沃博聯公司 (WBA) 2007 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to today's conference, the Second Quarter Financial Results. (OPERATOR INSTRUCTIONS) At this time it is my pleasure to turn the floor over to your host, Hope Van Dyke. Ma'am, the floor is yours.

Thank you. Good afternoon everyone and thanks for joining us today. First let me apologize for any inconvenience in the call-in process. We were informed moments ago that there are technical difficulties with our dedicated call-in number and all callers are being rerouted to a new number.

With that said, with us from management today are Frank Martin, Chairman, David Bock, Executive Vice President and Chief Financial Officer and Dr. Ray Fabius, President and Chief Medical Officer.

Before starting the call I'd like to read the Safe Harbor statement. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words anticipate, believes, estimates, expects, intends, may, plans, projects, will, would and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ possibly materially from what the Company now anticipates. Management has outlined the risks about the Company's business in the section titled, "Risk Factors" and "Management Discussion and Analysis of Financial Conditions and Results of Operations," in the most recent Annual Report on Form 10-K and the Quarterly Report on Form 10-Q. These reports are on file with the Securities and Exchange Commission and they should be reviewed with great care because all forward-looking statements that management makes during this conference call or otherwise should be interpreted in light of the risks appraised in those reports. I-trax is not under any obligation to update the guidance or any other statements discussed on this conference call and investors should not assume that the Company would update any of these statements.

With that, I'll turn the call over to Frank Martin.

Thank you, Hope, and welcome everyone to our 2007 Second Quarter Conference Call. We're short one member of the team today as our Chief Executive Officer Dixon Thayer got a little too enthusiastic about living the vision and leading by example and he is recuperating from injuries from a bicycle riding accident; but he is fine and we're looking forward to his return shortly.

As usual, I will give a brief introduction to the call, David will take us through the financial results for the quarter and then Ray will talk about the investments we are making to enhance clinical excellence and to produce proof of concept results through our research and development. And then I will wrap up.

Once again we had a record quarter with accelerating growth rates. We ended the quarter with 225 sites and 103 customers, up from 220 and 101 customers at the end of the first quarter. Since the end of the quarter we've opened an additional five sites and our total now is 230. We've had a great quarter for new business and we now have 260 active or committed sites. We're extremely proud of recent proof of the success of our multi-site strategy as we've just been awarded a 15-site agreement after a successful pilot for a major chemical company. These are new sites and they will roll out at the rate of one per month starting in the first quarter of 2007. Our trend of winning multi-site deals continues to build at an accelerating pace.

Another great advancement since the end of the last quarter is that we're in the middle of negotiating our pharmaceutical supply contracts and we are very excited that the result will yield millions of dollars of benefits that will inure to us over the life of the new contract. We expect this to start in the fourth quarter of this year, as well.

Now I'd like to turn it over to David.

Thank you, Frank, and good afternoon everybody. I would appreciate it if you could refer to the press release and the attached tables as we go through this discussion of financial results. If you don't have a copy it's available on our website.

Let me, first of all, talk a little bit about our revenue and gross margin. As Frank mentioned, our second quarter revenue was up 15% over the prior year. That's an acceleration over the last several quarters. In fact, the last four quarters have seen a progression in our growth rate as follows - from 5.8% to 6.9% to 9.9% to now 15%. So we're seeing an acceleration in the rate of growth of the top line very consistent with our expectations at the beginning of the year. Our first half revenue was up 12.4% versus '06 and our gross margin was 24% compared to 24.2% in the second quarter of 2006. Now the first half gross margin was 24.1% versus 23.7% in the comparable period of 2006. Overall, the revenue growth and gross margin are in line with expectations and this acceleration in revenue, we believe, is directly related to the investments that we're making in sales and marketing. We're winning major deals including the 15-site award mentioned by Frank and the sales pipeline is up more than 25% for the second quarter in a row. Frank will talk more about this in a moment.

Our trailing 12-month gross margin was 25.3% versus 24.1% for a year ago. We're up 1.2% on a trailing 12-month basis in our gross margins. Our lift-out strategy which, as you'll recall, is directed towards marketing programs and to the corporate leadership of major companies in the services and manufacturing industries, continues to make progress and we continue to believe that multi-site transactions will increase in number and be a major contributor to our revenue growth.

In terms of our KPIs around revenue and gross margins, the same-site revenue growth in the second quarter was 2.2%. We're still showing nice growth in the same-site area. The new site gross margin was 1.2 -- the ratio of the new site gross margin to existing site gross margin was 1.25 which means that we're bringing on new sites at 25% margins than our existing sites. And the number of non-occupational visits grew by 1.9% in the quarter. The trend is also positive.

Let me also mention something about our pharmaceutical sales. As many of you will recall that we don't report as part of our net revenues the pharmaceutical sales. They represented in the first half about $72.7 million excluding the rebate to customers. Now that's an annualized rate of $145 million, so that's the annualized rate from the first half of our pharmaceutical sales which is over and above the net revenue that we report.

