NightHawk Radiology Holdings, Inc. Q4 2008 Earnings Call Transcript

NightHawk Radiology Holdings, Inc. (NHWK)

Q4 2008 Earnings Call Transcript

February 18, 2009 4:30 pm ET

Executives

Andrea Clegg – VP of Finance and Corporate Treasurer

David Engert – President and CEO

Tim Murnane – EVP and COO

Dave Sankaran – SVP and CFO

Analysts

Shelley Gnall – Goldman Sachs

Brooks O'Neil – Dougherty

Kevin Elliot – RBC Capital Markets

Stephen Shankman – Natixis

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the fourth quarter full-year conference call. (Operator instructions) This conference is being recorded today, Wednesday, February 18, 2009. I'll now turn my conference over to our host Ms. Andrea Clegg, Vice President of Finance. Please go ahead, ma'am.

Andrea Clegg

Thank you. Good afternoon everyone, and thank you for joining us. I would like to welcome you to the NightHawk Radiology conference call to discuss the company's results for the fourth quarter of 2008. By now you should have received a copy of the press release which was sent out a short while ago. If anyone still needs a copy you can access it on the Investor Relations section of our Web site at www.nighthawkrad.net. On the call this afternoon we have Mr. David Engert, our President and Chief Executive Officer; Tim Murnane, our Chief Operating Officer; and Dave Sankaran, our Chief Financial Officer. After management completes their prepared remarks, we will open the lines for your questions. Please note this afternoon’s conference call is being recorded and will be available for three weeks on our Web site.

I want to remind you that management will be making certain forward-looking statements in their remarks. All statements, other than statements of historical fact that address activities, events or developments that the company believes, anticipates, intends, estimates or projects or similar expressions are forward-looking statements. These forward-looking statements are based on assumptions and assessments made by the company’s management, based on factors they believe to be appropriate in light of their experience. However, these forward-looking statements are subject to risks and uncertainties that could cause actual results and business decisions to differ materially from those contemplated by these statements.

We describe these uncertainties and risks in the Risk Factor section of our periodic reports filed with the US Securities and Exchange Commission. The company undertakes no duty to update or revise any forward-looking statements made during this call whether as a result of new information, future events or otherwise.

Finally, we will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information in our press release and in our SEC filings, which can be found in the Investor Relations section of our corporate Web site.

Now at this point, I will turn the call over to Dave Engert, NightHawk's Chief Executive Officer.

David Engert

Thank you, Andrea. Good afternoon everyone, and thank you for joining us. It's good to be here and have this opportunity to share our results with you, and I look forward to getting to know our investors and analysts in the coming months. Well, my first 90 days have been very busy. I've undertaken a comprehensive review of our business, including accessing our mission, delving into our service offerings, getting to know our customers, employees and radiologists and fine-tuning our strategy. As I approach the 90 day mark, it's clear to me that have a great mission, a great set of employees, and affiliated radiologists and that we provide a valuable service to our customers.

There are many positive aspects to Nighthawk, including a talented and terrific group of people to work with. But there are also many areas ripe for improvement. Even though we have a very sound business model, I feel we have underperformed in a few key areas. Mainly, we need to sharpen our focus on our customers. We have suffered excessive customer attrition over the past 18 months and this is unacceptable going forward. We've instituted several programs to address this challenge, including a newly instituted account management organization and an executive customer outreach program. We intend to prove to each and every one of our nearly 800 customers that we are committed to world-class service quality level. Which brings me to the next key focus area.

The practice of teleradiology is still a relatively nascent industry and it is not surprising that a clear industry standard for measuring quality has not yet emerged. As a leading provider of radiology solutions today, I feel it is incumbent upon us to be the organization that sets and defines a new industry standard of quality. Our measures of quality will encompass the service levels our company delivers to our customers as well as the medical services our radiologists provide. It includes the medical finding itself, is it accurate? It also includes the report quality, is the report complete, easy-to-follow and concise with a clear impression. Quality also includes all of the related delivery services, do we have a properly licensed and credential radiologists on call when our customers need them? Is our turnaround time fast enough and are there no scheduling gaps? And our rad assistance, IT help desk and the radiologists easy to reach and responsive when a customer calls?

