SXC Health Solutions Q1 2009 Earnings Call Transcript

May. 8.09 | About: Catamaran Corp. (CTRX)

SXC Health Solutions Corp. (SXCI) Q1 2009 Earnings Call May 7, 2009 8:30 AM ET

Executives

Mark A. Thierer - President and Chief Executive Officer

Jeffrey Park - Senior Vice President and Chief Financial Officer

Analysts

David MacDonald - SunTrust Robinson Humphrey

Amanda Murphy

Brooks O'Neil - Dougherty and Company

Lawrence Rhee - Blackmont Capital

Charles Rhyee - Oppenheimer

Blair Abernethy - Thomas Weisel Partners

Michael Baker - Raymond James

Michael Minchak - JPMorgan

Tony Perkins - First Analysis

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SXC Health Solutions Corp. 2009 First Quarter Result Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the company's risk and uncertainties related to these forward-looking statements, please refer to SXC's annual information form. I would like to remind everyone that this call is being recorded on Thursday, May 07, 2009, at 8.30 AM Eastern Time.

I would now like to turn the conference over to Mr. Thierer, President and Chief Executive Officer. Please go ahead, sir.

Mark A. Thierer

Good morning, everyone and thank you for joining us on today's call. This morning we issued our 1Q 2009 financial results by press release. If you did not receive a copy, the results can be found on our website, sxc.com.

With me on the call this morning is Jeff Park, our CFO. I'll summarize the key events for the quarter and Jeff will then provide an overview of our financial results along with our 2009 guidance. I'll then close with a few comments and we'll open it up to Q&A.

The positive momentum we built in 2008 continued strongly in the first quarter, resulting in both strong financial and operational performance. Strategically, we've emerged as the industry's technology-enabled PBM. And we've now set our sites squarely on driving new sales. We see growth opportunities in each of the markets we serve and as evidenced by several key wins during our first quarter, we put together now our sales machine to generate new business across multiple markets.

Our core business is proven to be largely resilient to the recent economic turbulence and uncertainty. And as a result based on a strong first quarter as well as our positive outlook for the balance of year, we are pleased to be raising our financial guidance for the full year.

Jeff will discussing our financial performance and our revised guidance shortly during his section. As you've heard us say before, SXC possesses the broadest set of PBM solutions and most flexible PBM model in the industry. Our unique business model has increased our market opportunities and our competitiveness and resulted in several contract wins in this recent quarter.

Announced deals in 1Q and Q2 (ph) included a three-year contract valued at $240 million with the UFCW Employers Benefit Trust, and a three-year multi-million dollar agreement with PharMerica, a leader in the long-term care market.

In the state Medicaid market we won a nice piece of business in Virginia managing their Medicaid drug rebate services. This win will give us a nice toehold in the state and reflects our ability to win in a variety of fee-for-service opportunities in the Medicaid market.

The agreement is a three-year contract and reinforces the government market as a promising growth area for our company. We also won several midsized accounts across our various markets adding 150,000 lives to our PBM operations. A portion of these new lives represent mid-year starts and a portion will begin later in the year. And as a point of reference on average a 10,000 life plan, a commercial plan will generate 10 to $15 million in annual drug spending depending on that population. Revenue contribution is far less for Medicaid and HCIT lives.

In addition, we have several opportunities in both our informedRx and HCIT sides of our business that continue to move nicely through our pipeline and that we hope to complete during the second quarter. As indicated on our last call, our pipeline of opportunities for 2009 and 2010, the new starts are very full and we've got qualified business across all our target markets.

We expect a number of purchasing decisions to make shortly during 2Q and the 3Q periods.

Looking at our operating activity for the quarter. Our operations team has done a truly exceptional job with the integration of NMHC. Our work continues in this area and in the first quarter we generated additional savings and operating efficiencies through site consolidations and facility closures. A few days ago, we formally closed our Port Washington facility and two other sites are on track to shuttered on July 1.

We've capitalized numerous mail order and specialty pull-through opportunities since the beginning of the year. And pull-through pipeline continues to build. As you know, mail order and specialty provide excellent margin expansion opportunities for the company. We have a lot of room to run in this area. Separately we're very focused with pull-through activities in our HCIT. We're exploring a number of full service informedRx deal structures with a number of those clients.