Looking at it in terms of the two broad groupings, our pharmacy business versus the other on-site business, the gross pharmacy revenue was $175 million annualized on first half results. And the on-site revenue annualized, as well on first half results, was $105 million, so for a total of $280 million of gross revenue.

Let me now turn to our G&A. As you'll see from the earnings release and the tables, our overall G&A increased by $1.7 million in the quarter or by 28.4% and by $2.8 million or 23% for the first half compared to the same period in 2006. Now this G&A growth reflects a deliberate strategy to build a business of the future by careful investment in several categories of expense while maintaining control over other spending.

Our discretionary spending which is mainly on sales and marketing and research and development, accounted for about $0.5 million of the increased spending on G&A in the first quarter, that's about 32% of the G&A growth in the second quarter. And in the first half, those two categories, sales and marketing and research and development, accounted for $1.1 million of the growth or about 40% of total G&A increase in the first half. And a further $0.3 million of the first half G&A increase was due to higher non-cash stock compensation expense.

Now this reflects -- this increased expense emerges out of an ongoing, long-term incentive program which we have put in place that is designed to align our employees with the long-term shareholder interests. Now if you look at our G&A spending excluding these three categories, that is sales and marketing, research and development and long-term incentive program, that spending was 18.0% of revenue in the second quarter versus 17.1% a year ago. On the first half it was 17.3% versus 17.1% so we're essentially flat as a percentage of revenue on our key measure of G&A growth.

We're also, I should mention in this regard, we're in the middle of a major upgrade in our operating systems and IT infrastructure. We're rolling out new systems for pharmacy and our on-site operations. These are off-the-shelf, web-enabled, externally hosted and they are designed to provide us with highly scalable operation, lower maintenance costs, better client reporting and improved efficiency as well as sustaining our extraordinary clinical excellence as Ray will talk about.

As a result, we believe these investments will lead to lower G&A and non-billable overhead relative to our revenue. And these are, we believe, very solid investments and a majority of this spending is capitalized, but a significant portion also hits our current period G&A. And in the first quarter, the increase in IT-related expenses represented about 15% of G&A growth and for the first half it represented about 20%, 22% of our first half G&A growth. So you can see that in that -- within that category of our core G&A which we have held relatively flat, as a percentage of revenue there is a major component of that growth that is accounted for by just increased IT which is, in itself, another form of investment in the business of the future.

Now we believe that these increased expenses are totally justified as investments in growing the business. We believe that we're seeing clear proof of concepts and significant competitive advantage in the marketplace. We're seeing increased customer awareness and we're seeing accelerated growth of the revenue and margins and we're seeing a stretching out of our lead in terms of clinical excellence and programs of quality assurance. We're building increasingly. As we roll out, we're seeing a scalable and efficient infrastructure take shape and we're proud of our highly committed and motivated employees.

Let me conclude this discussion of G&A with a couple of other comments by saying that if you put this investment spending in perspective, if you take the sales and marketing, research and development, our long-term incentive program and the IT spending, that accounts for more than 70% of our G&A growth for the first half. And the balance of our G&A growth was only about $0.8 million and it grew at a rate of 9.3%. So we think we're accomplishing what we wanted which was to investment in the growth of the future while containing the growth of other G&A. And as we typically reported in the past, we've also noted the element of our G&A growth it was due to a mandate for Sarbanes Oxley in the first quarter that was -- first half, that was about $0.3 million.

Now I want to mention, draw attention also, to the fact that our second quarter and first half results were favorably affected by an insurance-related gain of $1.4 million which is reported under "Other Income" in our statement of operations. This represents a refund of professional liability premiums paid over the past three years and it reflects the quality of our, excuse me, quality of our clinical risk management programs and the successful and conservative financial management of our captive professional liability insurance subsidiary and Ray is going to expand on this point in a moment. In keeping with our growth and investment strategy, we have effectively used those insurance gains to fund the higher first-half G&A expenses just discussed.

Finally, I want to mention that we are in the process of moving our national offices into lower cost but larger space that will accommodate our growth in operations. Nashville is our operational and financial center; it's where the majority of our corporate staff employees are located. Now this move will result in an early termination of our existing lease and result in a charge of about -- approximately $1 million in the third quarter. This charge is more than offset by the savings we expect to realize from the move and it is being financed and rolled into the new lease financed by our landlord.

Let me now turn to our earnings and EBITDA of net income. Including the insurance refund I just mentioned, the second quarter EBITDA was $2.1 million, an increase of 56.5% over the second quarter of '06. And our first half EBITDA was $3.2 million, an increase of 30.9% over the same period last year. Our second quarter net income was $0.7 million which is up $0.2 million in 2006, an increase of 183%. And our first half net income was $0.7 million, an increase of 218% over the same period in 2006. Earnings per share were $0.01 per share for both the second quarter and the first six months of 2007 and that compares to a negative $0.01 per share in the first half of 2006.