Well, our ability to drive the company forward will be dependent upon our ability to deliver on this new commitment to quality. It will be guided by the understanding that ultimately the only reality that matters is the perception of our customer. So we intend to seek continuous feedback on what we are doing right and what needs to be improved directly with our customers. We feel so strongly about quality that we are building it into the compensation of every employee, our management, and, soon, our radiologists. Simply put, we intend to stake out the leading quality position in the industry and deliver on it.

Another key focus is to ensure we have appropriate medical leadership and involvement at all levels of the company. I'm actively recruiting a Chief Medical Officer to join our executive team. The CMO will play a critical role in ensuring that everyone in our company stays focused on the goal of delivering high-quality, cost-effective healthcare solutions. Another important component of our leadership is to foster a culture of excellence across all areas of our company. We've begun the extremely important step of restructuring the company to enable the improvement of the skills and effectiveness of first, our people, both our employees and our radiologists; second our processes, everything involved in delivering efficient, high-quality services; and lastly our technology, the systems and infrastructure platform to enable our future growth.

On that infrastructure point, our service offerings require a unique mix of medical expertise and robust reliable technology to deliver our services. As the industry's largest provider of radiology services servicing over 1,500 sites each day and performing over 3 million reads in 2008, we simply must have a world-class technology platform. My background in healthcare IT is allowing me to assess our technology with a unique perspective. While I am pleased with what I see overall there is an opportunity to expand our technological leadership and to provide an even more reliable and comprehensive services to our customers. We are actively working to improve our systems in order to extend our lead in the preliminary market and encompass the needed capabilities to dominate in the finals market.

I will provide further updates later this year on the investments and the progress we are making in our IT capabilities.

And finally on to the numbers. Our Q4 financial results clearly demonstrate the robust financial model that underlies our business. We generated solid profits and strong cash flow even in the face of unprecedented economic times. This financial strength gives us the confidence as we focus on building a truly great company. Looking ahead to 2009, we have provided guidance for a typically seasonal Q1; however, I do not feel it's appropriate at this time to forecast or provide any outlook for the full year. Simply put, given my tenure in this role and the economic uncertainty we are facing I don't see the point in guessing how things will evolve over the course of 2009. Clearly, all management teams are grappling with this challenging forward view, but when I provide guidance, I want to be reasonably sure we can deliver on what we say, and at this time giving an outlook for 2009, I feel would be just too speculative.

We will focus on doing the right things to build our company over the year and leverage our strong financial model to generate solid profit and cash flow. Over the next couple of quarters, I will strive to credibly earn your trust, create value for all of our stakeholders and deliver on our commitments. I hope you will come to share my enthusiasm for the opportunities in front of us and they appreciate and thank you for your investment and commitment while we undertake the work ahead.

With that, let me turn the call over first to Tim to review our progress on several key areas and then to Dave to review the financial details of our fourth quarter results.

Tim Murnane

Thanks, Dave. My focus over the last year has been on improving process, quality and productivity, particularly in sales execution and customer service. I'm pleased to report that we have continued to make improvements in these areas. We can, however, do better.

Over the last few quarters, we have been keenly focused on identifying critical success factors for our operations, addressing urgent needs, while laying a foundation of best practices and operational excellence to help position Nighthawk for future growth. We’ve made good progress this past year, but as we looked closer at what defines service levels we realized there is much more that we can do for our customers and ultimately their patients. Simply put, we are committed to developing and delivering the high standard of customer service quality in the industry.

Let me talk more about how we define customer service quality levels. I’ve talked to you in the past about the improvements and turnaround times and the significant reduction of coverage gaps, both critical issues the company was facing a year ago. We continued to make solid progress this last quarter as our average turnaround times declined by an additional 8% and are now down 30% from a year ago. But service levels are measured not only by speed but also by quality and value to our customers. Our physicians are among the best in the world and deliver excellent patient care. However, our customers expect not only accurate medical findings, fast turnaround times and no gaps in coverage, but they also expect consistently high report quality, real-time access to physicians, a comprehensive quality assurance program, standardized reports, 24 x 7 customer support and dedicated account management.

Meeting this comprehensive level of high-quality service is our current focus. To start, we have realigned our organization to improve and streamline our customer interactions across all customer facing functions. We have also created and staffed a dedicated BPO customer management to focus on and address the core issues that have contributed to customer attrition. Finally, we are investing in our marketing function, including funding a customer survey to ensure that we understand our customers’ needs and set benchmarks for measuring our progress on customer service and satisfaction. Importantly, every employee will have a portion of his or her compensation tied to improvements in these customer service results.

