. To succeed, Lifeline needs to continue to get better at what it does, increasing productivity without inflating costs, and finding new avenues to organic growth.

Before we discuss 2004, I want to take a moment to thank our Board of Directors for the role it has played in the arena of Corporate Governance. They continue to invest the time, energy, and resources necessary to achieve the highest levels of regulatory compliance. Recently the Board approved a series of Board committee charters, code of ethics, corporate governance policies and guidelines for Lifeline. I invite you to review these documents in the next few weeks by visiting the Investor Relations section of our Web site.

Now I want to touch on our goals that we've set for ourselves for 2004, our 30th anniversary year, having been founded in 1974. Our core strategy remains intact. It involves continuing to improve customer satisfaction with service enhancements and greater competencies, increasing service revenues and margins, and our most challenging goal, accelerating real organic revenue growth through subscriber growth and market penetration of both the Personal Response service and the Senior Living segments of our business.

To pursue these goals, we'll be focusing on the following initiatives. The first is the continuing improvement in our competencies around direct marketing. After investing nearly $2 million in this strategy in 2003 and again at least that in 2004, it appears that this program will be accretive later in 2004, well ahead of our three-year schedule.

The second initiative is making service an ongoing growth strategy and value proposition. We will continue to listen to our customers and focus on quality improvements. This begins with realigning our sales, customer service, finance and other teams in ways that allow each group to specialize on their customers. This can range from our healthcare channel to Senior Living and across to our Lifeline One Source subscribers and our Government Services Division. This will create a backdrop of service excellence we can leverage.

The third initiative is determining who is paying for services and refining the marketing message accordingly. Increasingly, we're seeing a larger percentage of baby boomer children paying their parents' Lifeline bill. We'll begin directing our marketing strategies to meet the expectations of this audience which could include digital marketing knowing that they frequent the Internet in addition to the healthcare system for solutions.

Our next initiative is becoming a leading provider of Personal Response service to the Senior Living industry. Pursuing this initiative led to the March Networks acquisition that we discussed earlier. Exploiting the synergies between the two companies and the two industries means going after the pullcord, an obsolete warning device, and targeting the larger operators of eldercare facilities including national chains of for-profit assisted living centers. Currently we sell them the equipment and offer to provide monitoring services. Our hope is that we can gradually upgrade and retrofit their equipment - these equipment customers and eventually provide some of their monitoring needs. Our implementation of the Senior Living program will be gradual but promising.

The fifth initiative involves developing complementary channel strategies. Here the opportunities are clearly evolving. In fact, some are only concepts that have yet to be explored. They include everything from finding new ways to use Internet sales as a channel of distribution and expanding our referral sources to include subacute care, homecare, non-medical homecare, and pursuing employer eldercare benefit plans among others. One segment that we're currently pursuing is improving the competencies around chronic illness.

Elders with chronic heart disease are the most frequent users of emergency rooms. Lifeline can tap into this market by being slightly more clinical and customizing its messages accordingly in ways that allow it to reach different referral sources and different departments within the community hospital. Our service could only help relieve the patient's anxiety and reduce the number of unnecessary trips to the emergency room. Our reminder services may reduce hospital lengths of stay for congestive heart failure patients, as well.

We will also be implementing our nationwide market development coordinator program, a new initiative devoted to intensifying the communications between our healthcare referral sources and our marketing outreach efforts. This program will further complement both our sales force and direct mail efforts and strengthen our relationships with referral sources and individual Lifeline programs at local hospitals.

And the last initiative involves improving the profitability of our Medicaid business. This business continues to account for less than 10% of our subscribers. Lifeline's goal is to streamline its systems, improve subscriber intake, billing, and collection procedures to the point where it meets our profitability requirements. Only then will we attempt to grow the Medicaid subscriber base beyond the less than 10% of subscribers it currently represents.

In summary, this has been another quarter and another year of achievement for Lifeline. Some of the achievements have been incremental. Others have contributed to strong results. All told, we're gratified by our performance and the contribution of our dedicated staff and business partners. While we've accomplished a lot, there's still an untapped market of roughly six million elders not currently using any personal response services. The potential for the growth of this industry and Lifeline's leadership position is enormous. We believe our commitment to total quality management coupled with favorable trends and demographics in our industry and the low-cost peace of mind solution we provide to elders define a favorable outlook for Lifeline.