On terms of cash flow and balance sheet metrics during the second quarter, we extended the term of our revolving credit facility. We increased it to $20 million and we reduced the fees and spread on the facility. At the quarter's end we had $7.1 million in cash and $14.4 million in debt outstanding. Our current ratio improved to 1.61 from 1.12 at the end of 2006. We used about $0.4 million in cash in our operations and about $0.6 million in investing activities and we financed this by additional drawings on our credit facility.

Let me sum up this portion of the presentation by saying that we are very pleased with progress, that we see many tangible and intangible results as Ray and Frank will discuss further in a moment. And as we have said repeatedly, in this process we are seeking to achieve a balance between current and future profitability. Our investments in sales and marketing, new product development and information technology have been financed with internally generated cash flow and debt and we have not raised new equity since the acquisition of CHD Meridian in early 2004. We continue to expand -- continue to pursue acquisition and disruptive growth opportunities which we expect will add significant additional revenue and earnings in 2008. Thank you very much and let me now turn it over to Ray.

Good afternoon, everyone. Our investment in our infrastructure continues to distance us from our competition. Last investor call I focused on our national conference and association activities, our clinical scorecard and our remarkable contributions to the medical literature. This call I would like to highlight our efforts in patient safety, clinical support and training and our wellness and prevention suite of services.

Increasingly, patient safety is being recognized as a fundamental component of quality healthcare. The Institute of Medicine has published two books to create greater awareness and proposes activities to markedly reduce medical errors. Few organizations have adopted as many of these solutions as CHD Meridian. Principal among them is creating a culture of safety, encouraging our trusted clinicians to continuously improve the structure and process we use to deliver care.

This quarter we were able to substantially reduce the cost of our professional liability insurance. This benefit is a reflection of our remarkably lower claims activity. In fact, when comparing our encounter numbers to our claims activities, our patients' safety and quality management programs exceed Six Sigma performance.

We have made significant investment into an electronic platform called [Eye] Center to support our clinical community, the 1,400 clinicians who provide care in 34 states. This platform now includes a real-time decision support tool that allows our healthcare providers access to evidence-based care guidelines during patient visits. Additionally, we have converted over 100 medical training program modules into an easy-to-access online format. Since the beginning of this year, we have delivered six courses in live classroom settings throughout the country and distributed nearly 1,000 continuing medical educational units to our doctors and nurses. Our programs include the treatment of back pain, ergonomics, and return to work programs, all intended to help injured and ill employees recover and return to work quickly.

Finally, the National Committee for Quality Assurance, NCQA, featured an interview with me in their recent quality profiles focused on wellness and prevention. There is arguably no better forum for our healthy measure suite of wellness and preventative services to be included. As employers become more enlightened, they are investing in the health of their workforce. Our research has already demonstrated that the workplace offers an advantaged platform for wellness and prevention programs and the marketplace is responding.

We are excited by our first sale of fully integrated wellness and disease management to an existing client. This value-added suite of services includes lifestyle change programs, screening tools with health coaching and chronic illness management all administered through the trusted clinicians at the workplace. It is a pleasure to share these activities and patient safety, clinical support and training and wellness and prevention with you. Each of these efforts position our Company as a leader in healthcare delivery.

Frank?

Thanks, Ray. While we remain on course for a very good year and we are now prepared for significant breakthroughs over the next 9 to 12 months. As you have heard, our top line is accelerating for the third quarter in a row, our gross margin continues to remain ahead of last year as well, and we continue to maintain a very good balance between short-term profitability while making substantial investments in our growth and discretionary business spending. And we, once again, achieved awareness and respect in the field for acceptance of our proof-of-concept research and popular peer-reviewed medical journals.

Now regarding the composition, excuse me, of what I'll call our two baskets of future sales opportunities, the first being our mainstream sales opportunities as a result of our current multi-site marketing and sales activity and the second being our strategic basket of mega-opportunities. First regarding the mainstream basket, the dollar value of potential sales opportunities where we are formally engaged in a proposal process at the request of a prospect, is up this quarter by about one-third and up over 75% since the beginning of the year. This extraordinary growth in our mainstream sales opportunities is clear evidence that our investment in sales and marketing are bearing fruit. The pipeline is already looking like a hockey stick and clearly patient investors will be rewarded.

Also, the average size of each proposal continues to remain much larger than ever before due to requests for larger full-service health centers like our Toyota San Antonio facility that opened its doors January 1st of this year; requests for more multi-site engagements than ever before are coming in. In addition to the 15 site opportunity already mentioned, other larger engagements are moving through our pipeline. We'll give you more on this in the future once we've receive permission to mention names.

Now regarding our strategic mega-opportunity basket, as we said on our last call we're actively pursuing a handful of initiatives the scale of which is quite a bit larger than the whole mainstream basket I've just reviewed. Of course these are harder to accomplish so they are less predictable in their probability and timing and like Dixon would say, if he were saying this, lumpy!

But the scale of the return on these opportunities is huge. So in summary, we think we're in great shape in all aspects of our business in pipeline development, in clinical excellence and scalable infrastructure investments and now we'd like to take your questions.

