Emdeon Corporation Q1 2006 Earnings Conference Call Transcript (HLTH)

May. 5.06 | About: Emdeon Corp. (HLTH-OLD)

Emdeon Corporation, (HLTH-OLD)

Q1 2006 Earnings Conference Call

May 4, 2006, 4:45 p.m. EST

Executives:

Martin J. Wygod, Chairman of Board of Directors

Kevin M. Cameron, Chief Executive Officer

Andrew C. Corbin, Executive Vice President and CFO

Wayne T. Gattinella, CEO and President, WebMD

Analysts:

James Kumpel, Friedman, Billings, and Ramsey

Alexander Draper, JMP Securities

Anthony Vendetti, Maxim Group

Duane Pfenningwerth, Raymond James

Operator

Good afternoon and welcome to Emdeon Corporation March 2006 Quarterly Conference Call. Today’s conference is being recorded. I’ll now turn the call over to Risa Fisher, Vice President of Investor Relations.

Risa Fisher, Vice President, Investor Relations

Good afternoon and welcome to Emdeon’s First Quarter Earnings Call. I will read the following statement concerning forward-looking disclosures. All statements made today other than statements of historical facts are forward-looking statements including those regarding our guidance on future financial results and other projections or measures of our future performance and the amount and timing of the benefits especially from acquisitions and other transactions, from new products and services, and from other potential forces of additional revenue. These statements speak only as of today and are based on our current plans and expectations, and they involve risks and uncertainties that could cause actual feature events or results to be different from those described including risks relating to market acceptance of our products and services, our ability to develop and maintain relationships with healthcare industry participants including healthcare payers and providers and vendors of services to those payers and providers, difficulties in integrating acquired businesses, changes in economic, political or regulatory conditions or other trends affecting the healthcare, Internet, information technology, and plastics industries including matters relating to HIPAA and the outcome of the previously announced profits of exploring alternatives with respect to Emdeon Business Services and Emdeon Practice Services and its effect on those segments. Many of these risks and uncertainties are described in our SEC filings. We expressly disclaim any intent or obligation to update these forward-looking statements. The earnings release issued today is available on our website at www.emdeon.com in the “About Emdeon” section and has also been included in the Form 8-K file today with the SEC. The Form 8-K and other SEC filings are available on our website and on the SEC’s website. The release in Form 8-K to be filed today include reconciliations between GAAP and non-GAAP financial measures to be presented in this call. I’d now like to turn the call over to our Chief Executive Officer, Kevin Cameron.

Kevin M. Cameron, Chief Executive Officer

Good afternoon everybody and thank you for joining us today. Joining me on the call is Marty Wygod, Chairman of Board; Andy Corbin, CFO of Emdeon Corporation and CEO of Emdeon Practice Services; Wayne Gattinella, CEO and President of WebMD; and Bill Midgette, CEO of Porex. Andy will review our financial results for the March quarter. I will then review our business segment results. Andy will review our guidance for 2006, Marty will make some closing comments, and we’ll take Q&A.

I’m pleased with the progress we’re seeing across our businesses. For the first quarter, we achieved record revenue of $339.1 million and record adjusted EBITDA of $54.2 million. At Emdeon Business Services, we generally saw strength across the business with stronger than anticipated medical claims volume and remittance in payment services volumes, as well as better than expected sales with DIPS and growth in our direct-to-provider revenue cycle management solutions.

At Practice Services, our focus on creating operating efficiencies and increasing customer satisfaction continues to drive significant margin expansion and earnings growth. At WebMD, we continue to demonstrate strong revenue in earnings growth while continuing to invest in our technology and other distributions. We are beginning to see the financial leverage in WebMD’s business model and we are well positioned to capitalize on the emerging trends in the industry. Porex continues to deliver consistent results with strong margins. I’m going to turn it over to Andy now.

Andrew C. Corbin, Executive Vice President and CFO

Thanks Kevin. As a reminder, our press release including comparable financials is available on our website. Also, we have furnished as an exhibit a Form 8-K filed with the SEC today, a summary of detailed 2006 guidance. I will now summarize our financial results for the first quarter relative to the quarter year ago and then highlight some additional financial items to assist you in understanding our financial performance.