Second, as mentioned on prior calls, we installed new sales leadership last summer and reorganized and expanded the sales team from top to bottom. These changes broadened our sales reach and improved our responsiveness to customer needs. In January, we took another significant step and created a dedicated account management function to focus on building high-quality relationships with each of our current customers. To be clear, we also have a dedicated focus group of new business sales representatives. We are confident this is the right model for our business and will position us well to both improve our customer relationships and to drive new business. My team and I are excited about these initiatives and our ability to move beyond the more immediate service issues we have experienced in the last year and to begin to stake out a leading position in terms of quality and customer service. I'm confident that we will succeed in this regard and ultimately see improved relationships with our customers, improved customer satisfaction, and importantly, improved customer retention.

With that, I will turn the call over to Dave Sankaran to discuss the financial details of the quarter.

Dave Sankaran

Thanks, Tim. Let's start with revenue. Fourth quarter revenue was $39.7 million, down $3 million or 7% from last year and down $3.7 million or 8.5% sequentially. The year-over-year decline consists of a $1.9 million decline in professional services revenue and a $1 million decline in business services revenue. The sequential decrease was primarily due to seasonally lower read volumes.

Looking at professional services revenue, the $1.9 million or 5% decline from the fourth quarter of last year is largely driven by the unfortunate but real effect of customer losses and the impact of price declines. Despite this loss – despite the impact of lost customers, total scan volume of 718,000 scans during the quarter was down less than 2% from the year ago quarter as new sales and organic growth nearly mitigated the effect of lost customers.

Year over year, the average price decline was 3.5% in the quarter, which consisted of a decline in preliminary pricing offset by an increase in finals pricing. Preliminary read revenue of $30.3 million was down 10.5% or $3.6 million year over year, predominantly due to a 6.5% price decline, volumes also down 4% largely due to the effect of lost customers. Same site growth drove a 5% increase in volume and new sites contributed 4% and lost customers lowered volumes by 13%. Final read revenue of $4.9 million was up 46% year over year due to a combination of 22% higher volumes and a 20% increase in average price. Final reads now represent 12% of our total revenue, up from 8% last year. Final pricing increased during the quarter as a result of a mixed shift away from X-rays and towards more complex higher priced studies, principally CTs.

The growth in final read volume relates primarily to acquired volumes from ERS as well as the impact from new customers. However, these gains were partially offset by lower same site volumes from current customers. Historically, final volume has tended to spike initially as we help our customers fill a need, and then to moderate over time. Increasingly and going forward, we expect the nature of our finals offering to evolve to where we are a more permanent part of our customers’ practice. Business services revenue was $4.3 million compared to $5.3 million in the year ago quarter. You will recall that we acquired this business in the third quarter of 2007, and that the year ago quarter reflected a one-time revenue adjustment that had a net effect on revenue of a positive $1 million. Without that item, the revenue from this business was essentially flat year over year. One further comment on revenue, a key metric for us is the percentage of revenue that comes from our new services. In this area, we continue to see the positive impact from our new finals and business services offering. During the quarter, the revenue from these new services combined was $9.2 million or 23% of total revenue, up from 20% in the prior year.

Before I continue, similar to my comments from last quarter, I want to remind investors how we present our adjusted or pro forma results. To start, we do of course publish GAAP results in our press release and our SEC documents. Having said that, internally our management and Board analyze our results in a number of ways, including looking at a cash basis income statement and viewing our results on an ongoing basis to analyze for any one-time items, which might provide a clear financial picture. First, similar to other companies, we removed significant non-cash items such as stock comp and intangible amortization. We also removed the impact of unpredictable non-cash items such as adjustments to our IBNR malpractice reserve. Any adjustment to this reserve is driven solely by third-party actuarial reports. In fact, the actuarial estimate for IBNR was reduced during the fourth quarter of 2008, and we have excluded this credit from our adjusted income measurements.

We also excluded any restructuring charges as we experienced in Q2 and Q3 of 2008. In addition, adjusted net income in the fourth quarter of 2008 also excludes a tax credit of $400,000 related to amended prior-year state tax returns. We excluded this credit because we didn't want to show an unusually low income tax rate in the fourth quarter only to see it go back up to more normal levels in the first quarter of ‘09 and beyond. We do of course fully describe these adjustments to our investors and give you the details on each of these adjustments so that you have the same insights into our numbers that we do.