(OPERATOR INSTRUCTIONS) Brooks O'Neil, Dougherty & Company.

Good afternoon, this is Deepak Chaulagai filling in for Brooks O'Neil. I had a few questions here. How important do you think is a (inaudible) drug pharmacy with the physician service to your employers rather than just a standalone service that you might offer?

I'm so happy that you asked that question. That actually is a question that reflects on our recent research that we published around antibiotic prescribing as an example of the influence of the integration between primary care and pharmacy. We have been using the term "pharmacy clinical leadership" as a way of explaining how important the influence of a dedicated primary care doctor working in concert with a dedicated pharmacist can be. And we look forward in the not too distant future to share in the medical literature some recent research that we've completed to demonstrate that we can augment so many programs that up to this point have been promoted by pharmacy benefit managers. When you have a primary care doctor and a pharmacist working together you can demonstrate better generic usage, greater formulary compliance as well as improved prescribing.

Let me just add to that that one of the things we've demonstrated with our model is that the benefits of having the pharmacy are very much tied to the -- being able to control the pen, being able to have this integration so while we show substantial savings in our standalone pharmacies, the really big pay-off for our clients is when they integrate the pharmacy and the primary care and, indeed, now as we're seeing there is additional pay-offs that come from integrating wellness programs into some of our sites where we don't have full-blown primary care but we have primary care [light] and we have wellness. So it's the integration and, as Ray described, it happens at the clinical level. It is really this integrated pharmacy care where you have physicians and doctors working together that have pay-off for the patient but it also has a pay-off for the employer sponsor in the fact that that's where the financial and cost saving benefits arise, as well.

That's very helpful. Thank you.

Stuart Goldberg, Somerset Capital.

Quick question for you, the new contract with the chemical company, the 15 sites, is that purely healthcare or is there a pharmacy included in that?

Initially it will be purely healthcare.

Initially. So you will be working towards trying to get pharmacy?

We work towards trying to get pharmacy everywhere we can. But, yes.

And when you talk about the difference between mainstream pipeline and the mega-pipeline, would the chemical plant fall into the mainstream pipeline?

Yes. It would.

So you have -- you are working on, and I realize these are very lumpy but long-tail deals, you're working on things bigger than a 15-site win, now?

That's correct.

With the 230 sites open, can you break that down between who many are just pharma alone?

I would say --

You mean, standalone pharmacies?

Yes.

And then nothing else associated with it? There are about --

Seven, I believe.

Seven standalone and how many have pharmacies? So there's 223 standalone, how many of the 223 have pharmacies?

About 23.

And of the 260 active and committed, how many are going to have pharmacies?

That I can't tell you, Stuart, I'm sorry.

Tell me because you don't want -- it's material non-public or you don't know?

It's more about -- it's more non-public. I mean, where some of the committed sites are not yet under contract even though we've signed a memorandum of understanding or we've got an award and I'd rather, before we gave you the specific number, have those contracted. But one thing I will tell you is that we're seeing, especially versus last year, we're seeing an awful lot more activity in the pharmacy area. A lot of RFPs coming out on pharmacies and both our pipeline and in the committed sites have more pharmacies in them than we've had in the past.

In fact, I would augment that in reflection to the earlier question and say that the pipeline is also reflecting increasing interest in our integrated primary care pharmacy model.

And when you talk (technical difficulty) to your new pharma contract, is that in place?

We have gone through a bidding process. We've short listed the two. We have selected one. We are in the process of contracting with that particular provider, but regardless of which of the two providers, we would experience substantial benefit going forward.

Are we talking mid-high seven figures or eight figures over the life of the contract?

We're talking millions over the life of the contract.

Yes. I think mid- or high-seven figures covered that part.

You really like this pharmacy business, don't you Stuart?

I'm not sure I understand any other reason to own the stock.

Hey -- I think what's very important as Ray pointed out before, we don't loose, we have not lost business to the pharmacy company that want to offer pharmacy because I think people are recognizing the value of the combination.

Well, that's my next question. Given the competition and what's been happening with Walgreens and some of the other purchases they've made recently, are you seeing any competition or an increased competition?

Well, we're seeing increased competition but we -- the only deal we've lost on a pharmacy basis was -- to Walgreens was, I'll say, a big technology company where we were short-listed with ourselves and [Sarner] who had indicated them getting into the business and Sarner partnered with Walgreens on that proposal. Sarner ended up getting it and we firmly believe that the reason Sarner got the deal since they have no other health centers other than their own was the relationship to that particular customer as a strategic partner. So that's the only time we've lost at this point to Walgreens.

And I want to make sure I clarify something David said in his presentation. In the pipeline, the deals that are in the pipeline that -- do I understand it that they have an inherent margin 25% better than current margins?

No. Stuart that's the -- what we do is we split our sites into new sites and then existing sites. So we measure two things about existing versus new. One is the same site growth rate of revenue and the other is the ratio of the gross margin between the new sites and the existing sites. These are all operational sites. It's not the pipeline. It's stuff that's operational. The new stuff is running at a 20 -- the gross margins are running at this 1.25 ratio at the moment. But then --

What is the ratio of new sites to old sites for lack of a better term?

