沃博聯公司 (WBA) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the I-trax fourth quarter and fiscal 2007 conference call. (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.

With us from management are Frank Martin, Chairman; Dixon Thayer, Chief Executive Officer; Brad Wear, 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 anticipates, 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's Discussion and Analysis of Financial Conditions and Results of Operations" in the most recent annual report on Form 10-K and the quarterly reports 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 apprised 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 first let me apologize to everyone for the delay in starting the call. Marketwire apparently had some technical difficulties with regards to putting out our press release, but hopefully everybody's had a chance to see it, and we'd like to welcome you to our 2007 fourth quarter and year-end conference call.

We've had another great year of accelerating growth. Revenue was up over 19% from the prior-year period. We ended the year with 243 sites and 108 customers, which is up from 234 and 105 customers at the end of the third quarter. And as of the end of the year, we now have 270 active or committed sites for health centers.

Recent sites or new clients would include Gladfelter Paper Company, where we're expanding our relationship to include an integrated wellness and disease management program. That is in addition to the occ health services we already provide for them. For Elliott Turbo we're also offering -- or introducing a new on-site wellness and disease management program. We're starting a new occupational health center for Marvin Windows and Doors, and we're in implementation with Micron on its primary-care center.

As you know, we closed on the acquisition of ProFitness Health Solutions in mid-December. We've nicely integrated the business and now have a number of cross-selling opportunities.

Combined with ProFitness, we now have nearly 300 physical locations where we run either health centers or fitness centers and numerous additional locations where we run health promotion programs.

The combined customer base of our company is now more than 160 blue chip employers. Recent adds for ProFitness include ING, Bendix Spicer, New York Life, and we'll soon be opening a fitness center in Boston for Bingham McCutchen.

Combined with ProFitness, we expect to do approximately $180 million in net revenue in 2008 with $9 to $10 million in EBITDA. This represents top-line growth of 26% and EBITDA growth of over 50%. This is our base case outlook and does not include any major multi-site deals that we continue to pursue.

We're starting to recognize the benefit of our investments in creating the leverage necessary to sharply improve profitability, and we see no reason why we cannot continue these growth rates with EBITDA increasing at twice the rate of revenue as we look beyond 2008.

And now I'd like to introduce Brad Wear.

Thank you, Frank.

As many of you know, I began my affiliation with I-trax CHD Meridian in September of 2007. During the last earnings call, I expressed my strong belief that this company had the perfect platform to integrate technology, clinical best practices, wellness, and disease management directly to the patients in a workplace setting.

As I've had now time to evaluate systems and processes and have visited multiple sites over the roughly six months of my tenure, my confidence in the business and clinical model and in the potential of this company has only strengthened. We are demonstrating very day that we can materially and aggressively expand our revenues both by integrating additional services across our existing client footprint, which now includes ProFitness, but also by expanding our footprint by adding new customers, such as the recent 15-site Lyondell win.

I'm also confident that investments already made and activities currently underway will enable us to materially expand our gross margin, as well as to leverage our SG&A with the effect of dropping significantly greater dollars to the bottom line as we go forward.

Revenues for the quarter ended December 31, 2007, were a record $40 million. This excludes pass-through pharmacy revenue. This represents a growth rate of 19.2% over the same period in 2006, and it's the fifth consecutive quarter of an accelerating growth rate.

Revenues for the full year of 2007 were $143 million, another record. This represents a growth rate of 14.9% over the prior year.

We, as Frank mentioned, completed the acquisition of ProFitness in late December. While this acquisition is reflected in our balance sheet as of December 31, the Q4 and annual 2007 income statements do not include any impact of ProFitness. Therefore, our annual and quarterly growth rates of 14.9% and 19.2% respectively are comprised entirely of organic growth from new customers and the integration of new services to our existing customers. We believe that we are only beginning to see the benefits of investments made in sales and marketing, as well as new product development, over the last couple of years.

Our gross margin for the year was 24.3% versus 25.2% in '06. The '06 margin benefited from the effect of a one-time upward adjustment related to insurance refunds that directly offset operating costs.

The '07 margin is slightly impacted due to the opportunity during the year to build directly for our directors of client operations to some of our larger clients. Historically, we have not been reimbursed for these managers, and their costs were simply part of our nonbillable overhead included in SG&A. Billing these has had the effect of directly recovering these costs, which is the good thing, but since they are dollar-for-dollar charges, they have the effect of reducing margin on a percentage basis.

The margins as a percentage in '07 were also negatively impacted by the higher proportion of start-up costs related to new sites, particularly in the fourth quarter. While these activities carry lower margins during the start-up period, they obviously result in new sites that carry higher margins once open, and so we are thrilled to be doing so many start-ups, even if they do carry lower margins during the start-up period.

