Executives
David Boone – CEO
Steve Armond – CFO
Analysts
Morgan Frank – Manchester Management
American CareSource Holdings Inc. (XSI) Q3 2008 Earnings Call Transcript November 13, 2008 11:00 AM ET
Operator
Good morning, ladies and gentlemen, and welcome to the American CareSource 2008 third quarter financial conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session following today’s presentation. Please note that this call is being recorded. At this time, I would like to the turn the presentation over to David Boone, Chief Executive Officer. Please go ahead, Mr. Boone.
David Boone
Good morning and thank you for joining us today for American CareSource’s 2008 third quarter financial results conference call. With me today is Steve Armond, our Chief Financial Office. If you have not received the financial press release that we issue this morning. Please call the Rx communication group at 917-322-2568 and they will send it to you, you can also find it on our website.
During the course of this call, management will make projections and other forward-looking statements regarding future events and the company future performance. These forward-looking statements reflect American CareSource current perspective on existing trends and information that can be identify by such words as well, may, anticipate, belief, should, intend and other words of similar meaning.
Any such forward-looking statements are not guarantee in future performance and involve risk and uncertainties and include those noted in our filings with the SEC on Form 10-K, 10-Q and 8-K. Actual results may differ materially from those projected or estimated in the forward-looking statements.
For the benefit of those of you who maybe listen to this replay of the call. This call is held on recorded on November 13, 2008. Since then we have may have made announcements related to topics discussed, a brief reference of the company’s most recent press releases and current SEC filings. American CareSource disclaims any of them or obligations to update these forward-looking statements.
Well, as you can see from our press release, we had another impressive quarter, a testament of the robustness of our business model and our organizations ability to execute. Our results today marked the sixth consecutive quarter of double-digit revenue growth and five consecutive quarters of profitability.
Equally important we are continuing to make significant investments in our company as we build our capabilities to sustain this growth rate. Our growth rate continues to be a combination of adding new accounts and fortunate closer working relationship with our existing client base.
Steve will be providing you with specific information during his discussions with you. As a precursor I want to note that we’ve added two accounts from this quarter and year-to-date have added six accounts, five of which were active in the third quarter. This brings our total number of accounts to 16 versus 12 last year.
Equally important to our story is our growth in our existing client base. Our client look to us to help them reduce their healthcare spend and as we work with the managed or ancillary providers, we should be able to sustain a minimum of 50% organic growth from these clients to extend our proprietor base and rationalize their existing networks. In the third quarter our claim volume increased over 21% from the claim volume in the second quarter. 91.7% of that growth in claims will result of our existing client’s growth.
As we discussed during the second quarter conference call, we are continued to focus on three areas. The first, lowering the costs of ancillary share for our client patients or providing high quality ancillary healthcare services, second driving strong organic growth from our client base and third investment and business to accelerate growth and profitability. As we have discussed before, our target market is assisting the second tier regional and local insurance payers, health insurance employers and PPO networks to compete against the Blue Cross Blue Shield, United, Cigna and acting as a big force.
We effectively bundled the collective life of our clients with rare purchasing power that they would have individually. Collectively now represent over 18 million lives across the country. Based on our internal analysis, we have saved our clients 5.6 million in this quarter alone and 12.5 million year-to-date. As we drive greater penetration within these lives and expand our client base, we expect these numbers to dramatically increase.
Second, we continue to achieve strong organic growth from our existing client relationships. As we extend network providers and service offering. One key differentiator of our models is that we are provider centric. Our goals deliver savings of our partnering with our actual providers and delivering more patient lives to their practices and improving their efficiencies. We are working diligently to create deeper relationship with our provider partners, to earn even greater discounts for our clients.
Third, we continue to invest in our company. As we have discussed before, we are making significant investments for our people, our technology and our capabilities that will allow us to accelerate our growth and deliver that growth profitably. Today in our separate announcement, we announced addition of Jim Robinson to our Executive team as Senior Vice President of Sales and Marketing. We all know that (inaudible) Vice President of Sales and Business Development for the Eastern part of the country.