That's what this is.

Oh, you're saying -- you're not talking about margins here, you're talking about the sites are 25% -- 1.25 to 1, new sites to old sites?

No. I think we may have confused you there in terms of how we calculate that. We look at existing customers versus new business that we're bringing on. The new business that we're bringing on has a 25% higher overall margin contribution than the existing business.

That's what I thought.

You can deduce from that as we continue to move through the pipeline that we're certainly trying to continue to improve our margin contribution. And we do that by adding services.

And now let me step back and ask the original question. Of the 230 sites that are open, how many are in that 1.25 to 1 number? In other words, how many have margins that are in the 1 and how many are in that 1.25?

Twenty-One (21) would be the answer.

Twenty-One (21) new sites over the last 12 months.

So in other words, to bring the margins up to the new levels, you still have a ways to go to get equilibrium?

Oh, yes.

And does that exclude pharmacy?

No. That includes pharmacy in there.

I'm done hogging it for now and I apologize. Frank, you know I love this story and there's a lot of reasons to own this stock.

Thank you, Stuart. I still have a job!

Jackson Spears, Capstone Investments.

It's my turn to now go at you. Could you walk us through the sales cycle on the 15-site win? How long was it, what were the issues that differentiated you and who did you beat out for it and is this a three, four-year process or was it a lot shorter? And who is the one that we had to convince to finally win the business?

Ray's offering to take this one but -- go ahead.

Ray, would you answer that?

First off, let me start by saying that we were asked, actually, I'll say approximately six months ago to run a single facility against a competitor who was offered another facility. And we were -- our performance was compared to the competitor with the promise that whoever performed better - and initially we were told that it would run over a whole year - but at the end of six months we were told that we were doing so much better than the competitor that we would be offered the full multi-site opportunity. The competitor, actually, was a small regional player.

Jack, I'll tell you the process with this particular client actually started about 18 months ago. We opened the pilot site in January; they had originally indicated a desire to add 10 sites if the pilot was successful. They decided to go to 15. They will be new sites rather than lifting out existing sites and we should have the first one of those new sites open by October.

And is this the potential of 25 sites ultimately if you get the entire business?

No. I think the 15 is the entire business.

Frank, what about the managed care insurance carriers? Because you give them a way of reducing their costs or managing their risk profile easier, are you working with any of the Blues or any of the United's or [Congen] or whoever?

Well, the guy who sort of wrote part of the book on managed care is sitting to my left and is chomping at the bit to answer that.

Well, I'm happy to interject that as we have talked about on other calls, it wouldn't be surprising if we were having conversations with many of the, I'll say, the health plan carriers, particularly those that have a significant amount of exposure in what we would call the national accounts, self-insured space.

And by self-insured, could you allow them to reduce their risk by helping the self-insured's better control their own healthcare costs?

Yes. I mean that's really the play here. It's not really to assist the health insurance companies in their risk. It's really to help the practice administrators reduce the costs that the self-insured large employers participate in.

And isn't that a large opportunity? And isn't that an area the medical (inaudible) business would love to have you guys involved because you could manage their risk better or more efficiently?

Yes. I mean, earlier on a question was asked about the general concept of integration. And what you're alluding to now is a remarkable opportunity that we have through the integration of a planned administrator and the great work that our trusted clinicians can do at the workplace.

So should we see some news on this front over the next 6 to 12 months or next 6 months where we get a better clarification of your strategy in this arena?

I think that's fair to say.

Now you talked a lot about the drug industry and a barrage of questions there. Why don't you book the revenue separately or book it as part of your GAAP accounting because your drug business is profitable. And could you also walk us through what kind of savings you provide the companies themselves in the drug -- that are working with you as opposed to the PBMs or some of the software companies?

Jack, this is David. I think it would take up a lot of people's time to explain the gross net accounting rules that we're under here. But -- this dates back to 2004 when we did the merger between I-trax with CHD Meridian and went through a review with the SEC. And during that process a lot of discussion with accountants we went through extensive analysis of revenue reporting and we came to the conclusion at the time that tipped it over, I wouldn't say it was -- it wasn't sort of a bright line of 90/10 sort of arguments that said we should be on a net basis; it was more on a 55/45 sort of analysis. But it was clear that in the end everybody felt somewhat more comfortable doing it on a net basis.

But this is profitable for you today, is it not?

Oh, yes it is.

So there is a profit contribution there. Does that book to the reduction of G&A? How do we, as outsider analysts, know the profitability of that business or where it's contributing?

Well, it's -- if you look at it, our gross margin in our pharmaceutical business is currently running at about 6.8% of gross revenue, if you look at it that way. So we're making a substantial margin on that business. It's a major contributor to our profitability.

And what kind of administrative costs do you have to support that 6.8% gross profit?

Well, we don't specifically allocate G&A between the -- in fact, we don't do -- as you know, we don't do segment reporting.