As I said earlier, I'm confident that investments already made and activities currently underway will enable us to materially expand our gross margin in the future. These efforts have been given minimal weight in our '08 guidance, and we believe we will see the full benefit of them by '09.

Overall, SG&A for the fourth quarter grew at a mere 1% of the revenue growth rate and 80% of the revenue growth rate for the year over prior-year periods. SG&A was 20.2% and 20.9% of revenues for the quarter and year respectively, compared to 24% and 21.2% for the same periods of the prior year.

This significant reduction of SG&A as a percentage of revenue reflects the anticipated leverage on investments made in support functions as we have grown our revenue. As I said earlier, I believe that activities already underway will enable us to continue to hold the SG&A growth rate to a significantly lower rate than our rate of growth in revenue. This will, of course, result in more dollars dropping to the bottom line as we continue to aggressively expand our revenues.

In our last earnings call, I noted that our board had approved a capital investment of roughly $2 million to expand our capabilities to provide strategic information systems and to accelerate deployment of these systems through organic growth and/or acquisition. I'm happy to report that the majority of this expenditure has been deployed and that we are now enjoying most of those benefits.

Reported EBITDA was $1.7 million for the quarter, compared to $1.1 million for the same quarter last year, excluding last year's $1.3 million gain from discontinued operations. Reported EBITDA for the year was $5.5 million, compared to $4.9 million, exclusive of the gain from discontinued operations, an increase of 12% for the year and 59% quarter over quarter.

Net of the nonrecurring lease termination expense recorded in Q3, the 2007 EBITDA grew at a rate of 28% year over year, almost double the 14.9% year-over-year revenue growth rate. This is further evidence that investments in sales, marketing, new product development, IT, and other administrative overhead are beginning to payoff, not only in revenue growth but in accelerated growth and EBITDA as well.

On December 31, 2007, we had $10.1 million in cash and $19.1 million in bank debt.

The ProFitness acquisition was financed by a total addition to our credit facility with Bank of America of $5 million plus the usage of $2.5 million existing swing line. $1.4 million of cash was provided by operations activities for the year, and in addition to the ProFit acquisition, the company made cash investments in property, plans, and equipment of $2.4 million. Noncash investments in PP&E total $1.2 million.

We believe that we have sufficient availability of cash on hand and under our credit facility to finance our operating requirements in the near future.

So in summary, our continued investments in sales and marketing and product development have resulted in record revenues for the quarter and the year, as well as a robust pipeline of both committed and submitted deals. Our existing footprint -- and now with the acquisition of ProFitness -- give us 290 locations where we can expand our integrated services to grow the top line, along with revenues from winning new contracts with new customers.

Our continued investments in IT and other infrastructure have enabled us to leverage this significant organic growth in revenues by almost doubling the rate of growth in EBITDA relative to the growth in revenues for the year without consideration of one-time lease termination expense.

We continue to pursue acquisition and disruptive growth opportunities, as well as roll out internally developed new product. We expect that these initiatives will add significantly to revenues and earnings in 2008 and beyond and will enhance our ability to provide integrated health and wellness services to help our customers to maintain healthy workforces and reduce health-related costs.

And now I'd like to introduce our CEO, Dixon Thayer.

Dixon?

Thanks, Brad.

You know, our strategy for the past two years has been focused on driving future earnings growth by investing in revenue growth and new products today and containing core G&A expenses while we grow. Well, simply put, we're on course and picking up speed.

We finished 2007 strongly, setting new records in several areas, such as the fifth-consecutive quarter of accelerating revenue growth from 5.8% growth back in the third quarter of 2006 to 6.9% in the fourth, then 9.9% in the first quarter of '07, 15% in the second, 15.3% in the third, and now 19.2% in the fourth quarter, while our sales pipeline also grew over 50% in the fourth quarter versus the same period in '06.

Our core G&A continues to decline as a percentage of net revenue, now to 16.6%, versus 19.7% in fourth quarter of '06. We're already in the middle of the implementation phase of our largest sole-source client contract to date. Five of the fifteen new Lyondell sites are now operational. And we were in more respected publications and speaking engagements than ever before.

We've now reached another pinnacle in recognition. Our clients, as well as respected authorities, are standing with us at the podium speaking on our behalf regarding the substantial benefits they're reaping from our services.

Looking at 2008, I'm pleased to announce that this is the year our earlier investments start building the bottom line. We will now be achieving current earnings growth from the investments we've been making in the last several months. As a result, as Frank said, we believe EBITDA will likely grow about 50% to $9 to $10 million.

Finally, our successful acquisition and integration of ProFitness has already begun to yield plan synergies and cost savings, and, most importantly, early stages of our integrated pipeline development work is looking very promising. Ray will speak more in a minute about the leverage we've gained by including this complementary on-site business in our portfolio.