Consolidated revenue for the March 2006 quarter was $339.1 million compared to $303.9 million a year ago, an increase of 11.6%. Earnings before interest, taxes, depreciation, amortization, and other non-cash items, which we’ll refer to as adjusted EBITDA, was $54.2 million or $0.18 per share compared to $39.3 million or $0.12 per share in the prior year, an increase of 37.9%. Net income was $16.4 million or $0.06 per share compared to $9.8 million or $0.03 per share in the prior year, an increase of 66.8%. For comparability purposes, please note that while we don’t project our included expenses related to the DOJ investigation and our guidance, our first quarter results for 2006 did include $542,000 of legal expenses related to this investigation compared to $4.2 million to the same period last year, and our first quarter results for 2006 include $12.5 million of stock compensation expense compared to $1.7 million the same period last year reflecting the adoption of SFAS 123R.

Consolidated cost of operations was $195.3 million or 57.5% of revenues for the March 2006 quarter, compared to $172.2 million or 56.6% of revenues a year ago, an increase of 90 basis points. The absolute dollar increase is primarily due to the higher revenues during the quarter. Also included in the cost of operations in the first quarter of 2006 was $3.1 million of non-cash stock compensation expense with no comparable amount in the prior year. Excluding the impact of stock compensation, cost of operations as a percentage of revenue is consistent year-over-year.

Consolidated sales, marketing, general administrative expense was $88.8 million or 26.2% of revenues for the March 2006 quarter, compared to $82.1 million or 27% of revenues a year ago. Excluding non-cash items related to stock compensation and our non-cash advertising consolidated SG&A were $78.3 million or 23.1% of revenues for the March 2006 quarter compared to $77.9 million or 25.6% of revenues a year ago, an improvement of 250 basis points. This improvement reflects our ability to increase revenues with our proportionate increase in certain general administrative expenses, which are generally more fixed in nature.

Turning to our balance sheet, our cash position at March 31, 2006 was approximately $376.8 million consisting of cash and short-term investments, which primarily consist of U.S. Treasury notes. The $132.8 million of the $376.8 million is attributable to WebMD. Operating cash flow in the March 2006 quarter was 46.8 million compared to $23 million for the same quarter a year ago. As we had previously stated, our operating cash flows can be negatively or positively impacted by the timing of the compensation accruals, other expense accruals, and a caution of receivables in relation to the quarter’s end. Other items impacting our cash balance during the quarter include capital expenditures of $14.2 million, the acquisition of eMedicine for $23.8 million, and $66.6 million of stock repurchases in the first quarter for 6.8 million shares. Now, I’d like to turn it back over to Kevin to give you some color on the individual business segments.

Kevin M. Cameron, Chief Executive Officer

Thanks Andy. Emdeon Business Services revenue was $201.2 million in the first quarter versus $185.7 million a year ago. This 8.3% increase is attributable to stronger performance across our remittance in payment, patient statement, provider services, and DIPS businesses, and the impact of the January 8th U.S. Postal Service rate increase. Our results exceeded our expectations due to stronger than anticipated volume in our remittance and payment services, due to volume ramping up faster than expected with respect to certain new customer implementations. Stronger than anticipated growth in sales of direct-to-provider revenue cycle management solutions including Emdeon Office, stronger than anticipated consulting services and software sales and DIPS, and stronger than anticipated medical claims volume resulting in part from the renegotiation of a number of customer agreements during the first quarter, and increase compliance by submitters with respect to certain preexisting agreements.

While we have made progress in this area, some of these issues may continue to persist. At Business Services, our sales pipeline has recently grown in the payer area, particularly with respect to remittance and payment services, which include paper and electronic solutions. Consequently, we are beginning to generate sales for some of our newer advanced claiming solutions. Finally, we also are beginning to generate interest in our newer solutions related to financial services. We expect our businesses to benefit from the accelerating adoption of higher deductible consumer directed health plans.

Emdeon Business Services record segment adjusted EBITDA of $43.2 million represents a 12.9% increase from $38.3 million in the year prior. Operating margin increased to 21.5% in the March 2006 quarter compared to 20.6% a year ago. This margin improvement resulted from the revenue increase and the continued achievement of operating efficiencies and cost savings.