It's clearly a lower number relative to that number, if you do.

It is Jack. But I think you should -- if you're looking for valuation metrics here in terms of contributions, you ought to look at gross revenue. David's giving you the gross revenue in the pharmacy side versus the health center side and if you look at our, I guess Stuart brought up Walgreens, look at their multiple of revenue, look at the outsource provider side of the business or staffing side of the business for the rest of it is multiple revenue and I think that will be a great way to help you look at a valuation metric rather than have us try to segment the business.

And the last question, you've been talking a lot about (inaudible) numbers except for at top line accelerating for the last four quarters. Should that continue with the third and fourth quarter this year and into the end of '08 until we might see it by the second and third quarter in '08, 28% to us top line growth?

Well, we stated that our goal is clearly to get to 20-plus-percent top line growth and hopefully we'll keep accelerating.

Thank you, sir.

And, Jack, I can't help myself but continue to state that I think you do a disservice to our model if you were looking at the separate valuation of the pharmacy side. The -- the structural costs of the primary care activities contribute to the remarkable performance that we're able to engender for our client on the pharmacy side.

Thank you, sir.

Balaji Gandhi, Oppenheimer.

Just a couple of questions. One, just a housekeeping item on the number of clinics you have. If I understood correctly, were we expecting to see about 12 new clinics come on line before July 1st?

From the end of the year, yes.

Correct. From the end of last year to -- and so I've got -- so year-to-date is that the right mindset? Is that what we finished up with if we had 225? I guess that is -- that's --

I think we've exceeded that.

But is that exceeding by one? Correct?

Yes.

Just wanted to make sure I have my numbers right.

We have closed two facilities, too.

Okay. And then, Frank, just maybe if you could elaborate a little bit on the new pharmacy contracts. So exactly what is the source of savings? I mean, is it just you're able to buy better? Is it --?

It's a combination of better pricing because of the overall volume but there's also - because the field has gotten so competitive and we are a pretty good account for anybody, there are some very big strategic values that the parties are bringing to the table over and above the drug costs. So I would say it's a combination of drug costs. It's a combination of technology support and some other strategic values that they're bringing in to the equation.

If we think about just kind of the economics of the pharmacy business is it still, even under this new contract, the same I guess thought process? You're getting the fast pay rebate is the key component to your profit?

I wouldn't say rebate, but yes, the fast pay is a big component of the market.

And is that any -- is that more or less the same thing kind of -- similar economics than the new contract?

At least as good.

Is there any kind of industry standard for the fast pay component?

No. I think it's just something we've been able to negotiate based on, as we continue to add pharmacies, and increase the pharmacy spend.

It's driven off volume. The larger the volume the better the fast pay discount.

And I've forgotten, are you willing to share with us with the new --?

And give them leverage? Heavens no!

Okay. I figured I'd try. Thanks.

Hugh Cohen, Applied Financial Research.

It looks like you're doing just great. I just wanted to point out the obvious here and make sure I'm just seeing this right. You guys booked five new sites last quarter? You've already booked five sites this quarter and if my math is right, you've got three sites for the next five quarters after that already under contract with the chemical company?

Yes.

So growth here looks like it's pretty much just rolling right along. At this point you don't even have the time going forward. Correct?

Correct. We're -- we gave the street a target of 300 sites by the end of '08 and we think we're well on the way to achieving that target.

The question on that, you mentioned you closed two facilities. What was the basis by which you closed them?

Attrition in the businesses. They weren't large facilities, fortunately, which we've talked about in the past that when we do lose one it's often in the manufacturing sector. They are not large facilities when they are in an occupational health environment. So it was attrition on the part of the customer. It was not service related.

Are you being replaced by another company or are they just not doing it anymore?

They're just not doing it anymore.

And finally, just a quick question, an accounting question. This refund that you got, that's not in your revenue, is it?

No. It's not in the revenue.

Appreciate it.

Raymond Myers, Emerging Growth Equities.

I want to probe a bit more into this pharmaceutical contract that will be accruing benefits. That's that fast pay rebate that you've been talking about. Right?

Well, the fast pay rebate is clearly an important component of our pharmaceutical contracts. Yes.

So what is that?

Well, and it's a volume grows, the rebate grows. But also, I think, one of the things that we've been able to garner because of having gone through this process and the competitiveness which the vendors approach this with, it will improve that fast pay rebate.

So will we see an appreciable difference in 6.8% gross margin contribution for pharmacy due to this new contract? What will we notice different going forward?

I really don't want to get into that on the call yet, Ray. Regardless of whether we kept our current vendor or we selected a new vendor, we would see substantial benefits. But I would rather wait and talk about that in more detail later.

What is the term of the contract that you signed?

Five years.

Thanks. And I think I missed one of the KPIs. Non-billable overhead as a percent of revenue, did you give that?

That was the one that I was -- Ray, is if the 17 for the first half, that was 17.2%. Okay? Against the prior year -- sorry, 17.3% versus the prior year of 17.1% in the first half.