As a result of our growing scale of operations, we are driving stronger purchasing efficiencies through both our network and rebate management functions. This area was a significant contributor to our strong margin performance in the second half of 2008 and in 1Q 2009 as well.

Regarding the Zynchros integration, we have successfully now folded in that operation into our HCIT business. Zynchros as a reminder has 45 customers, principally brand named health plans, many of whom represent cross-sell opportunities for our HCIT and our informedRx solutions. We are actively pursuing those opportunities as we speak.

Okay, looking ahead, 2009 is shaping up to be a very good year for SXC. As the industry's technology enabled PBM, our differentiated model delivers the tools, technology and services to help a wide range of clients in multiple markets, save money on pharmaceuticals and take better care of patients.

At this point, I will turn it over to Jeff to take a closer look at our financial results for the quarter.

Jeffrey Park

Thanks Mark, and welcome everyone. As Mark said, Q1 was a very strong quarter for SXC. We generated 16.3 million in adjusted EBITDA, up more than 155% from Q1 2008 and we grew our GAAP earnings per share to $0.31 from $0.16 last year.

Excluding amortization related to the purchase of NMHC, our earnings per share increased from $0.16 in Q1 2008 to $0.38 in Q1 2009. As a result of this strong performance, we delivered $11.8 million in cash from operations in Q1 compared to $8 million in Q1 2008.

Revenue for Q1 was $291 million, which was in line with management's expectations for the quarter. PBM revenues and scripts counts were consistent compared to Q4. We did go live with health plan of San Mateo and this was offset in part due to reduced revenues from members use of their plain deductibles at the start of the New Year. As you know we do not record any member payments or co-payments in our revenue.

Our top-line outlook for the year is positive and we expect revenue levels to trend higher during the year as agreements, such as those with PharMerica and UFCW Northern California ramp up. Adjusted prescription claim volumes on the PBM side, was 8.4 million in Q1 consistent with $8.4 million in Q4 2008.

Our mail penetration remains steady at approximately 8% and will be a key focus for us in 2009. Our generic dispense rates are industry leading at 71%. Q1 was helped by strong cold and flu season, in particular at our specialty pharmacy. It was building in Q4 and was in full stride in Q1 2009. You can see PBM revenue is consistent in Q4, but gross margin expanded $600,000. You should take this $1.5 million at the run rate of Q1 for the seasonal benefit for future quarters in 2009.

Turning to performance on the healthcare IT side, we increased slightly from Q4 2008, reflecting strength in our professional services in the quarter. As discussed on the last call, we expected transaction revenues to decline approximately $1 million in the quarter or 25 million transactions. However, we did see increased transaction processing revenue and strong maintenance revenue due to the one-time benefits in the quarter.

Overall, we received approximately 500,000 in gross margin one-time pick ups in the quarter. Please keep in mind as we have discussed on prior calls, that on a year-over-year basis, the Q1 HCIT revenue numbers do not include the pre-acquisition informedRx, which we now account for in our PBM segment.

Recurring revenue on the healthcare IT business remained steady at 79% in Q1 compared to 81% in Q4 2008 and 78% in Q1 '08. Transaction processing volume was $96.8 million in Q1 compared to $118.5 million in Q4 2008, of which approximately 32 million transactions were for pre and post dated work.

The decline in the commercial side is due to the departure of one HCIT client we discussed on our last call. The impact is approximately 25 million transactions in the quarter.

Consolidated gross profit for Q1 was $39.2 million, up from $37.3 million in Q4 '08. Gross profit for adjusted claim on the PBM side was $3.43 per claim compared to $3.34 in Q4 '08 and $2.77 in Q3 '08. Strong gross profit performance in the quarter was due primarily to the realization of the efficiencies related to the acquisition including but not limited to the purchasing of leverage to our pharmacy network and manufacture rebate initiatives. As mentioned the one-time benefit boost of approximately $2 million from both the HCIT and the PBM segments in the quarter.

Q1 adjusted EBITDA was $16.3 million compared to $14.7 million in Q4 2008, and $6.3 million in Q1 '08. Adjusted EBITDA totals for Q1 increased due to strong gross profit expansion and realized efficiencies related to the acquisition.