Turning to Emdeon Practice Services; revenue was $75.7 million compared to $73 million last year, a 3.7% increase year over year. Segment adjusted EBITDA was $10.2 million compared to $4.4 million last year, an increase of 131.4%, and operating margins were 13.4% compared to 6% in the prior year, which both represent record highs for this segment. The financial results of Practice Services benefitted from the strong carryover of December 2005 sales, stronger than anticipated gross margins due to systems revenue mix and favorable pricing. We also experienced lower than anticipated operating expenses from greater-than-expected operating efficiencies, cost savings, and the timing of expenditures related to certain projects and positions.

To date, most of our focus has been on leveraging our existing assets to improve the backend of the process like infrastructure, delivery, and support, and we expect additional efficiency gains to be made in the second quarter. Beginning in the third quarter, we expect to shift our focus and resources towards leveraging additional assets in marketing, sales, and distribution, strategies that will help us achieve more meaningful revenue growth in the future.

We continue to position our business to take advantage of the growth expected in the electronic health record market. Now that we have made significant improvements in our infrastructure, we are better positioned to efficiently sell our full suite of Intergy Solutions to both current and new customers. I’m particularly excited about a new installation which is for one of the largest multi-speciality groups in the Eastern United States. Orthopedic Associates of Allentown has installed the full suite of Intergy Solutions including our Practice Management, Electronic Health Record, Radiology, and Document Imaging capabilities in its 300,000 sq. foot state of the art medical clinic which is slated to open this summer. Orthopedic Associates which has approximately 160 users with an existing Intergy client and chose our advanced integrated solution because it enabled them to reduce cost in many areas, enhance quality, and effectively manage the growth of their practice. We expect to close similar sales and to expand our pipeline in the coming quarters.

Our financial results demonstrate that our process and profit improvement plan is gaining traction and many initiatives launched during 2005 and early 2006 will continue to drive improving results in the future.

Turning to WebMD; revenue for the first quarter was $50.1 million compared to $33.6 million a year ago, an increase of 49.1% driven by continued growth in online services. Segment adjusted EBITDA for the first quarter was $6.5 million compared to $3.2 million a year ago. The reach of the WebMD health network continued to expand significantly. The average number of monthly unique visitors in the first quarter reached $29.2 million, an increase of 23% over the prior year period and 14% from the fourth quarter. Page view traffic during the first quarter totaled 746 million pages, an increase of 27% over the prior year period and 25% from the fourth quarter.

WebMD’s online reach to physicians continued to significantly expand as well, both organically and with the integration of the heart.org and emedicine.com sites. In the first quarter, WebMD averaged more than 1 million physician visits per month to its professional sites. In the March quarter, a record 479,000 continuing medical education programs were completed, an increase of 71% over the same period a year ago. We believe WebMD’s client list continues to represent virtually every leading pharmaceutical, biotech, and medical device company, as well as the growing list of major consumer package goods companies focussed on reaching health involved consumers.

During the quarter, WebMD continued the phased deployment of its new technology infrastructure that is designed to increase traffic to its network, create new sponsored revenue opportunities, and deliver new capabilities that further help users to make the most informed health decisions. WebMD launched the second phase of WebMD Health Search to further enhance its ability to deliver the most relevant health-related search results including search results from across the web in addition to WebMD content. Additionally, WebMD completed redesigned its home page and key condition channels within the site.

In the private portals market, WebMD continued to increase its market lead in providing private health and benefits portal to large employers and health plans with its private portals revenue excluding any contribution from new acquisitions increasing by 50% from over a year ago. As consumers are assuming greater responsibility for their healthcare decisions, the kinds of decisions for applications delivered on the WebMD platform will be essential. On April 17th, WebMD announced that it entered into a definitive agreement to acquire Summex Corporation, a provider of comprehensive health and wellness programs that include online and offline health risk assessments, lifestyle education, and personalized telephonic health coaching. The Summex programs will complement WebMD’s online health and benefits platform and will be marketed to both new and existing customers. Please refer to WebMD’s press release as well as their earnings call which is available on their website for more in depth detail on WebMD’s quarterly results and the outlook for 2006.

Turning to Porex, Porex’s revenue was $20.6 million for the quarter, slightly ahead of last year and segment adjusted EBITDA was $5.6 million versus $5.4 million in the prior year. Operating margins were generally in line with last year.