And what about for Q2?

Q2 is 18% versus prior year of 17.1%.

That's great. Sorry, I had missed that. The move to Nashville.

Not to Nashville. We have a -- CHD Meridian, as you recall, was based in Nashville. So the largest number of our corporate employees are based in Nashville.

Right. But the corporate office is moving away from Pennsylvania and will be in Nashville now.

No. The corporate office is still in Chadds Ford.

Oh, I see. So what is moving to Nashville?

Nothing. We have had a strong operations group in Nashville for the last three years since we acquired CHD Meridian. I-trax is based outside of Philly; CHD Meridian was based in Nashville. So the corporate headquarters has been Chadds Ford, but the operational headquarters has been for the last three years in Nashville. With the expansion of our business and the expected expansion of our business, we've negotiated the ability to take a larger space for less money than we're currently spending in our existing -- under our existing lease in Nashville. We've got a number of years remaining on that term. So in order to get out of that, we negotiated an early termination fee with our current landlord which will be paid by our future landlord and then amortized over the term of the new lease.

So the $1 million charge in the third quarter will that be --

That's lease accounting. It's a matter of the fact that the -- our future landlord is paying that both in upfront cash and it's being reflected in the lease, the new lease. We still have to take the charge so it's an accounting issue rather than economic substance.

So there will be no change to your cash?

No. It doesn't have a cash effect on us.

And what you're saying is that your lease payments will actually go down because this is a cheaper facility?

Yes. The lease payment is going to go down on a square footage basis by -- well, I was going to give it as a percentage, by about 40%. And our space is going to expand substantially.

So will your actual dollar outlay for lease payments increase or decrease or what will they do?

They are essentially flat.

I get it. Thank you very much.

Brooks O'Neil, Dougherty & Company.

Again, this is Deepak Chaulagai calling for Brooks O'Neil. Just wanted to get your sense on the G&A expense going forward. Obviously, it's 22% of net revenue this quarter. How should we be looking at it going forward given the fact that you have R&D and sales and marketing expenses that you have been investing heavily in?

We're -- the reason we refer to the R&D and the sales and marketing as discretionary is that we have a lot of control over that and we're managing to -- a balance, as we've said many times, between current profitability and future growth. And we intend to continue to manage that way. We don't anticipate that G&A will stay at the 22% level of revenue. In fact, we want to get it down as quickly as we can. But we're not going to sacrifice the growth. We think the primary thing we should be doing is managing the business for the future and for the opportunity and balancing against that an adequate level of profitability.

That's great. That's helpful. On the credit facility, it seems like you increased it from $50 million to $20 million and you talked about improving the terms. So would interest expense go down based on that expansion?

The spread is down by 100 basis points on the facility and the, I would say, our average outstandings are up maybe 20% or so. So I think our interest expense is going to be about the same. We're using more of the facility, again, because of growth in the business.

That's very helpful. Last question, is the market still -- is it beginning to warm up to your on-site platform or is it still -- given the fact that you guys have deals in the pipeline and it looks like you are growing at a pretty robust rate, is there still some kind of reluctance in accepting that platform?

First I'd like to just review with you what we're going to be engaged in on the national scene over the foreseeable future. We have presentations that we've been asked to give at the National Business Group on Health at the National Business Coalition for Health, at the National Institute for Occupational Safety and Health, at the National Meetings for the Disease Management Association of America, among others. So the industry has clearly identified workplace health as one of the solutions in the toolkit for containing healthcare costs for the large employer and, perhaps more importantly, investing in a healthy workforce which is increasingly being recognized as a competitive advantage in the workplace.

Deepak, I'd also like to add that I think we've talked in the past about the fact that Watson Wyatt has done a study for the National Business Group on Health and about three years ago they targeted workplace health centers as a way which employers could both reduce costs and improve productivity but also improve employee satisfaction. They anticipated at that point that the industry would likely grow at the rate of 20% over the next five years and we're probably 60% into that study. They've recently updated that study and upped their growth rate to 29% in the area of workplace health centers and then they've added pharmacy to it and they also projected that workplace pharmacies would grow at the rate of 19% a year over the next five years. So it's becoming an increasingly exciting platform. I think there are trade organizations that are now building up around the concept of health and productivity. But many of the healthcare organizations and trade organizations are doing lots of studies. Ray has been a prominent figure in those panels. He's also written books and toolkits for various organizations around metrics on health and productivity and we think a lot of that helps us be a leader in the space.

Thank you so much. Congratulations on the great quarter.

Stuart Goldberg, Somerset Capital.

I have two questions for you guys. First and foremost on the pharma contract, of course I won't let it die, your build-a-new contract include -- I've got to see how I can phrase this so Frank can actually answer it! Will it include some four wall contribution for standalone pharmacy or even some kind of -- or even if it's a combined pharmacy entity, with the healthcare side? Will it include some kind of funding for inventory if you want to go that route?

Yes.

Alright. So this contract is vastly different in that you will now have some kind of financial support to open more pharmacies whether they are standalone or otherwise?