So, in summary, we've built a platform that's now in its fifth-straight quarter of consistent top-line growth, well into the double digits, while our investments in future growth will start boosting our bottom line starting today in 2008.

I'll turn it over to Ray now with the following segue: Today's investor conference is a bicoastal call of sorts. Ray's in San Diego chairing the first-ever industry conference dedicated to workplace health, another first and another strong endorsement of both the momentum of the market, as well as a testimony to our specific leadership in shaping this fast-growing space. Ray will speak briefly about this and some of the tangible results we're now getting from our development investments.

Ray?

Thank you, Dixon.

I am so excited to be able to speak with you today from San Diego, where I've been asked to be the host chairman of the first conference dedicated to workplace health.

During our last quarterly call, I spoke about the (inaudible) change that has occurred in our client relations. With me at this summit are several companies investing in workplace health. Most of them are known customers of ours. These organizations include Goldman Sachs, Cummins, Gladfelter, Goodyear, and Caterpillar.

All of these organizations have realized that a healthy workforce is a competitive advantage. All are striving to create a culture of health inside their company, and by doing so, these large employers are becoming employers of choice.

Today, I want to feature the importance of integrating benefits and services utilizing the advantage platform of workplace health.

Our past research has established that integrating disease management programs with primary care and pharmacy markedly improves engagement rates. We have just submitted another article for publication demonstrating that this approach retains a higher percentage of active participants for six months and even one year compared to traditional efforts. By getting more chronically ill employees and their dependents involved in their care for longer periods, these workplace-integrated programs will reduce illness burden and costs for employers.

Our research has also demonstrated that integrating primary care and pharmacy leads to better prescribing of medication, generating remarkable savings and a higher quality of care.

The acquisition of ProFitness is another important step in our strategic development plan. It confirms our interest in seeking out opportunities to augment and further integrate the workplace health care continuum. This co-location of health and fitness centers can return injured employees back to partial and full employment more quickly, reducing productivity loss. Sports physiologists and physical therapists can work closely with physicians to implement the full cycle of rehabilitative services.

These include getting new employees fit for duty, also known as work readiness; responding proactively to work environmental issues that may cause an injury, called ergonomics; using physical therapy to assist in the healing of an injury; developing an exercise program so that the employee will not get injured or reinjured, which is known as work hardening; assigning employees to restricted work; recognizing physical limitations, called modified work; and, ultimately, returning workers to full employment.

Studies have shown that workplace rehabilitation reduces the lost work time to receive necessary treatment, increases the use of accommodations so that injured workers can be productive while healing, and returns the worker to full employment more quickly.

But, most importantly, by adding robust fitness and wellness programs to our broader ray of offerings, we will be better able to keep healthy workers well. Research has shown that employees with significant risk factors, such as obesity and sedentary lifestyles, have greater medical costs, disability rates, and absenteeism. For this reason, large employers seeking to control medical costs and enhance employee productivity should invest in health centers to aggressively attack these risk factors before the disease presents. And let's not forget that health centers and wellness programs can maintain the health of the working well, who are doing the majority of the work at the employer site.

Changing an employee's lifestyle or getting an employee to adhere to evidence-based treatment is a challenge. Encircling him or her with an array of trusted practitioners at the workplace all working in concert toward the same goal has been proven by us and others to be an advantaged model. Adding personal trainers, health educators, and sports physiologists to our clinical community of doctors, nurses, therapists, and pharmacists will significantly enhance our points of contact, greatly increasing our ability to produce lasting lifestyle improvements. This, in turn, provides our clients with a healthy workforce and a competitive advantage.

Finally, our great patient-care programs are based on the right people, processes, and infrastructure. We continue to refine our recruitment and selection process, seeking out clinicians who can communicate well, happily participate as a member of an integrated team, and comfortably fit within the corporate culture of the clients they serve.

We are making significant investments to build an electronic platform that will allow medical records to interface with occupational health software, health and wellness trackers, and a sophisticated pharmacy management system. This level of integration will produce better outcomes from our treatment of the ill, as well as from our expanding efforts to make well populations even healthier over time. As we integrate these services and continue to prove the merits of this advantaged model, we will provide remarkable value to our customers and you, our shareholders, as well as increase the barriers to entry.

And with that, I'd like to return the podium to our chair.

Frank?

Thanks, Ray.

Well, hopefully, you can see why we're so bullish about the business, and I think the fact that we've been asked to host the very first workplace health center conference is a testament to the fact that workplace health centers are truly emerging as its own sector in the health-care services industry and we are certainly recognized as the industry leader.

I've seen a number of research reports out lately on health-care services. They're constantly pointing to a trend to look for now in the growing and emergence of the workplace health and productivity sector.

We appreciate the fact that you've been patient with our investments and recognize the fact that we are now starting to show the benefit of those and getting leverage in our model that will show dramatic improvement in earnings per share as we go forward.