Turning to corporate expenses for the March 2006 quarter were $11.3 million or 3.3% of consolidated revenue, compared to $12 million or 3.9% of consolidated revenue last year. Improvement in our operating expenses is related to greater-than-expected cost savings, certain hiring delays, and the shift of certain planned expenses to future periods. Please note that both this year and last year reflects a corporate allocation to WebMD Health, representing the cost of services that Emdeon provides to WebMD Health.

Andy will now walk you through our previously announced financial guidance for 2006.

Andrew C. Corbin, Executive Vice President and CFO

Today’s guidance is consistent with the revised guidance that we provided on April 18th and can be found on the schedule that was furnished as an exhibit to a Form 8-K that we filed with SEC today. You can refer to that document as I proceed. First, I’ll briefly review our assumptions relative to our guidance for 2006. Guidance does not include any expenses related to the Department of Justice investigation for the balance of the year. Our guidance does not reflect any potential repurchases of shares of our out gaining securities which may occur over the balance of this year. Our guidance reflects the pending acquisition of Summex by WebMD. Cash and GAAP earnings per share are both calculated based on assumed weighted average share count of $299 million for the full year 2006.

The 2006 consolidated revenues are expected to be between $1.38 billion and $1.43 billion, an increase of approximately 8-12% increase from 2005. The timing of these revenues is expected to break down as follows throughout 2006: Approximately 25% in the second quarter, 25% in the third quarter, and 26% in the fourth quarter. We expect adjusted EBITDA to be between $225 million to $255 million or $0.75 to $0.85 per share. The timing is as follows: Approximately 24% in the second quarter, 25% in the third quarter, and 28% in the fourth quarter.

Including the impact of SFAS 123R, we’re expecting 2006 net income of $70 million to $90 million or $0.23 to $0.30 per share with the timing as follows: Approximately 23% in the second quarter, 23% in the third quarter, and 33% in the fourth quarter. More specifically by segment, Emdeon business services is expected to represent approximately 59% of consolidated revenue in the second quarter, 57% in the third quarter, and 56% in the fourth quarter. We expect operating margins to be about 21% for the balance of the year. We anticipate that this represents approximately 12% of business services and segment revenues and 12% of business services and segment adjusted EBITDA for the full year 2006. Emdeon Practice Services is expected to represent approximately 22% of consolidated revenues in the second quarter, which may be less than last year’s extremely strong second quarter. Practice Services is expected to represent 23% of consolidated revenue in the third quarter and the fourth quarter. Expect operating margins of about 12% in the second quarter improving to approximately 14% by the fourth quarter.

WebMD is expected to represent approximately 15% of consolidated revenue in the second quarter, an increase sequentially to approximately 18% by year end. Expect operating margins of about 16% in the second quarter improving to around 29% by the fourth quarter. Additional detail detailed on WebMD’s guidance can be found in an exhibit furnished with the Form 8-K that was filed by WebMD on May 2nd.

Porex is expected to represent approximately 6% of consolidated revenue through the year. Operating margins are expected to be approximately 27% for the year, except for the seasonally strong second quarter where margins are expected to be slightly higher. Corporate expense is expected to represent approximately 3.3% of consolidated revenue throughout the year. Additional data points to help you complete your models, inter-segment eliminations are expected to be approximately 2.5% of net revenues. Net interest expense is expected to be approximately $3 million to $4 million for 2006. Capital expenditures are expected to be between $70 million and $85 million in 2006. Depreciation and amortization is expected to be approximately $75 million to $80 million with the timing as follows: Approximately 24% in the second quarter, 26% in the third quarter, and 26% in the fourth quarter. Non-cash content in distribution services is expected to be approximately $7 million; the timing is follows: Approximately 24% in the second quarter, 20% in the third quarter, and 34% in the fourth quarter.

Stock compensation expense including the impact of SFAS 123R is expected to be approximately $48 million $50 million for the year which the timing as follows: Approximately 27% in the second quarter, 27% in the third quarter, and 21% in the fourth quarter. The estimated NOL balance at Mach 31, 2006 was approximately $2.1 billon, 69% at Emdeon and 31% at WebMD. Our estimated tax expense for 2006 is approximately $21 million to $22.6 million which equates to an effective tax rate of approximately 22%.

Turning to our second quarter 2006 guidance, we expect revenues to be approximately $345 million to $355 million, adjusted EBITDA to be approximately $0.19 to $0.20 per share, and net income to be approximately $0.06 to $0.07 per share. Again, these estimates are based on the same assumptions I mentioned earlier.