Today we made significant investments in our IT infrastructure. Our management, our front line employees all designs to ensure that the company can deliver on its commitment and then our ever increasing client love. These investments are helping to company grow profitably. Year-over-year our claim volume is increased by approximately 156% without a linear increase in people or cost.
We also have several exciting advance to discuss today. First and foremost we began trading on the NASDAQ Stock Market under the symbol ANCI effective September 29. Our decision to move to NASDAQ is an important step in the evolution of our company, which we believe will provide investor to the more transparent electronic market to both trading efficiencies and liquidity needs.
We commemorated our new listing by ringing the closing bell on October 9, which flied us with an opportunity to publicly that our employees, customers and shareholders who will continuously support the company.
Since, the end of the second quarter, we implemented two new clients. As noted in the past, we do not announce contracts only successful implementations. While we’ve signed contracts with additional new clients as a matter of practice, we will only probably announce clients once we’ve completed implementation process and are producing revenues for the company.
The new accounts we added recently to the JMS Associates, which will enable us to penetrate in the TPA markets, we expect to realize an estimated $1 million to $2 million in annual revenue, once that agreement is fully implemented.
In addition, we signed an agreement with Evolutions Healthcare Systems; Florida's largest independently owned PPO. We are at same they are the Florida location Evolutions have the strong presents in Florida, which allow the gain of important foothold in that very important healthcare market. We expect to realize an estimated $4 million to $6 million in additional annual revenue once agreement is fully implemented and we are able to build out that marketplace.
Before I turn over the call to Steve, I’d like to welcome our new Board member Sami Abbasi, he joined us in the beginning of December. Sami has over 20-years of healthcare experience and we look forward to tapping into expertise as we continually expanded our actual footprint.
With that, I’ll turn the call over the Steve Armond, our Chief Financial Officer, to review our financial results with you.
Steve Armond
Thank you, David, and good morning everyone. I am pleased to have the opportunity to share with you our third quarter 2008 detailed financial results. We continue to generate strong financial results including recorded revenues, consistent growth, expanding profitability and strong free cash flow. For the third quarter of 2008, net revenues increased to $16.1 million compared to $7.1 in the third quarter of 2007. This represents an increase of $9 million or 127%.
Approximately $5.2 million of the increase was due to the addition of five new clients during 2007 and four new clients that were added in 2008. Revenue from established clients increased approximately $3.8 million in the third quarter of 2008, compared to the same quarter in 2007 which was the result of expansion of services for those existing clients. Q3 ’08 revenues of $16.1 million represented another top line record and marked the sixth consecutive quarter of revenue growth for the company.
Gross profit for the quarter was approximately $2.6 million compared to approximately $1 million for the third quarter of 2007. The increase in gross profit is attributable primarily to the increase in revenue partially offset by several factors including increased administrative fees and a fluctuation of the mix of price, services provided by the company. The increased in administration fees was due to increased claim volume as a result of expanded relationships with both new and existing clients.
Fixed cost increased due to an increased headcount, the implementation of an important center plan in early 2008 and increased information technology cost associated with software development and infrastructure expansion. Gross margin as a percentage of net revenue for the quarter was 15.9% compared to 14.1% for the comparable period of 2007. The increase in gross margin is primarily attributable to increase in revenue and reflects continued leverage of the company’s fixed cost infrastructure.
We expect to realize continued margin expansion as we increase the rate of client volume and adding new client and expanding existing client relationships. We will drive further transaction efficiencies to utilization of claims processing technology of our business gross. Selling, general and administrative expenses increased to approximately $1.5 million for the quarter ended September 30, 2008 compared to $767,000 for the same quarter of 2007.