Thank you, and we now invite your questions.

Thank you. [OPERATOR INSTRUCTIONS]

And we'll take our first question from Mitra Ramgopal of Sidoti. Please go ahead.

Yes, hi. Good morning, guys. Just a few questions - first, if you can give us a sense of - in terms of the Senior Living equipment - how much revenue you derived from that in 2003. And secondly, I think Ron you mentioned the average lifetime rev per sub up to 450 right now. If you can give us a sense of what that used to be maybe a couple years ago and where ultimately you see that over the next couple of years. And finally, if you can address the traditional marketing channel for your subscribers - the hospital-based given the subscriber growth you saw in 2003 in terms of what came from the direct marketing versus the hospital-based.

Well, let me take the Senior Living question first. Our revenue in 2003 is approximately $5 million on that segment, Mitra. And that's almost exclusively equipment - I would say probably 85-90%. Some of it is recurring service revenue, but it's a small component.

The - let me go to your third question, which is the subscriber growth - the direct marketing versus the traditional marketing. We are overlapping the two initiatives, and to the degree that we do overlap it we're not working extraordinarily hard to give credit to direct mail versus our field sales market development activities, as an example. But as best we can determine we think that, as I indicated in my comments, about 12,000 subscribers came from direct marketing. We expect that to accelerate this year as we refine our process, and we're hoping that it will have a positive impact on the overall 6% organic growth - 5-6% organic growth that we've been experiencing. So the mix is a little bit hard to separate since the referral sources are the same in many cases as the hospitals are currently using.

Let me just ask you to repeat the second question.

I think you mentioned the average lifetime revenue per sub is about $450.

Right.

If you can give us a sense of what that used to be maybe a couple of years ago and where you see that going over the next couple of years.

Well, let me start with that 450 is approximately two years at approximately $20 per month per subscriber. If we take a look at the last, let's say couple of years, the average revenue per subscriber - and I'm (inaudible) the full - the full year numbers, last year the average for the full year was about $19.75. That was $20.20 in the fourth quarter for that year. The previous year was $17.91; the previous year was 16.76; and the previous year 15.49. So from 2000 to 2003, it's gone up by over $4.

Now, at the consumer level, our subscribers can pay anywhere from 30 to 37 to $45 per month through our channels of distribution, so as you can see the mix change, depending upon how much value chain is outsourced from our channel to us would continue to give us robust upside potential. We do not have a target number I can give you, but we can certainly see the 450 continuing to accelerate and hopefully materially over the next few years.

OK, thanks.

And we'll take our next question from Jim Bartlett of Bartlett Investors. Please go ahead.

Just following up on the first question, it's - you said two years at $20 per subscriber. That - let's go back and say, you know, what was the length of time in the prior years.

The data that we were collecting on the average revenue is a little bit more accurate than the data that we were collecting on the length of stay, and the reason that's the case has to do with some of the metrics that we had in place. But I would say that we go back over time and can find that there was a point when we were at 15 months and another point when we were at 18 months, but I hesitate to target the exact year of that because some of those numbers aren't as sharp as I'd like them to be. I can just tell you that over a period of, let's say of the '90s when we started the service revenue model, it started as low as that 15-month horizon.

Now, obviously, we consider it a key performance indicator and we're tracking it very carefully, so going forward I think we'll be able to articulate it not in monthly terms but even in daily terms. If we increase our length of stay by one day, it could generate a quarter of a million dollars worth of incremental revenue. That's significant profit for the company, so ...

Did you have that data one year ago?

I think that the data we would have one year ago isn't as sharp in 2002 as I'd want to quote a number from, but I would say it's - you know, it might be twenty-two-and-a-half months - something like that.

OK.

It was only - it was only - Jim, it was only in 2003 that we really shifted focus from the average revenue per month to the length of stay on the service as a key metric to drive the company's strategy. And as a result of that, we've launched a number of initiatives focusing on getting the subscriber onto the service sooner and keeping them on the service longer. And these are all new strategies within the company.