For your reference, we include a comprehensive reconciliation of each of these items in our press release and on our Web site.

Looking forward to 2009 and 2010, we will also exclude a non-cash charge to interest expense related to the early settlement of our prior interest rate swap contracts. I’ll discuss the details of this early settlement in a few moments.

With that said, let me continue with details on the quarter and turn to our expenses. Adjusted professional services expenses, which excludes non-cash stock compensation and non-cash

IBNR malpractice reserve adjustments, decreased 3.1% or $15.8 million for the quarter. These costs are virtually all variable cost of service, and thus we expect this item to move largely in line with the overall change in volume and to a lesser extent due to any changes in mix. Offsetting this impact, we saw a 1% decline in the average cost per study as our scheduling improvement initiatives and productivity enhancements took hold. Adjusted SG&A expense excluding stock compensation was $14.6 million compared to $11.9 million in the fourth quarter of ’07, an increase of $2.7 million. However, adjusting for one-time credits of approximately $2 million in the fourth quarter of ‘07 and $1 million of severance expense in the fourth quarter of ‘08, SG&A was slightly down year over year.

Adding it all up, fourth quarter adjusted earnings were $4.1 million or $0.14 per diluted share, in line with consensus estimates and at the high-end of our guidance range of $0.12 to $0.15. GAAP net income was $2.7 million or $0.09 per diluted share, which is $0.05 better than consensus estimates and down $0.01 per share from $3.1 million or $0.10 per share in the year ago quarter.

Other key metrics that we focus on are operating cash flow and free cash flow. Operating cash flow for the quarter was $6.2 million flat with the prior year. And free cash flow was also very strong, $5.5 million for the quarter, which was up slightly from prior year. Beyond free cash flow, there were two other large cash items during the quarter. To start, we analyzed our capitalization structure closely and our current cash balances and related interest rates and decided to deploy a portion of our cash balances towards share repurchases, debt repayment, and to lock in lower interest rates on our debt. Specifically, we are determined to utilize $20 million of our cash balances. First, we announced a $10 million share repurchase program in December 2008. As of the end of the year, we have spent $3.6 million and the remaining $6.4 million under the plan was purchased in January 2009. In total, we repurchased 2.2 million shares under this $10 million program. In addition to these share repurchase activities, we also applied approximately $10 million of our cash to lower our outstanding debt and lock in lower interest rates on the debt. In December, we took advantage of historically low interest rates and utilized $5.3 million to settle our two existing interest rate swap contracts and entered into new interest rate swap contracts with more favorable rates.

In addition, we paid $4.4 million for a voluntary principal repayment on our debt. The effective interest rate on our debt is now 4.95% on a balance of about $94 million, and we have hedged that for the next 5.5 years or until maturity.

At the end of 2008, we had over $47 million in cash on our balance sheet, which puts Nighthawk in a very healthy liquidity position. It's worth noting that the bulk of our cash is currently invested in money market bonds which are 100% federally insured, and we have no investments in corporate debt or auction rate securities.

In the earnings release, we provided guidance for the first quarter of 2009. We have chosen to provide first quarter guidance and not for the full year of 2009 due to the uncertainty of the economic times we are in. We anticipate providing guidance for the upcoming quarter during each earnings conference call this year. With that said, the company expects first quarter 2009 revenues to be in the range of $38 million to $39 million, slightly down from fourth quarter of 2008 due to normal seasonality in volumes. This is essentially due to the fact that there are two less days in Q1 than in Q4 and due to the holiday impact on Q4 volumes.

On the bottom line, the company expects first quarter 2009 adjusted earnings per share to be $0.13 to $0.15, essentially flat with Q4. We are using a diluted share count of 28 million shares, which reflects the completion of our recent share repurchases.

With that we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Shelley Gnall with Goldman Sachs. Please go ahead.

Shelley Gnall – Goldman Sachs

Hi, thank you very much. So it looks like a pretty good quarter. I guess my first question is how important was December?