I would now like to turn the call over to our Chairman, Marty Wygod.

Martin J. Wygod, Chairman of Board of Directors

Thanks Andy. I’m going to keep my comments brief. I too am pleased with the first quarter results. I’d like to acknowledge the efforts of all of our employees whose hard work contributed to these improved results. Additionally, in anticipation of what you’re likely to ask when we open the call up for Q&A, I wanted to make the following comment. We are pursuing our previously announced process to evaluate strategic alternatives for our Business Services and Practice Services segments. We do not expect to be in a position to provide you with more specific or definitive information until we are further along with our evaluation. This will probably take another 30 to 60 days. Operator at this time, we are ready to field any questions.

Question-and-Answer Session

Operator

Thank you. At this time, we’re ready to begin the question and answer session. To ask a question please press “*” and “1.” As a reminder, please limit your questions to one question. To remove your question you can please press “*” and “2.” Once again, to ask a question please press “*” and “1.” One moment please. Okay, our first question comes from James Kumpel of Friedman, Billings and Ramsey, your line is open.

James Kumpel, Friedman, Billings, and Ramsey

Great quarter, looks very much in line with what you had guided to before. I was curious if you could talk a little about some of those re-negotiated contracts with payers and generally the kinds of terms that maybe got hashed out over the past quarter.

Kevin M. Cameron, Chief Executive Officer

Jim, there weren’t really re-negotiated contracts with payers. What we talked about more had to do on the submitter side and with re-negotiating some of those contracts and then also increasing compliance with some of the existing contracts that we had out there. So, a couple of the obvious ones, there were some things that were happening in the November-December timeframe that ran into January this year with some of the submitters and we were able to resolve all of those situations quite favorably, and then I think I spoke in the last quarter about some of the problems that were being cause for us because people were not complying with their contracts primarily on the submitter side, and we worked a little harder in enforcing that compliance and that has been pretty successful. We’ll have those issues out there and they could persist, but we’ve made good progress.

James Kumpel, Friedman, Billings, and Ramsey

Just one observation, looks like on the DRJ expenses it’s really come in dramatically. Can we expect those expenses maybe to hit these levels or decline even further over the course of the year?

Kevin M. Cameron, Chief Executive Officer

As you know we don’t project the DRJ expenses but I think we did say last quarter that they would come down and we’d expect that to continue.

James Kumpel, Friedman, Billings, and Ramsey

Great, thank you.

Operator

Our next question comes from Alex Draper of JMP Securities, your line is open.

Alexander Draper, JMP Securities

Thanks. I’m not sure if this question is for Andy or Kevin. I’m looking at the incremental profitability of business services. You’ve been able to drive that at north of 30% in 2005 and starting out that way in 2006, and assuming you hit your numbers this year staying at those level, are you at a point in the business now where most of the HIPAA expenses invested, where you, do you think of 30% plus incremental margin is a sustainable level for achieving growth.

Kevin M. Cameron, Chief Executive Officer

Yeah I think it’s very much a sustainable level and while it takes time, I don’t think the implication of your question is that sort of the top of where we can get, I don’t think it is, but there’s still substantial cost savings that we can realize as we continue to consolidate some of our systems, some of our data centers as we put in place newer technologies that don’t require the same level of personnel or the same number of personnel to accomplish some of the same tasks. Additionally, we’re continuing to develop portal-based products and other products that allow people to essentially do their own customer service. So, the more control we give out to the client, the better the client experience is, the better their customer satisfaction is, and it also happens to lower our costs dramatically to the extent they’re doing things for themselves as opposed through our call centers and customer service representatives.

Alexander Draper, JMP Securities

Okay, great, and one quick followup or clarification. Kevin, you commented that based on the guidance of margins and positions that Practice Services are going to be down in the second quarter and then building back up. You made some comment in your prepared remarks. I didn’t quite catch you. Can you just explain what’s causing the short-term drop and then what you’re doing with your investments and expenses in practice?

Kevin M. Cameron, Chief Executive Officer

I’m going to let Andy answer that question.

Alexander Draper, JMP Securities

Okay, thanks.