The increase was primarily related to the accrual of bonuses directly associated with improved operating results compared to the prior year, increased stock-based compensation expense recruiting fees, sales commission associate with our higher revenue; employee cost including salaries, benefit and travel and professional fees.
SG&A as a percentage revenue for Q3, ‘08 was approximately 9.2% compared to approximately 10.8% in Q3, ’07. The business realized substantial fixed-cost leverage over the past year and expected to continue realized further SG&A efficiencies as a business expands.
The company’s generated EBITDA as adjusted of approximately $1.3 million from the quarter compared to approximately $357,000 from the same quarter of 2007. This represents a 254% increase compared to last year. EBITDA as adjusted, a non-GAAP measure is declined as income from operations, less depreciations and amortization, non-cash warrant and option compensation expense and executive severance.
EBITDA as adjusted should be considered in addition to, but not in lieu of, income from operations reported under generally accepted accounting principles. Net income for the quarter was approximately $1 million or $0.06 per diluted share compared to $188,000 or $0.01 per diluted share for the same quarter of 2007.
Q3, earnings represented at record for the company and also the fifth consecutive quarter of the standing profitability. Cash flow from operations for the third quarter was approximately $2.1 million, compared to approximately a $143,000 for the same period in 2007. Factors affecting the improvement in operating cash flows include earnings growth, accelerated client collections and overall effectiveness in working capital management.
Now, let’s take a look in our financial results for the first nine-months of 2008. The nine months ended September 30, 2008 net revenue increased 204% to $40.6 million from $13.4 million in the 2007 period. Approximately, $17.3 million of the increase in revenues was drive from five new clients who begin with us from 2007 and four new clients who begin with us in 2008. In addition, approximately $10 million of our growth is attributable to the expansion of services performed for existing clients.
This is a result of both expanded payor and provider relationships, which had enabled us to capture more claim volume from established clients. Gross profit for the nine months ended September 30, 2008 was approximately $6.2 million, compared to approximately $1.7 million in 2007.
Increase in gross profit is distributable primarily to the increase in revenue partially offset by several factors including increase administrative fees and the fluctuation in the mix of types of services provided by the company. Increase in administrative fees was due to the increased claim volume as a result of expanded relationships with both new and existing clients.
This costs increase due to the increased headcount, the implementation of employee benefit plans in early 2008 and increased information technology cost associated with software development and infrastructure expansion.
Gross margin as a percent of net revenue for the nine months ended September 30, 2008 was 15.2% compared to 12.7% for the comparable period in 2007. Gross margin have substantially improved as a result of leveraging our fixed cost including system, processes and people demand significantly expanded claims volume. We expect to experience margin expansion as the rate of client volume increases overtime and as we continue to leverage our fixed cost infrastructure.
SG&A expense increased by $1.1 million to approximately $3.8 million to the nine month ended September 30, 2008. The increase in SG&A was primarily related to the accrual of bonuses associated with improved operating results, increased stock-based compensation expense, recruiting fees, sales commissions commensurate with our increased revenues, employee cost including salary and benefits and increase professional fees.
The increases were offset by one-time severance cost of approximately $330,000 incurred during Q2, 2007 for the company’s formal CEO who resigned effective as of June 30, 2007. For the first nine months of 2008, EBITDA as adjusted was approximately $2.9 million, compared to negative $306,000 for the same period of 2007.
The company also reported net income of approximately $2.1 million for the first nine months of 2008, compared to a net loss of approximately $1.1 million for the same period in 2007. Diluted earnings per share for the first nine months of 2008 were $0.12 per share, compared to a net loss of $0.08 per share for the same period of 2007.
Cash flow from operations for the nine months ended September 30, 2008 were approximately $4.2 million compared to negative $969,000 for the same period in 2007. We ended the quarter with approximately $8.2 million in cash on the balance sheet which compared to approximately $4.3 million at December 31, 2007.
It’s also important to note that the business continue to operate debt free and without exposure to the credit markets. We continue to generate significant operating cash flow and plenty operations and they continued strategic investments in the business, to harvest growth and profit opportunities in the future.