Dave Sankaran

Yes, it's Dave Sankaran. The quarter, when we first set guidance for it, you will recall winding the clock back a little bit to put it in perspective. September saw pretty sharp fall-offs from the summer, perhaps sharper than we are used to seeing as we come away from the summer peak. For lack of other information, a lot of us were extrapolating from that. So, sure enough, we came in at the higher end of our volume and revenue range for the quarter. I wouldn’t say that December was necessarily any sort of interesting volume pattern. I would say that what we expected in terms of a worst case scenario for the quarter didn't come home to roost. But really the volumes have fell off in October, trail down a bit in November, but really looked pretty typical in terms of the way they flow through the late part of the year.

Shelley Gnall – Goldman Sachs

Okay great, thanks. Moving on into the first quarter revenue guidance, it looks like you are looking for a 6% to 9% decline. I think you had mentioned there's two less days, maybe, in the first quarter. But on a year-over-year basis, can you talk a little bit about the contributors, the pricing versus volume?

Dave Sankaran

Yes, it's Dave again. Sequentially, you are right on point there is two less days, which is – you can do the math for us. It’s north of 15,000 reads. And the holidays contribute positive volume to us as we pick for our radiologists customers around Thanksgiving and Christmas and so on. So the fourth quarter also has a bit of a holiday spike. So sequentially, those things tend to go away, and we are looking at the business, looking relatively consistent absent those changes as we enter into the first quarter. In terms of looking at it year over year, I haven't spent as much time analyzing that. I think I year-over-year price declines, you can expect to see this year are relatively consistent with what we’ve seen in the last couple of quarters – for the prelims business, something like 6% and the rest of that same site growth assumptions – we have been in the low single digits. And I think you'll see trends like that continue until we get a different feel for the economy and how the business is evolving.

Shelley Gnall – Goldman Sachs

Just to be clear, so if you are looking about a 6% decline and positive same store growth, we don’t get to the 6% to 9% decline year over year for the first quarter?

Dave Sankaran

Yes, and so the rest of it is essentially the net of new customers and losses, Shelley, and we haven't broken out the details of that.

Shelley Gnall – Goldman Sachs

Got it, got it, okay, great. And then I guess can we just get an update? I know you talked about some customer attrition, that maybe it's business specific. But can you talk a little bit about competitive dynamics, what you are seeing? Maybe, Andrea, you could update us on your volume and customer retention rate.

Dave Sankaran

It’s Dave first on the customer retention rate. For the last 90 days the metric that comparable to our publicly traded competitor, the number for us, I believe, was 97% retention for the quarter. And Tim Murnane will give you a sense of what's going on competitively.

Tim Murnane

Yes. It's definitely a competitive marketplace, as you will know our customer retention rate improved somewhat in the fourth quarter. We have improved dramatically in our losses related to delivery issues. We are being very price competitive to make sure that we hold on to the customers that we have, and there are variety of reasons why customers leave that we've talked about before, everything from a customer losing a particular site to customers, in some cases, taking their own call to, as I mentioned earlier, delivery issues. But we are improving in all of those issues and all of those areas, and we think that during ’09 we will continue to improve throughout the year.

Shelley Gnall – Goldman Sachs

Would it be reasonable – thank you for the color. Would it be reasonable to think that the first quarter, because of so many initiatives underway, that the first quarter will be the weakest quarter in ’09?

Tim Murnane

You’re thinking from a revenue perspective?

Shelley Gnall – Goldman Sachs

From an EPS perspective.

Tim Murnane

It's a fair question. I think a number of the programs that we articulated, notably on the account management side in expanding our capabilities in terms of being close to our customers, addressing the needs, certainly have some cost components to it. What they didn't say on the call but we certainly talked about it in prior calls is that we are making a number of cost reduction and moderation efforts as well. So, if I look at the sum of how we make those investments on IT or on account management together with the savings we’ve identified, I think it will be relatively consistent. We are not trying to tell you that there is going be some large increase in SG&A or trying to be prudent about how we make those investments within our current cost structures.

Shelley Gnall – Goldman Sachs

Okay, great I appreciate the color.

Tim Murnane

You're welcome.

Operator

Thank you. Our next question is from Brooks O'Neil with Dougherty. Please go ahead.

Brooks O'Neil – Dougherty

Yes, good afternoon. I'm just curious, it sounds to me like you might be contemplating a relatively significant IT investment. You mentioned the SG&A. Did I read that correctly?