OK. Could you also go into the Ceridian deal? Has that had any impact as of yet? And you could just talk a little bit about more of what you expect there.

Ceridian, for those on the call that are not familiar, is a very large Minneapolis-based company providing work/life solutions to employers of all sizes. They're in the Fortune 50 as well as Small Business. As they have shifted their benefit strategies from, for example, childcare to eldercare and embraced the marketing of our service, we are just beginning to generate marketing at the employer level. And I would say we have hundreds of subscribers initially and not thousands of subscribers. In other words, we're just getting started with this marketing.

We're optimistic that it is going to be material. We feel that way because the workforce is a baby boomer workforce and they're having pretty significant caregiving issues with their parents. Ceridian is aggressively behind it and promoting it very actively. So, you know, I can equate it to in past times I remember when we first got started with the Red Cross, we were dealing with hundreds of subscribers and it took several years for that to become a material strategic partner of ours. I expect this to be the same level of gradual ramp-up.

OK. One other question - you said the (inaudible) that you could - believed you could identify as new subscribers benefitting from the direct mail services and you'd like to accelerate that this year. What do you think you could accelerate it to?

Well, we have internal goals. We have targets. And they are materially higher - probably more than 50% higher, I would imagine. Is that right, Mark?

Yes, that's right. An internal target that we have is closer to 20,000 incremental subscribers. And as we go through and further analyze those incremental subscribers, some are truly incremental because we're touching referral sources that our field sales force doesn't currently touch, and some are incremental subscribers from existing referral sources. So that's the target.

And the number of Medicaid subscribers - didn't you get rid of some of those in 2003?

We did. We ...

How many - how big was that number?

I would guess it was in the range of probably 5,000 - maybe a little bit less than that. But it was a material number. These were - these were programs and contracts and agreements where we were losing money.

OK, thank you. I'll let someone else ask a question.

And we'll go next to Greg Fortunov (ph) of First New York. Please go ahead.

Hi. Good morning. You mentioned some additions to your Board. And one of the people that you mentioned - I don't know if you mentioned their name - is someone who is an expert in disease management, and this is the first I've heard you mention that. Can you elaborate on what your thoughts are in that area?

Well, the fellow that I was referencing is Dr. Casscells from the University of Houston. He is a renowned world speaker in disease management related to cardiovascular disease; he is a cardiologist; he's involved in a number of different ventures, experiments, pilots, and an expert in remote patient monitoring. I don't want to suggest that our strategy is around either telemedicine or remote patient monitoring our disease management, but I do want to say that it is - I think it's important to have that kind of competency on our Board given the number of our subscribers that have chronic illnesses and some of the enormous pressures that the healthcare system is under to reduce the cost of the elderly patient.

So you're basically looking to increase your current (inaudible) in that area just to enhance what you currently offer. You're not looking to get into disease management, per se.

Not at this stage.

OK. The last question is, I mean, you have a - obviously a wonderful balance sheet with all that cash and certainly no debt, but right now, I mean, you're obviously not making much money on the cash and there have been some studies that say some manner of leverage is good. Are you planning to stay in this position, I mean, or are there plans to use the money in a way that would benefit shareholders?

Mark, do you want to comment on the cash?

Sure. We're aware of the levels of cash we currently have, and we're quite pleased that the company continues to throw up cash every month in every quarter. We look internally to strategically deploy that cash in a very disciplined way perhaps for an acquisition at some point in the future, but currently we don't have any plans that we can discuss.

OK, thank you very much. Nice job. Thank you.

Once again as a reminder, if you would like to ask a question or if you have a follow-up question, please press the star key followed by the digit one. And we'll take our next question from Joel Gray (ph) of Wachovia Securities. Please go ahead.

Good morning, folks.

Good morning, Joel (ph).

I was wondering if you could expand a little bit upon your concept of complimentary channel strategies. That's a little bit of an extension of the last question, vis-à-vis disease management. You've mentioned you want to be more a homecare substitute eldercare services and so on. How do you plan on developing some of these new initiatives?