So with that, I'd like to open the call to questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS)

Okay. Our first question is from Brooks O'Neil from Dougherty & Company.

Please state your question.

Sure. Good afternoon. I guess the first and most basic question is the press release -- or the release that Roseanne sent me did not have the full financial statement in it, including the line-item detail on the income statement. When do you think that might be available?

It's available on the Web site, and it should have crossed the wire, Brooks, by now. Our understanding is --

Okay. So we could just pick it up on the Web?

-- there was a table conversion issue with Marketwire for some reason, which is why the original first draft didn't cross. But the full financial should be available right now.

Okay. Secondly, could you just talk a little bit about the assumptions that underlie the two key metrics you gave us in terms of guidance, which is, I think, $180 million of revenue and $9 to $10 million of EBITDA? Specifically, what assumptions have you made regarding unsigned business -- or how much gap is there between what you have very much under contract today versus what you think might occur in the balance of the year?

Well, there's very little -- as I said, that's our base case guidance. There's very little in there that is not visible to us. And the reason for that is, as you know from history, sometimes new site openings, in particular, slip. So I think this is not inclusive of a large amount of business that is in the pipeline. As I said, it's base case.

In fact, Brooks, what we do -- this is Dixon. What we do is, when we put our budgets together, they're not based on hope. They're not based on saying this is what we hope we might be able to close going forward. Although there's a small piece of that, that's a very, very small piece of what we budget for.

Okay. And then -- sort of a complement to that -- do you expect much attrition relative to your existing book of business in 2008?

No. We had two site closures, one at the very end of the year and one that is happening this quarter. They are plant closures, they're large sites, and they've already been taken out of the numbers.

Okay. And then, I guess, obviously we're all kind of waiting -- I don't want to say breathlessly because that would be dangerous -- but we're all waiting for the onset of these lift outs. And I'm just curious if you can sort of generalize or summarize what some of the issues in the delay -- or why you think customers have not embraced that concept yet in any big way?

Well, first of all, Brooks -- this is Dixon again -- we have had significant benefit with lift outs. It's kind of hard for us to all remember, but back in 2005, almost all of our gains were one site at a time, and as we've recited in some other investor calls, we've been growing at an increasing rate of multi-site deals and Lyondell being a 15-site.

Now, what I think you're really referring to is some of the stuff I've talked about as really disruptive, sole-source lift outs. And as I've said in the past, I look at these as when, not if, and I can't predict. And it's not that people are rejecting the idea. It's that, in this pursuit, we're creating a whole new business model and it's taking our targets a significant amount of time to get their hands around what's being proposed.

Okay. That's good. Two last questions, and then I'll step into the queue.

Number one, could someone address what you're seeing from the competitive environment? Who else is playing? Who's showing up at some of these bakeoffs you're having?

And then, secondly, could you just address your perceived need for capital for 2008 at this time and where you think you stand from a balance sheet and a capital availability perspective in terms of your plan and needs?

Thanks a lot.

I'll take the competitive piece.

And then I'll toss the other one off to you, Brad.

Brooks, the competitive frame that we see, although it evolves year to year, doesn't change a whole lot. There's usually each year somebody that comes in and makes some big noise that they're going to come in and take control of the market, and that doesn't seem to come to pass because people keep underestimating the barriers to entry with the model we've built.

But the kind of people we're facing are actually quite a bit smaller than us and -- by magnitudes -- and they -- some of them have very good processes and so on, and we consider them to be what we call good competition because we're all building an industry and there's always room for more than one.

But we haven't seen any one particular competitor coming on strong or, in fact, winning at the rate that we're winning. I mean, that sounds pretty bold, but we feel that we're the one that's picking momentum here.

Great.

Bruce, this is Brad. On the question regarding capital, for our base line plan, which is just the organic growth, which is the $180 million guidance that's been given, we're confident that we have enough capital to achieve that plan.

With the expansion of the credit facility -- the $25 million at the end of the year to help us accomplish the ProFitness acquisition -- we have ample room under that facility. That also involved discussions with Bank of America, as well as other banks, about the potential of increasing that facility, and we're very confident that, if opportunities arise that should require that, we have the ability to increase that facility within a reasonable range to accomplish that too.

Okay. Great. Thank you very much.

Thank you for your question.

Our next question is from Balaji Gandhi from Oppenheimer.

Please state your question.

Good afternoon.

Hey, Balaji.

I just had a couple of -- I guess one is kind of a follow up to Brooks's question.

If you took the fourth quarter EBITDA number, I guess you'd get just under $7 million run rate, and then in your guidance of $9 to $10, how much of that, if you were to bridge those two, would be coming from the benefit from ProFitness versus just kind of what you're thinking about growth off your base business?