Andrew C. Corbin, Executive Vice President and CFO

What we said was some of the savings in that quarter were timing of expenses, so some of the expenses just moved into second and third quarter; certain projects that we’ve held off on will just start off in the second quarter and third quarter.

Alexander Draper, JMP Securities

Okay, great, thank you.

Operator

Our next question comes from Anthony Vendetti with Maxim, your line is open.

Anthony Vendetti, Maxim Group

I just have a follow, Marty. I know you don’t want to comment much more than that, but is it safe to say then that the sort of parameters that you outlined before, which is that you’d proceed with bids for both segments and within the next 30-60 days you will evaluate whether to sell one, both, neither, and still hold on to this, is that still the message?

Martin J. Wygod, Chairman of Board of Directors

I think it’s safe for you to say that, but we received indications of interest and we’re going through our strategic alternatives, and we will be making a decision in the next 30-60 days.

Anthony Vendetti, Maxim Group

Okay, great, thanks.

Operator

Our next question comes from Duane Pfenningwerth with Raymond James, your line is open.

Duane Pfenningwerth, Raymond James

Hi, I wondered if you could tell us what DIPS is as a percent of revenue and margin in Business Services?

Andrew C. Corbin, Executive Vice President and CFO

Yeah, that was actually in the prepared remarks. This will represent about 12% of Business Services’ revenue and approximately 12% of Business Services’ adjusted EBITDA.

Duane Pfenningwerth, Raymond James

Great, and then just on the update on the sale of the divisions, have there been additional bids since the initial announcements?

Martin J. Wygod, Chairman of Board of Directors

We can’t give any additional information at this time. As soon as we’re able to, we’ll put out some of the information. We expect that won’t be before 30 days.

Duane Pfenningwerth, Raymond James

Okay, and then on the guidance raised, can you talk about more on the cost side, what costs were you expecting to spend in 2006 that are no longer vacant to the guidance?

Kevin M. Cameron, Chief Executive Officer

I think the two places where we talked about costs, other than just managing the cost as we always try to do, were at corporate and to some extent Practice Services. I’ll let Andy comment on Practice Services. With respect to corporate, obviously we announced previously that we were going to recruit a CFO and we’ve deferred that decision, so that would an example of that expense.

Andrew C. Corbin, Executive Vice President and CFO

Practice Services part with margin expansion in first quarter some how came to gross margin with revenue mix, particularly in systems revenue, there is less hardware as a percent of the system sale. Also, we had better pricing so that was part of it. So, as we move forward that may not recur the same way. In terms of the expenses, we’ve talked about doing some infrastructure investments in Practice Services and just given where we are in the process, we’ve taken more sequential steps with project rather than run some of those projects concurrently, and that’s where we’ve had some expense savings in that business, and then the rest of it is just better operating efficiencies than we expected and cost savings from some of the other programs that we put in place.

Duane Pfenningwerth, Raymond James

So then, should we assume that if you did not sell these divisions that some of those costs might need to come back in?

Andrew C. Corbin, Executive Vice President and CFO

Yeah, it would be 1% of Practice Services, $700,000, so it’s not big dollars, 1% change in margin. It’s pretty insignificant for the timing of some of those projects.

Duane Pfenningwerth, Raymond James

Thank you very much.

Operator

Our next question comes from Andy Draper with JMP Securities, your line is open.

Alexander Draper, JMP Securities

Thanks. The question is for Wayne if he is on the call, if not maybe from Kevin. There was some noise out in the market today with some comments about Google coming into the healthcare space, and I would just be curious if you’d be willing to comment on how you view that as that competition potentially a source of incremental growth to your traffic and if you could spare me some comments there that would be great.

B>Wayne T. Gattinella, CEO and President, WebMD

Hi Andy, it’s Wayne. You may or may not know there’s nothing specific put out that, just some comments that they find the space interesting and they may be talking about it soon. Our view is that the market we compete is very large and yet the dollars spent online right now are very, very small. So, there’s certainly more than enough market to go around. We believe that anything that would help accelerate the conversion of those offline marketing dollars to online would benefit WebMD. In addition, I would say that two-thirds of the marketing dollars spent by pharmaceutical companies are actually spent on direct-to-physician marketing where WebMD has unique and commanding lead versus any other commercial sites on the Internet. So, we feel pretty strong about the market position and we feel very strong about the upside that we’ve described in the past irrespective of other market entrants.