That's one of the strategic benefits.

Excellent. And, Frank, lastly can you just talk about the competition in the pipeline, what you've been seeing as you go to new clients or even for your current clients, talk about what you're seeing across the board from the competition?

Well, our two biggest competitors as we've talked about in the past are Whole Health and Comprehensive Health and I would say we see them quite frequently. There are often small regional players, as Ray mentioned earlier. One of them was -- we were in a bake-off with one of them with this chemical company. The only other competitors that we really see is occasionally a local provider group which could include the hospital or as we've mentioned Sarner has announced that they're getting into the space. I think that their entry into the space is largely based around their clinical patient management system and their desire to get that into more health centers than they currently get through integrated delivery networks. But we still stay in the front. I think we certainly win more than we lose when it comes down to finalists. I don't know that we've ever not been a finalist but we end up walking away with the majority of the business.

Excellent. And, really, congratulations on the pharma contract. I think that's great news to hear that you're going to get support from whoever the winner is as far as inventory and financing goes.

And technology.

And technology. Thank you. Congratulations.

And, Stuart, I would just add that in some of the color I try to add into these conferences should give you some indication of how we're separating from the pack, how we're creating a competitive advantage for this Company. So the discussions today around, for example, patient safety and the last quarter around our clinical scorecard are examples of the kinds of things that we're doing that our competitors are not doing.

Great. Thanks.

Dick Hume, private investor.

We hope Dixon gets back to work soon and wish him the best.

Thank you very much. I told him yesterday that I had spoken to you and you wished him the best and he laughed and was probably the only reason that he -- well, he's actually on the call as I can see so -- he'll be back (inaudible).

I might add that he's getting very good healthcare through a few of us here.

His trusted clinician at the workplace.

That's good to hear. And in his Capstone's presentation, I took a note that he referred to an upper-Midwest hospital system that was, I thought he said, a relatively new client but he was not at liberty to discuss the name of the system. That sure is a curious new client, an actual hospital system -- could you elaborate on that?

Well, I would tell you that I agree that they are a curious client but hospital systems and integrated delivery networks have the highest employee healthcare cost of any other employer. And they also tend to be the largest employers in a geographic area. So we've clearly looked at the space. We've had certain healthcare systems tell us that it would be political suicide for them to have their employees be going into a workplace health center versus out of the provider network. And we have seen, certainly in the case of this Midwestern client, a desire to -- it was actually a renewed contract and they found that they had great savings, that their employees loved it and they absolutely wanted to renew it and we have, also, a couple of large health systems with anywhere from 9,000 to 30,000 employees that are actually considering this as well.

That's good to hear.

I might add that while, in general, workplace -- the workplace has become remarkably safer over the last 50 years, and it's something to be very proud of in the occupational health space. One industry where the safety at the workplace has actually diminished or where the workplace has become more hazardous has been in healthcare, particularly in the hospital. So that's another area where we could help them. And then in addition, if you read about the challenge of maintaining a clinical workforce, integrated delivery systems have a particular problem with turnover and we can help them with that, as well.

That's good to hear. Frank, I have to ask, I'm guessing in the last 48 hours that nothing changed in our DuPont conversation?

Nothing has changed in our DuPont conversation.

Lastly, I just wanted to pick up on -- well, two things. I take it, then, the number of square feet that you guys are moving to is maybe going to almost double based on the fact that the lease cost is going to about stay the same yet it's 40% cheaper per square foot.

It's up about two-thirds, Dick. One of the things we want to do as part of our living division outside of falling off our bikes is to be able to have a workplace health center for our own employees. So our goal is to put in a workplace health center, fitness center and a small footprint pharmacy in our Nashville offices for both our employees and also to use as a showcase.

I never thought to ask, so you don't have one there now or maybe something smaller?

We do not have one there now. We actually don't have the space to put it in now.

Yes. Interesting. And lastly, I just wanted to pick up on this convertible preferred which continues to confuse me and maybe others. How many shares continue to be outstanding and do you actually pay a cash dividend for those preferred shareholders? I noticed in your income statement there's a line item "Less Preferred Stock Dividend." I thought that was accrued in stock or something.

It is accrued and it is payable in stock at the time of conversion based on the ten day trailing average price of the stock. There's right now about 290,000 shares of preferred outstanding which would convert into, pardon me, 2.9 million shares of common stock. We've had substantial conversion since the beginning of the year and I would say we would hope that we would continue to be able to get the rest of it converted. There's no cash payment on that. It picks and gets paid in stock.

So it's a little confusing on your income statement where it says "Less Preferred Stock Dividend" but --

Well, we have to -- in order to show what earnings available for common stockholders are you actually have to report the dividend just above that line.

Right. But it's not cash.

No. It's not.

Yes. Well, very good. Thank you and good luck in the next quarter and the quarters to come.

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Great. Well, we'd like to thank you all very much for your participation. I hope you are as enthusiastic as we are and we look forward to continued acceleration. Thanks, again.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.