We're pleased with our adjusted EBITDA performance in the quarter and with our ability to drive improved and combined performance post acquisition. It validates our strategic acquisition of NMHC and is a strong indicator of our ability to successfully integrate it into to the SXC organization.

In terms of cost synergies as Mark mentioned, we are moving through the next phase of the NMHC integration which relates to certain site closures and head count reductions. We are pleased with our progress so far and remain on track to achieve or potentially exceed the cost synergy targets that were established at the time of the acquisition.

Q1 GAAP net income was $0.31 per diluted share, compared to $0.20 per diluted share in Q4 '08 and $0.16 per diluted share in Q1 2008.

Its worth noting that the GAAP EPS growth year-over-year was achieved despite the inclusion of significant non-cash acquisition related costs in a very difficult economic environment. This is due to gross margin expansion, our ability to accelerate the timeline of the acquisition synergies and an increase in organic growth activity.

Non-GAAP adjusted EPS was $0.38 per diluted share in Q1 compared to $0.28 in Q4 '08. This metric excludes the amortization of intangibles directly related to the NMHC acquisition and we believe provides a better comparison with the net income from the pre-acquisition period. A reconciliation of Q1 '09 adjusted EPS can be found in today's press release. This represents a greater than 145% increase in EPS compared to Q1 '08.

We currently expect 2009 to have 7.6 million in deals related amortizations and six million for 2010 related specifically to the NMHC acquisition. This detail will be outlined in our 10-Q which will be released tomorrow.

Post-acquisition, the company's ability to generate strong cash from operations, remain a key focus of our business model. In Q1we generated net cash from operations of $11.8 million compared to eight million last year, a 47% increase.

Looking quickly at the balance sheet. Due to the acquisition, we hold 48 million in term loan. At the end of Q1, we had 80 million in cash on the balance sheet plus an additional $13.6 million in restricted cash. CapEx for 2009 is expected to be nine to $10 million.

Finally let's focus on guidance for 2009. With revenue, we have increased our forecast from 1.2 to 1.3 billion and increasing it to 1.25 to 1.35 billion.

As you are aware, Q4 and Q1 are seasonally high for utilization, so we expect the bulk of the revenue expansion to continue in the second half of the year. With consolidated gross profit, we have increased our guidance from 140 to 150 million to now 145 to 155 million. In considering this range relative to the level of Q1 gross profit, you should take into account Q1's one-time benefit of $2 million.

With adjusted EBITDA, we've increased guidance from what was 51 to 54 million, to now 57 to 60 million.

GAAP EPS guidance on a diluted basis is now expected to be $0.93 to $1.01 versus our previous estimate of $0.77 to $0.85. The midpoint here implies healthy year-over-year EPS growth of approximately 50%. With the higher guidance, we expect our annual tax rate to be 30% versus the 27% in the quarter.

With respect to non-GAAP adjusted EPS guidance on a diluted basis, it is now expected to be $1.13 to $1.21 versus a prior estimate of $0.99 to $1.08. As mentioned before by excluding the due related amortization of intangibles for the NMHC acquisition, this measure really provides a better comparison to the pre-transaction GAAP EPS. It also highlights the ability of the cash generating potential of the combined businesses.

In closing, Q1 was a strong start for the year and our outlook for the remainder of 2009 remains positive. We believe that the increases to our guidance targets reflect our overall optimism in the business, yet remain conservative.

With that I will turn it back to Mark for closing comments. Thank you again for your time and your continued support.

Mark A. Thierer

Thank you, Jeff. Overall, we are very pleased with our strong performance in the first quarter and with the growth opportunities that are in front of us. We continue to make great progress in advancing our mission of redefining pharmacy benefit management as the industry's technology enabled PBM and expanding our markets.

Although the economic outlook remains difficult and uncertain, our core business is healthy and we are in the enviable position of increasing our guidance for the full year. We believe we now have the industry's broadest set of choices to contain the costs of pharmaceuticals and improve patient care, capabilities that are especially important to our customers in today's difficult economic environment.

So our game plan for 2009 remains very straight forward. First, complete the phase, the final phases of our integration with NMHC and with (inaudible). Second, drive continued EBITDA growth through cost and revenues synergies. Third, drive continued operating efficiencies across the company. And finally, realize our growth potential with broad sales initiatives in 2009 that drive new customer wins throughout this year and into 2010.