With that, I’ll turn the call back over to David.
David Boone
Thank you, Steve, and to review our strong top line growth to-date and near-term opportunities to expand services with the existing clients and realized revenues from our new clients we’re increasing on our 2008 revenue guidance from $55 million to $57 million for the full-year.
Now, let me reiterate our publicly stated milestones and advise you with an update on our progress. We continue to increase our national penetration with the addition of regional clients such as Evolutions Healthcare Systems, our Union relationships in the Upper Midwest and our TPA relationships with JMS. Also we expand our relationship with Viant we expect to improve the breadth and depth of our provider coverage across the country. We continue to customize and expand network to our clients, which has resulted in significant increases in existing client revenues.
Today, we’ve implemented 16-clients our goal for the year was 10 more implementations. We will fall short of this goal due to the delays we are experiencing with several of our contracted clients. We believe these delays are a result of limited resources and competing (inaudible) on their part, but not any issues with the business.
However, if we were to measure this goal in a number of contracts on this year, we feel confident that we would exceed this goal. That being said, we are not deviating from our policy of only announcing or accounting implemented clients headwinds for the year.
We are very proud with the potential of the business generated by our newly implemented clients. When we announce clients, we do get guidance on their potential impact once they are fully operational. As you may remember, we’ve always described our typical deal size is around $3 million to $5 million generating a book of business from outstanding and expected implementations of $30 million to $50 million for the year.
Using this metric, we have now generated roughly $48 million in new business and we’ll likely have further deals announced this year as we pushed towards the upper end of this range. We are driving a minimum of 15% growth margins in clients. As Steve mentioned during the presentation, revenue from the sales clients increased approximately $3.8 million in the third quarter of 2008, compared to the same quarter of 2007.
As we expand our network and expand our relationship with the clients, we expect to see a continuation of strong organic growth. We continue create a brand identity for our company through the support of our clients and demonstrated success. As regard to our client handwork capabilities, we’ve been recognized as a leader in the ancillary network management space.
With that operator, please let me open the call for questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from Morgan Frank with Manchester Management
Morgan Frank – Manchester Management
Couple of questions for you, what was the expense of the recruiting cost in the quarter? How much it add to SG&A?
David Boone
Yes, in the quarter. We had activities going on principally associated with hiring our new Senior Vice President of Sales and Marketing, as well as several other positions in the business. Those costs in the quarter is some more between $75,000 and $100,000 of SG&A.
Morgan Frank – Manchester Management
And that probably is it onetime?
David Boone
Yes, we would expect those to be recurring.
Morgan Frank – Manchester Management
Second question is about the guidance remainder for the remainder of ’08. It sounds, if look at the range you putout, the midpoint of it seems to imply a flat Q4 with Q3, but several (inaudible) difference encompasses recently would seem to probably you think that you might do it better in Q4 than in Q3, just understand a kind of clarify that?
David Boone
As always, Morgan we’re being very conservative with our guidance. With this uncertain economic time both the financial market as well as the important market we just want to be conservative and put a number of that, but I think we can do math and add up what we have done to-date and we do expect our quarter to have growth in the fourth quarter. So, we’re being conservative, I’ll leave it with that.
Morgan Frank – Manchester Management
So, you have no expectation of the down sequential quarter?
David Boone
No, not at all that we’re very optimistic about the way the business performing and how our existing client base and new clients are performing.
Operator
(Operator instructions) And we have no additional questions at this time
David Boone
Well, I thank everybody for taking the time and joining us today in the conference call. We’ve had a terrific quarter report. I hope we communicated the enthusiasm and optimism we have about our future prospects successfully. We look forward to sharing our successes with you over the next several conference calls. And with that, I’d like to conclude today’s call. Thanks again.
Operator
We thank you for your participation on today’s call and have a wonderful day.
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