We grew up on the community hospital, and we got there first. It was - as the textbook says, we were the first mover and established a channel and the brand and we've done a - we've had a wonderful relationship with that channel. I used the baby boomer as an example, but if you take a look at the children now that we're doing the invoicing for many of the hospitals and seeing the children pay the bill, the children may get their input as it relates to the care plan outside of the discharge planning function at the hospital. They may go up on the Internet and search for solutions about eldercare at home. We historically have not been an e-commerce oriented company. Digital marketing hasn't even been in our vocabulary. So we're going to develop a competency around the direct marketing through the Internet to the children.

I think it was Jim Bartlett that asked a question about Ceridian. Well, employers are a channel of distribution. Someone said something about the Medicaid component which we've always deemphasized. Well, as we streamline the process improvements to increase the profitability, we are going to be much more cognizant of which states we want to take a position in where we can make money where historically when it was all blended together. We would take a look at Texas, we'd look at Ohio, we'd look at Massachusetts, we'd look at them all and not understand the profitability by state because even though everyone had a different contract, it was blended. So the government piece is a channel in its own right.

When we embrace national contracts with homecare agencies like the Visiting Nurse Association of America, the VNAA, that is a new opportunity for us. There's affinity groups out there that we could market to such as a very large teachers retirement union. There are really more opportunities than we have resources to exploit, so the trick for us is to be able to prioritize which of those to develop, which are complementary to our core community eldercare system within the hospitals, and which ones going forward are going to change in ways that could materially open this barrier to entry that currently exists to penetrating the under-penetrated markets. So it's a constant channel marketing strategy.

Is there a significant capital investment or people investment that you will need as part of this or will it be via affiliations, as an example with the VNAA or other senior living organizations or disease management organizations?

Well, at one end of the extreme, I would say that the incremental cost would be immaterial. And I don't want to suggest that we don't spend a lot of money in dollars and resources, for example, on our relationship with Ceridian or with the Red Cross or things of that sort. We do. But at the other end, if we decided, for example, that we were going to take our direct marketing competency outside of the hospital and bring it to the marketplace at the consumer level, the materiality of direct marketing at the consumer level would be very material to the company and obviously require a level of competency the company doesn't have today. So, you know, I think that the answer is a function of which channel strategies we embrace. Currently the channel strategies that we're embracing do not require more than incremental resources.

Thank you very much.

And we do have a follow-up question from Jim Bartlett of Bartlett Investors. Please go ahead.

What are your objectives for Senior Living this year?

Well, our goal is pretty significant equipment growth, probably at least a 50% - maybe greater than that revenue growth on the hardware side. It also is a strategic repositioning of the strategy to begin to develop sourcing relationships with some of the very large for-profit chains. I'm reluctant to mention any specific customers, but we are actively working with really I think the best of the best of the national chains on vendor relationships.

When did you start doing (inaudible)?

Well, we hired a vice president and general manager a year ago, so 2003 really was the first year. We hired some additional salespeople, we dedicated separate product management to it, we began the definition of the product line strategy because obviously the product line in an assisted living facility with common areas and with different wireless requirements is quite different than the residential situation in a person's home - the mix of product is different. So I would say that 2003 was the first material investment we made in it.

So, and as far as marketing there, this is something because you were going after pullcord before, so this is (inaudible) marketing towards the large chains, this is recent within the last quarter?

I would say it's been the full year but certainly the second half of '03 more than the first half. There is a - if you stand far enough back in looking at the senior living initiative, Jim, there's synergy on a number of levels. The most obvious is the sale of equipment to this category. But the senior living market is becoming a market that's actually doing discharge planning. It used to be you'd go into an assisted living facility and that was a one-way street. That's not the case anymore. It used to be that apartment buildings that aged in place didn't require technology. That's changing materially. It used to be that you wouldn't take Lifeline with you when you left your home and you went to another eldercare setting. That's changing. And of course, as you take a look at the technologies that are being used in this environment beyond this pullcord technology, there's opportunities for fall detection, wandering and inactivity, and a host of other new technologies. So we think that long-term strategically this is a good fit for us.

Well, sounds good. Thank you.

And at this time it appears there are no further questions. Mr. Feinstein, I'd like to turn the conference back over to you for any additional or closing remarks.

Well, I just want to thank everyone for taking the time and appreciate the support that we're getting. Have a good day.

And that does conclude today's conference. We thank you for your participation and you may disconnect at this time.