Well, one of the things we're going to really try to avoid going forward is carving out the difference between us and ProFitness because we have consolidated and integrated them thoroughly into the operations. We've reorganized -- or regionalized -- the way which we manage the business to be more efficient as a service company, and it'll be -- I think what we reported was that they did around -- adjusted to about $850,000 last year in EBITDA. So we're going to have at least that plus some synergies in that $9 to $10 million.

Okay. And then you talked a little bit about same-site revenue growth in the press release. Did you -- I couldn't find a number there. Could you maybe quantify that year over year -- the fourth quarter?

Yes. We've got a number people here whispering to each other to try to answer that for you. It was not that we tried to leave it out.

The same-site growth for the quarter was 3%, and all of the standard KPI's will be fully disclosed in the 10-K.

Okay. And then I had two other questions.

One is the same question about the pass-through revenue. You had $37.6 in the quarter. What did that compare to last year?

It was $39.6 last year, and the difference is that we had two pharmacies close as of the end of the year on two large sites. They sort of ate through the balance of inventory. We did no reordering for them in the fourth quarter.

We also have had a higher -- a rise in the use of generic medications, which is a good thing for our clients. So the total dollar goes down -- actually, our incentive goes up, and the cost to our clients go down. So the net effect has been positive.

Good alignment.

And then you also had your new agreement on purchasing -- right? -- in this quarter's period versus last quarter's?

We did. We started to see some benefit of it in the fourth quarter. We still were using up the inventory from our prior vendor in the beginning of the quarter, but it's starting to meet expectations.

And we're very happy with the performance of it.

Would it be safe to say, though, that, even though the revenue is down year over year, the margin contribution might have been the same or better?

Yes.

Yes.

Okay. And then just in terms of the '07 results, if I remember correctly, you had talked about hitting about $6.0 to $6.2 million in EBITDA for the year, and is the $5.5 number kind of an apples-to-apples with that?

We're just checking to make sure we get the answer to you on apples-to-apples.

Sir, you have to add back the lease-termination expense that we took in the third quarter, and that gets you up to over $6.3 million.

Right. No. I understand. I'm just trying to get a sense for the guidance was from back in, I guess, January or February and was adjusting -- excluding that which you wouldn't have known about at the time. Was it higher spending levels because, obviously, the revenue came in?

I'm not sure I understand because the lease termination was an expense, and it wasn't anticipated in January or February. Had that not occurred, we would have hit over $6.3 million, which I think would have been consistent with guidance.

Okay. Okay. Great. Thanks, guys.

Thank you, sir.

Thank you for your question.

Our next question is from Stuart Goldberg from Somerset Capital.

Please state your question.

Good afternoon, guys. I apologize if we have -- I missed some calls here as my cell dropped you for a minute.

What were the revenues from ProFitness for '07 as you stated them during the acquisition?

There are no income statement affects of ProFitness included in the '07 numbers.

We did put out a press release saying that they're revenue for '07 was $13.5 million. There was no effect -- we're not accounting for them until January 1 of '08. So there was no impact on our financials from that acquisition.

On our income statement.

So if I just held revenues steady and I added them to the $143, we get to $156.5. You're actually saying you're going to grow -- well, organic growth will be $24 million incorporating ProFitness and I-trax combined for '08?

Yes. That's right.

Okay. You said the pharma pass-through was $37.6 million, and I don't know whether it was Frank or Dixon who said there were two pharma closures. Was that in '07 or '06?

'07. One closed December 28th. It was a plant closure from a large client. And another one is about to close.

So they weren't impacting '07. They impact '08, which is then making us that much more proud about what we can accomplish still in '08.

I think, Stuart, though, the reality is the number going down is the lack of ordering during the fourth quarter for those pharmacies.

Okay. And then the last question relating to the pharma side is you had announced in the last conference call a large pharmacy -- a very large pharmacy -- and yet we have yet to hear the -- I think we haven't heard about the final announcement on that. Where do we stand?

Well, we've not been cleared to make a final announcement on that.

You have yet to be cleared, or you did get a clearance?

We have not been given clearance yet.

Okay. Are you working for them at this point in time, or are they -- is it just still kind of in a stand-still mode?

Well, no. There's a fair amount of work being done around implementation and design and so forth. We're budgeting it to open in the fourth quarter.

And we were formally awarded the contract. We just now are finishing up the details of the contract itself.

And when you say "budgeting for the fourth quarter," fourth quarter of '08 now?

Yes.

Okay. And so that's in your EBITDA numbers, as well as the $180 million in revenues, including that large pharmacy?

Well, the $180 million in revenues would not be impacted by any pharmacy spends. The health center component of that would be, but the pharmacy revenue would not be in the $180 million. There would be some EBITDA contribution from pharmacy spend, yes.

But marginal because it's the end of the year that it's ramping up and not hitting it's full stride.