David Engert

Yes, this is David Engert. Hello, how you doing Brooks? Yes, we are. We are looking at an investment to shore up systems and add additional functionality, for a couple of reasons. One, I think we just have an opportunity to improve the service level reliability of financial structure, and really bring a nice areas of improvement on efficiency, on how we can more fully automate our service capabilities. And I also think that is an opportunity for adding functionality that will better position us to really begin to take a larger market share of the finals market. Right now, we're doing a good job of it, but I think we can accelerate that once we get additional functionality, operational and operating on a more automated basis.

Brooks O'Neil – Dougherty

In any way can you size that investment or give us a sense for – you think it will take you throughout '09 to go ahead and make those improvements?

Dave Sankaran

It’s Dave Sankaran. As far as the time frame goes, we are still in the early steps of the assessment and the overall time frame. But towards the later part of this year we expect to be able to put improvements into production, in both an expansion of functionality as well as improving the environment. And as far as the cost, which I think is behind a little bit of your question you know a lot of the cost will be capitalized as internally developed software, of course. But there is – I wouldn’t want you to leave the call with the impression that there is a significant sized IT dollar outflows that’s going to change our cost base. This is doing the right things for the system, but it is well within the cost base that we are looking at today.

Brooks O'Neil – Dougherty

Great. And maybe David, thank you for your comments there. Can you just give us a sense of what kind of reaction you’ve gotten from the doctors as it relates to the management changes, the steps you want to take to strengthen the company?

David Engert

That's a fair and a good question. I am not a doctor, and of course initially that rose a lot of eyebrows as to having a non-physician in the CEO role of this company. So I did spend a good portion of my early weeks in the company reaching out and making sure that the radiologists that are our radiologists understand that we're not going to make any big changes in regards to our relationship with them. If anything, I want to strengthen it. But there is one clear message that came back to me and that was shared with you today is that in a very competitive market we are in today, we have to have a tremendous focus not only on our customers but on the quality of services we provide and quality of course expands more than just what our radiologists do, expand into what we do as a company on just executing and performing the services. So I think we have had meetings, we've had a lot of information exchanges. I think our radiologists feel very comfortable that I'm not going to do anything dramatic that would upset or change their word. And if anything, I'm going to try to do everything I can to improve it. Our mission hasn't changed. We are definitely going to still focus on our approach to helping radiologists, our customers in the marketplace, and never taking a position of competing with them. And I think a very big move to solidify my commitment to doing the right things in regards to our medical direction is hiding a Chief Medical Officer. And I'm actively engaged in interviewing and pursuing filling that position as soon as possible.

Brooks O'Neil – Dougherty

Thank you very much. And last question I have, and you may have touched on this a little bit, but I know you made some changes in the sales organization towards the middle to the end of the year. And if you could just give us a feel for pipeline traction, that would be a big help.

Tim Murnane

Yes, this is Tim. Hi, Brooks. The pipeline continues to grow as it has done over the last few quarters. What we did with the sales organization, back in the summertime when we brought in the new management team and try to get more focused, we had our entire sales organization focused on both current customers and new customers. And what we've done in January is to add some strength on the account management side and to divide up the sales organization into two pieces, both of whom are – still work for Chris Anthony, a group that is focused entirely on managing the relationships with our current customers and trying to grow the business that we have with them, and then a separate group that is focused entirely on finding new business. And we think that the time was right to do this and we expect good results from that.

Brooks O'Neil – Dougherty

Yes, it’s great. Thank you very much.

Operator

Thank you. Our next question is from Kevin Elliot, RBC Capital Markets. Please go ahead.

Kevin Elliot – RBC Capital Markets

Good afternoon. Thanks for taking my question. I was wondering if you could give us any feel or outlook on operating cash flow or CapEx for the year.

Dave Sankaran

Hi, Kevin. We haven't obviously given that forward guidance. You could probably look at the last couple of quarters as instructive. I do think the third quarter was particularly strong. The fourth quarter was pretty much what I would say as expected in terms of looking at our EBITDA and then thinking about how it translates to cash flow. So without giving you a number here that we haven't probably given out otherwise, I think you can look at the last three quarters or so on average, and I would think those are relatively indicative of the cash generation capabilities of the business. Don't forget in the first quarter we did complete the share repurchase program, so there's $6.4 million to finish that program up in the first quarter.

Kevin Elliot – RBC Capital Markets

Great, okay got it. And then, on CapEx, are there any major investments you guys are looking at this year or is it pretty nominal?