Alexander Draper, JMP Securities

Great, thanks.

Martin J. Wygod, Chairman of Board of Directors

I think in addition to that, Wayne, it’s realistic not only to expect Google to come into this but other companies as well, so I think you’ll see several other companies coming into this space because it is such a huge rocket place and so under-penetrated at this point. We look at this as a positive and we think we’re creating very substantial barriers for entry and have a domain expertise in this industry where it’s going to be very difficult for companies to compete with us in our core areas of growth.

Alexander Draper, JMP Securities

Thank you.

Operator

Our next question comes from Duane Pfenningwerth with Raymond James, your line is open.

Duane Pfenningwerth, Raymond James

Thanks, I wonder what other drivers you saw in the quarter other than enforcements of your payout agreements in terms of claims.

Andrew C. Corbin, Executive Vice President and CFO

I think a couple of things, and I referenced to them in the prepared comments, but you’re talking about Business Services?

Duane Pfenningwerth, Raymond James

Correct.

Andrew C. Corbin, Executive Vice President and CFO

On the claim side I think it was the thing that you just mentioned but also just stronger volumes coming through, and we think that really relates to…generally we made some very conscious changes in how we contracted with payers about a year and a half ago. We spoke a lot about that. I think there was some rough water in the market during 2005 and we’re seeing more customers come our way, some of them went out and tried some other solutions and I think found that ours was pretty good, so some of that is driving the volume on the claims side. I also referenced stronger than anticipated growth in our direct-to-provider revenue cycle management products, and particularly we have a product called MD-on-Office that we sell to ambulatory providers. We think around last year we were getting more aggressive in selling that product and we weren’t all that successful at it, and then later in the year implemented some changes in both the sales process and sort of ease of implementation, if you will, so that once the customers make their decision they can essentially go online and be up and running very quickly and go by themselves, and that’s led to much higher sales of that product and adoption, so that’s driving some growth. I mentioned DIPS, just had a nice quarter related to some software sales and consulting services, and then also leads importantly to our remittance in payment services area, we’re seeing the pipeline built there and the volume ramped in the quarter, took some implementations that we were doing, ramped up much faster and the clients moved to full volume faster than we would have anticipated them to do that. But we’re also seeing the pipelines grow there and that’s really being driven not only by what we think is the great paper solution we have there by selling through Healthy Payers USA, a postage collaborative, but more importantly because of the unique solutions we can now bring to market as it relates to driving provider adoption of electronic remittance advise and electronic funds transfer, and we’re uniquely positioned to do that in a way that our client payers can’t do it and in a way that our competitors can’t do it. And that’s driving people to do have an interest in our remittance services, not just because of the cost savings that we can give them but because of the strategic advantage we can give them in an area that they’re very focused on right now.

Martin J. Wygod, Chairman of Board of Directors

Kevin, once you also think that the clearing house solutions that we referred to earlier, it’s a little not completed and we still can have some disruptions possibly during the year.

Kevin M. Cameron, Chief Executive Officer

Absolutely, I think we’ve said a couple of time that with respect to the medical area we’ve made good progress, but we do see some folks out there who may or may not chose to work with us, so we’ll see how well that goes.

Duane Pfenningwerth, Raymond James

Thank you.

Operator

And our next question comes from Alex Draper with JMP Securities.

Alexander Draper, JMP Securities

I think this is a private conference call. Thanks for letting me back in. Can you comment at all, with the sale process are there points in time where you would be prohibited from buying back your stock, or do you have a program where you have pretty much flexibility in terms of the openness of the stock buyback program? Thanks.

Martin J. Wygod, Chairman of Board of Directors

No, there are periods such as now where we’re not permitted to be involved in a buyback program.

Alexander Draper, JMP Securities

Okay, thanks.

Operator

Once again to ask a question, please press “*” and “1.”

Martin J. Wygod, Chairman of Board of Directors

Thanks everybody.

Kevin M. Cameron, Chief Executive Officer

Thank you very much. Take care.

Operator

Thank you for joining today’s conference call. As a reminder, if necessary, there is a replay available of this call which can be accessed toll free at 866-516-0673, or if you are calling from outside the U.S. at 203-369-2037. There is no pass code required. There’s also the webcast replay available on the company’s website as well. Thank you again for joining today’s conference, you may disconnect at this time.

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