Right. Well, I thought on your portion of the pharmacy, the net that you take out of the pharmacy does hit the revenue line. Is that incorrect?

No, that's true. I'm sorry. I just meant that the $180 will not show any pharmacy ingredients. You're right. The incentive -- the net revenue will hit the $180.

Okay. All right. Thanks a lot, guys.

Thank you, Stuart.

Thank you for your question.

Our next question is from Todd Robbins.

Please state your question, sir.

Good afternoon, gentlemen.

Good afternoon, Todd.

To follow on from Stuart's questioning, can you help us get a little greater clarity on the pharmacy revenues? Now, I recognize that these don't get recognized by you, but you get a percentage of them, so you obviously know what they are. And I'm wondering if you can help us understand what that revenue was in '07 and is estimated to be in '08 or what kind of growth rate we should look for? If you can give us any kind of clarity on that, that would be helpful.

Well, we did about $150 million of pass-through pharmaceutical revenue on the -- I'll say, gross revenue in '07. We have a handful of pharmacies that under agreement to open in '08, and what we don't have definitive really is the actual timing on those. We would certainly hope to grow pharmacy the same way we grow our net revenue business and hope that that number would grow at 20%.

The very large pharmacy that is scheduled to open in the fourth quarter would move that number substantially, but we won't see that annualized until '09.

Just one note of caution on that. Again, we are incented to shift the utilization more toward generic, which has a lower price. So when you look at the cost of materials -- like, in this instance, the materials in Q4 were off a little bit, yet our revenue that we kept was up slightly. But we will see that phenomenon occur because we get paid more for shifting to the lower-cost drugs. We obviously try to do that.

So because you've gone from Amerisource to McKesson and are taking a higher percentage rebate from McKesson than you received in Amerisource, the profit contribution off the $180 should be substantially higher than the $150?

I'm sorry. I would not be framing it that way. We didn't switch from Amerisource to McKesson for a higher rebate. We switched because of several different programs, of which we believe the impact of all those programs will be more profitability to us, but it's not because we're getting a bigger rebate from one versus the other standing alone.

I wasn't talking about the reason for the switch. I was just trying to do the math in terms of what the effect would be. But --

We believe the McKesson relationship will yield more for both us and our customers than the ABC one did, yes.

So where I'm going with this is that the ProFitness contribution, if you add it on to the '07, shows a growth without ProFitness -- just holding that flat -- of about 15%. So the acceleration of the top line that you're talking about really is coming as a result of the acquisition of ProFitness, and it doesn't look like it's coming from an acceleration of the base business.

No. There's about 20% acceleration -- we're going to go from $143 to $166 or $167 in the base business without ProFitness. So that's a -- I mean, I think ProFitness is going to add $14 to $15 million in top line to get to $180.

There's not a significant skew between what we believe we're going to do on our base business and what they're going to do in their base business. But I also don't want to set this as a precedence that we're going to continue every quarter to try to report both of them because virtually we have taken people and integrated them into a regional structure to be functioning completely differently. But, no, it's not that theirs is the driver of our growth.

Okay. Just a couple of housekeeping things then.

Depreciation -- should we dial in about $5 million in '08? And amortization?

I think that's a good number.

And interest expense is going to be up as a result of the ProFitness acquisition. Does that --

Minimally?

Is that $200 million?

I'm sorry?

$200 million?

He said minimally.

Minimally, I said. I'm sorry.

I'm sorry.

Interest expense won't be much greater than it was.

$200,000?

Under $100.

Really?

We've got good cash flow in the business mill, Todd.

So that would give you earnings -- pretax earnings somewhere around $3.5 million? You know, there is --

Yes. I mean, I think that's accurate math.

So that means we're talking about $0.07 to $0.08 after tax?

We haven't guided towards earnings per share primarily because of the fact that there's still a small amount of preferred stock outstanding that hasn't converted. So before we can report earnings per share to common, we'd have to take the (inaudible) on the preferred, which is about $400,000.

I thought that went away in the fourth quarter with the press release?

No. We still have about 200,000 shares of preferred outstanding.

Okay. And the pipeline of potential business, how does that stack up?

It stacks up great. It's -- we closed a lot of business in the last couple of quarters of the year. It did not slow down in the fourth quarter, which normally would be the case. Right now it's up 50% over where it was at the end of last year, even with the closures, and we've got a lot of finalist presentations --

Yes. I mean, more anecdotal, less statistical is that Peter Hotz, the head of that whole area for us, was actually saying that demand is building more rapidly than he even anticipated right now for the pipeline.

The large contract that Stuart referred to that was closed in the fourth quarter but has not yet been press released, is that something that will be press released?

Yes.

Yes.

Is that something we should look for in the first quarter?

We were hoping we do a press release in the fourth quarter.