Dave Sankaran

It will be on the order of magnitude of last year. We did, a few minutes ago, allude to the IT investments and there will be both some on the hardware side as we mature the infrastructure and put it into kind of a triple-redundant word-class facility, and there be some spending on the software side as well.

Kevin Elliot – RBC Capital Markets

Okay, that's helpful. And then I might have missed this in the prepared remarks, but professional services expense was low. Was that due to attrition or what's causing that?

Dave Sankaran

A fair question. Professional services for us behaves very variable. It is essentially linear with our volume, so we don't have a fixed cost to our doctors. So it was nothing to do with attrition or anything else. Really it was just the volume change in the quarter, which was, as we described in the call, the net of a number of a number of moving parts, same site growth, lost customers, new customers and so on. So I think the cost per study was almost flat for the year-over-year comparison, and I think that’s about what we expected. I think there's more room, ultimately, to lower our professional services cost per study deploy better technology, make some other changes in the service delivery model. But for the near-term model, you are probably thinking about – I think the four quarter’s cost per study is relatively indicative.

Kevin Elliot – RBC Capital Markets

Okay, that's helpful. And then question to David Engert. Can you compare and contrast your expectations from the first day you started to the 90th day, where we are at now? What surprised you both positively and negatively?

David Engert

Well, that's an interesting question. You know I was on the board since April of last year. So it wasn't like I just jumped into the role of CEO without having some familiarity with the company. I think, though, in any role where you actually get into seat of having to be the person making decisions on how to operate and so on, you have to delve down into details, at least, I do, did delve down into enough detail to really understand how we operate and why, and the complexities of our model, which on the surface appear to be a little more straightforward than it really is. So I've come to learn that over, I'd say, the first couple of months, before making any decisions, it’s really been an education for me. And reaching out to some of our customers, I attended RSNA initially as well and got a good feel for this marketplace. And the thing that resounds with me tremendously is the quality of the people. Our radiologists that I have met had lost information exchanges with are very impressive. Everyone here is really trying to do the right thing. What I’ve seen and what I feel is what I bring to the table, and the opportunity ahead is just being able to get everybody really aligned to the same initiatives and the same goals. And I've made an effort to try to improve our communication across all our despaired locations around the world and to all of our constituents. I think those have gotten a lot of feedback that that's well-received. I think the goals that we really trying to focus on, which are a customer-centric focus and building a culture of excellence is playing out well with our people. I think there is always things that you learn that I didn't clearly understand before and now that I do. I haven't done anything that's not fixable, that can't be improved. There's no big gotchas [ph] anywhere, but there's enough of them that it just doesn't automatically happen unless you really focus on the leadership and drive it down through the organization so everybody is pulling the same direction and turn it around. And I think I see that as being achievable this year. So, I'm very bullish on that. But we do have our work in front of us.

Kevin Elliot – RBC Capital Markets

Well, that’s helpful. Just kind of following up on that, now that you are making all the decisions, we've talked a lot about new business opportunities with IT investments and driving the finals business. Is there anything else that you really looking at in a significant fashion? Or what else do you think could be a significant driver for growth?

David Engert

Good question. Let me answer it in two parts. First, I'm convinced we have a great opportunity to grow in the core business we are in today. I think we can improve our ability to execute at a much higher level, and drive quality and everyone that is chasing us in our business to improve as well. I think we, being the largest and financially as stable as we are we have the opportunity to change the paradigm of how well be complete in what we do. And we are going to first focus on that. And when we get to be the best at what we can do I think we will grow within our own core focus markets today. And that's my number one focus. After that, and certainly what we're looking at on the radar screen today is where do we go from there? And so we are looking at other areas of growth. We handle more reads in a year than any other radiology group in the world. We're the largest purveyor of that information. So I think we have an intrinsic value and with that information that we manage and process every day that we are going to explore ways of determining if there is a market value for that. So that's one area we are going to look at over the next year. I think that's also international opportunities that we just haven't consciously pursued, and I don't intend to that now until we first, I think, get really good at what we are doing and return to a level of excellence on our execution. But then we are going to go and look at international opportunities. We have started business in Canada, so technically I guess you can say we are now into international business. But there are a few other countries we’re beginning to look at right now and look at potential partnerships and maybe ways of low cost entries into those international opportunities. So that's later in the year, next year, but those are definitely on the drawing board.