We work very hard and respect our clients' and prospects' confidentiality, and they guard that very closely. And so we would never want to be in the business of predicting when they will decide it's time to announce. But we've been assured that there will be a time to announce.

Well, whenever that is.

Well, if I take a shot at it and I'm wrong, you'll vilify me later.

Okay. Okay. Well, good progress, guys. Thank you so much.

Thank you, Todd.

Thank you for your question.

Our next question is from Dick Hume.

Please state your question.

Dick Hume. Good afternoon, guys.

We know.

Hi, Dick.

Bet you thought I wasn't going to be on the call, Frank.

Couple of questions. I wanted to follow up on the pharmacy.

How many pharmacies do you guys operate, excluding, obviously, the two that closed?

We added 1; we closed 2. We had 30, we lost 2, we added 1. We're at 29, and we have another 5 to open this year, and we have at least 10 or 12 in the pipeline.

Okay. Do you operate any pharmacies where the on-site health center is not operated by you?

We do. We have a handful of places where we operate pharmacies. We had one pharmacy where the client operates their own occupational health center. We run the pharmacy. We are in the process of helping them with plans to expand to add primary care, and we would run that.

We have one pharmacy where we have a competitor that runs the health center, and we run the pharmacy.

Is that the Kohl's operation in Menomonee Falls?

We don't get that specific.

Okay. So the pharmacy side of your business may be a separate sort of marketing effort? I mean, you may separate it from the on-site, or do you try to take it in a bundle approach?

Well, we think that -- look, when we made the announcement of this very large contract, we beat out a very, very large pharmacy provider for what will be the largest pharmacy in the country. And the reason we did that is because of the fact that we're the only ones that have fully integrated the health center and the pharmacy and both the physician and the clinician in the care of the patient. So the value of that pharmacy model is strengthened greatly by the integration with the health center, rather than having two different vendors operate those health centers.

So I would say that, while there's a lot of interest in our pharmacy business for a lot of reasons, it's made much more valuable and much more successful. We've even done studies for a couple of our clients where we operate pharmacies and don't do the health centers and show that the utilization, the adherence, the pricing, the generic substitution is much better when you combine the prescriber and the pharmacist in one location.

How about the other way around?

(Inaudible) we consider it a separate business, the value proposition is really in the integration.

It's also one of the number of things that truly distinguishes in the market. We don't wake up in the morning and say, "Gee, we run pharmacies." We really run health-care solutions, and pharmacy is a part of that, and we really make a point of that in our discussions with prospects.

How about the other way around? Do you have any where you manage the on-site clinic and the on-site pharmacy is managed (inaudible)?

Yes.

Could you talk to us about that? Pardon?

We have one.

Oh, you have one. Oh, okay. It's not worth talking about.

No. It's not material.

Okay. A second area I wanted to explore, I haven't heard -- and I've been following you guys now -- I think I'm into my third year for sure. I haven't heard too much about the contract renewal process. I know the contracts -- Frank or somebody, help me. Is it three year contracts or -- and I guess what I'm --

Dick, this business has been built over 40 years one client at a time, and our contracts have a range of different terms and tenure. We loosely here talk about things being around three years, but we don't -- that's not a statistical fact. I mean, we have some that are longer, and we have some that are shorter.

We're always renewing contracts. Some of them are evergreen. Some of them go out to bid because of what the company's practice is to consistently put stuff out to bid. But our renewal rate is extraordinarily high.

I guess what I'm trying to get at -- after three years or five years with a good customer, it sounds like that they're saving a lot of money on their health spending.

Yes.

And I even think I saw where [Susskind Hana] said within five or six months they had a return on their investment.

I know. Wasn't that pretty cool.

Yes. So my question to you is -- I realize some of the contracts are cost-plus. What about -- do you ever try to get -- can we get a percentage of the savings?

So the question is really, if they're saving all that money, how do we get more of it, and that's something that we work on daily.

I would think they'd be happy to pay you 10% if they can keep 90%.

We aspire to have that be part of our solution.

One of the clients that I just said -- we're in the process of helping them plan for a primary-care center, they're building that out of the savings they got from the pharmacy we've been running for them for the last couple years.

So, yes, they do save a lot of money, and we are -- one of the reasons we've invested heavily in the research and the publishing is to prove the health economics around our value proposition so that we can move towards a pricing model that favors more value-based placing than cost-plus or fixed fee.

So, yes, you're pointing in a direction we are constantly pushing to try to get.

Okay. Say, I meant to commend you too on your new Web site. I think it's very classy, very upscale.

Well, thank you very much.

Our marketing department will be very happy to hear that.

And, Frank, I poke around on the job postings, and I just have to share with you that I uncovered a job posting in Fridley, Minnesota -- you know, I'm from Minneapolis. And so I just casually asked Roseanne, gee -- I didn't ask if it was Cummins, but I assume it was the Cummins facility in Fridley -- and she responded that she was not at liberty to release the client's name. Now, that tells me that it's not Cummins. All I'm asking you, is that correct?

(Inaudible) about Cummins.

So are you expecting us to respond to this question, Dick?

No. No. I'm just asking you -- Cummins is a publicly known client so that's why I was confused.

Yes. Well, there's other people that do business in a lot of these towns too.

I know a couple of other companies in Fridley, Minnesota. Absolutely.

Great.

Finally, one loose end. I thought someone else would bring it up. There was a second acquisition, I thought I read, that you had a nonbinding agreement maybe to pursue it. I'm guessing you're not pursuing it?

Not at this time. We're not pursuing it. We closed on ProFitness. We opted not to close on the second transaction and to digest ProFitness and work on that assimilation right now. So we did not close the second transaction.

But we'll continue to use our resources to build, partner, and at times acquire platforms as we see fit.

All right. That's all I have. Keep up the good work, guys.

Thanks, Dick.

Thank you for your question.

Our last question is from Bobby[Still].

Please state your question, sir.

Hi. Good afternoon.

Good afternoon, Bobby.

I've been an investor for like several years, and I don't know very much about your health-care industry, but I have a comment and then see if you have an answer for.

I work for a subsidiary of Home Depot, and they have given us information in the past that says "Employer of Choice" or "Employee of Choice," and I don't even know what that is.

Our human resources manager, I don't think that they're qualified or trained, they don't explain our benefits properly, and I was wondering if you know who the person is that provides Home Depot or HD Supply or Hughes, like, with that type of service? Because my health care is a wreck right now because I have Aetna for one thing and some different card through MetLife for something else and then a different card for iCare. So I've got like four different providers, and it's very confusing for me.

So, Bobby -- this is Dixon Thayer. Many different people look at many different ways of deciding whether they have something like "Employer of Choice" status. You might look in Forbes or Fortune magazine. They do like an annual review. But, otherwise, you'd have to check with Home Depot to find out what they're using to decide that.

But is that a client, like, someone that you would -- or a customer that you would maybe go after or --

Yes. We have a client very similar to them that we provide services for.

Was that Lowe's I saw in one of your reports?

It could be.

We've actually just opened our 11th site for Lowe's.

Right. Okay. One other thing. I like to invest in small companies like yourself, and I appreciate your comment about you say you appreciate our shareholders and trusting you with the responsibility of spending the money on research and development.

What I can see, as just a person that invests in companies, I'm looking at two or three years of, what I call, slow but steady growth, and you guys seem like you're building a nice model, but I just don't see the -- there's a disconnect to me that the stock could be almost exactly where it was two years ago but you've grown revenue and all of a sudden there's some EBITDA and you've got more customers and some of these build-outs that you're doing are going to hit the bottom line eventually. I still don't -- I don't understand the marketplace where they can still value your company the same price that it was two years ago but you're leaps and bounds ahead of two years ago.

Well, that's a great point, and the stock market is not necessarily that predictable, and I would say, especially the last year with small and micro cap companies -- and we'd certainly be in the micro cap range -- it's very difficult to predict the volatility in those stocks. I mean, we think we have done -- we've made great strides in the last couple years. We showed continuous improvement. In some ways, people would have liked to have seen us be more profitable, but as we like to say, we're creating an industry here, and we have to invest in assuring the success of that industry. So we like to see greater rewards in our share price as we start to show more profitability.

But I think we're meeting the expectations of the analysts that are covering us right now. We're getting a good strong institutional investor base and --

And, most importantly, we are very happy with what we've achieved and confident in where we're going.

Okay. To add to that, maybe the marketplace doesn't recognize that, but have you ever considered or is there a reason why -- I'm not understanding all the things about -- you have a three-digit symbol, and you're on the AMEX. Is there certain criteria you have to meet to get on different exchanges to become a more viable company? You have to meet a certain market cap or something like that?

Yes, that's correct. And I would refer you to the various exchanges to look at their listing criteria, and you can see why we're on the AMEX.

Sure. And then if you do achieve results, one thing I can tell you as a trader, I don't know -- and I'm not bashing them, so to speak -- but I find it less favorable to be on the AMEX and their market makers of the computerized trading, and you guys may want to look into it when you achieve certain levels to find your way off. Because there's a lot of manipulation with the computerized trading and your stock could be down 10% or 15%, but, materially, your company hasn't released any information to make a stock drop 10% or 15%, and it's right back to the same price the very next day. So I don't think it's a fair trading level, and if you can achieve a certain result to go elsewhere, I'd appreciate it.

Thank you, Bobby.

Thank you, Bobby.

All right. Thanks.

Thank you, sir. There are no further questions at this time.