Kevin Elliot – RBC Capital Markets

I see. And then how big is that Canadian entry right now? Is it only like one practice or a small group?

David Engert

Let me be careful on how I address that. Let's just say it’s a couple of groups in over a dozen sites right now that we're doing business with. It's very early stage and we are structuring ability to grow it. But right now we are trying to validate the very answers to that question you just gave us. How big is it? How fast can we grow? What is the adoption rate of Canada and so on, and it's a whole different health care model, as you know, than the US. And there are certainly intrinsic things that you have to get past when dealing with another country, and particularly Canada, that doesn't come across as just being a US extension of our business. They are another country, and we have to treat it that way. So it's a little more complicated than just opening an office there.

Kevin Elliot – RBC Capital Markets

Sure, I understand. And then last question, going back to the economy, with hospital admissions still under pressure, is this continuing to weigh on the business in a significant fashion? And I guess, what's your outlook on that front?

David Engert

I hate to use adjectives describing how big the impact is. I don't know I think it is going to have an impact, and certainly going to be a strain on – our economy is straining, every industry, and health care, even though somewhat resilient, is not resilient to it. It's going to be affected. I think it – every time you have increases in unemployment people are not covered by health care insurance, you will see utilization drop in healthcare across the board. So I think we are in for somewhat of a slowdown. And it's just too early to tell how big and how significant that will be. I think all the smart money, though, is on the fact that it's going to drop.

Kevin Elliot – RBC Capital Markets

Okay, excellent. Thank you.

David Engert

Thanks, Kevin.

Operator

(Operator instructions) And our next question comes from the line of Stephen Shankman with Natixis. Please go ahead.

Stephen Shankman – Natixis

Thanks very much for taking the question. I actually was going to delve into the Canadian subsidiary, but I appreciate the color there. Maybe I missed it, did you provide GAAP forecast for first quarter of ’09, GAAP EPS?

Dave Sankaran

We did not.

Stephen Shankman – Natixis

Any help there?

Dave Sankaran

I actually don't have it calculated. The same kinds of adjustments will be present. I did highlight that we will have one extra adjustment in the next couple of years related to some non-cash amortization of interest rate swaps. But the primary ones are the stock comp, which is so dependent upon because of our stock model giving some stock historically to affiliated radiologists, the stock model is really more dependent than other companies on the stock price itself. So it's very difficult to predict that I wouldn’t want to have to predict it, not knowing what the stock price is going to be.

Stephen Shankman – Natixis

Okay. If we can maybe talk a little bit about the customer attrition, what's the big driver there? Is it competitive pressures, or maybe customer pullbacks related to the macro-economy? What kind of color could you provide for us there?

Tim Murnane

That has changed over the course of the year. If you look back earlier in the year, clearly the delivery issues on our side where the primary driver, and to a lesser extent perhaps not being as willing to be as competitive from a pricing point of view as we are now. And those things have changed, and the mix of reason changes each quarter. But as I mentioned earlier, the price issue is, in the fourth quarter, as an example, was virtually not an issue at all of why we had any customer loss. Our delivery issues are down significantly, it's a very competitive marketplace when a customer contract comes up for renewal, sometimes if we are bidding for that business along with others we might lose the business without even, you know, perhaps know exactly the reason why. That doesn't happen very often. We do have some customers who have taken their own call. In the third quarter that was a fairly large number for us. It was much, much smaller in the fourth quarter, where they decided that it was more economical for them to provide the service for themselves. So it is a changing landscape from quarter to quarter, and our primary objective is to keep driving the number down, the total number.

Stephen Shankman – Natixis

Okay. That's very helpful. And then maybe just one follow-up there, any color that you can provide regarding the number of contracts that might be up for renewal in terms of 2009 versus 2008? Or, just remind me again how long the contract durations are for?

Tim Murnane

Yes, typically they are one year renewable. So we would expect a similar number in ’09 to ’08.

Stephen Shankman – Natixis

Okay. Fair enough. Thanks very much.

Operator

Thank you. And there are no further questions in the queue at this time. I will now turn back to management for any closing remarks.

David Engert

Thank you, everyone. I appreciate your time and your thoughtful questions and your investments and continuing support to the company. We look forward to doing the right thing this year, and look forward to having more interactions with you over the next several months as I get to know more of our investors. And certainly I will be looking forward to our next quarterly call. Thank you very much.

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