So while our focus remains on integration and selling new business, we are keeping our eyes open for future acquisition opportunities. And we're seeing some compelling opportunities and valuations.

In general the types companies that fit our criteria would typically be; a small to medium sized PBM with regional or specific customer focus, companies providing niche expertise in areas such as specialty pharmacy oncology, disease state management or outcomes and analytics, companies with expertise in the public sector pharmacy including state Medicaid, and finally companies with 10 to $25 million of EBITDA with high recurring revenue streams.

Well, thank you for your participation on today's call and for your ongoing support of SXC. Over the next several months we'll maintain an active schedule to continue to get the word out regarding SXC story. We'll be presenting at the JMP Conference in San Francisco on May 28 and we'll continue to meet with current prospective investors during plan non-deal road shows. In addition, our shareholder meeting will take place on May 13, 04.30 Central Time here Downer's Grove at the Marriot Hotel. We really do hope to see many of you during our upcoming travels.

This concludes our prepared remarks for today and at this point I would like open the call to any questions.

Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will conduct the question-and-answer session. (Operator Instructions) Your next question comes from the line Dave MacDonald from SunTrust. Please go ahead.

David MacDonald - SunTrust Robinson Humphrey

Good morning, guys. Hey, can you guys talk a little bit about the sales force and just kind of new business? Are you guys doing anything different with the sales force now that this is integrated, have you added folks? Can you give us a little bit more detail on maybe some of focused initiatives that you're trying to implement as we move forward here?

Mark Thierer

Yeah. Dave, and thanks very. The co-sales organization has been a top five priority and of the five that we laid out that we're going to get done this year, driving new sales is our single most important priority. So, under Mark Mateka's leadership we've now fully staffed out our sales team. We have ten full-time informedRx sales guys who are targeting the small to intermediate size employer base. We also have a couple healthcare IT facing folks and dedicated sales support for long-term care as well as our fee-for-service Medicaid business.

In addition, we've got roughly 50 card carrying account management people who are tagged with quotas to drive pull through in the business. And then finally we've got seven or eight physician facing sales guys, who are driving our specialty pharmacy initiatives in the field.

And so, we are at full force from our selling organizations standpoint. But and more importantly we are becoming very disciplined about our targeting activities, our marketing activities to support the selling process and our best and final process.

So, we've actually engaged a consultant to help us frame out our approach and really crystallize our message. And candidly, I am very pleased with the progress we're making from a process standpoint. And as I said we are now in full fighting strength. So hopefully that gives you a feel for some of what we're doing.

David MacDonald - SunTrust Robinson Humphrey

Mark, are you guys marketing more I would assume also to the consultants who are driving a lot of this process?

Mark Thierer

We are, in fact last year in the third and fourth quarter we put on a national consultant road show where in many cases it was the first time we got our name out for a lot of these people. And I think the fivefold increase we saw in bids was a direct reflection of just getting our name up.

What we've done with that initiative now is taken it to a whole another level. We have an eight step consultant strategy where we are very specifically rolling out our value proposition in terms of outcomes, analytics, our selling tools, our reporting tools. And really the value proposition SXC brings to their target market. And so, our top guys are out in front of the consultant community looking for opportunities to help them be successful. So we're spending a lot of time in what I call the Tier Two consultant community a lot less time with the hewits and towers of the world who are really focused on the very high-end of the market.

David MacDonald - SunTrust Robinson Humphrey

Yeah.

Mark Thierer

So we figured out who can help us and we're focused on working with them.

David MacDonald - SunTrust Robinson Humphrey

Okay. And then just on the integration, in some of cost savings synergies, the site consolidations, sounds like they are moving ahead fine. What's going on, on the systems side? I mean, have all of the NMHC multiple systems now been shut down or those people know kind of where are we there?

Jeffrey Park

Dave this is Jeff. Yeah we... as you know we've integrated all the clients over on to our claim platform. They're now all in one location. The datacenter operations are consolidated. The system and infrastructure components that our customers facing are all tied together. The financial systems are integrated. So, we obviously continue to have areas where we're going to continue to refine through 2009, certain of those systems.

But, we feel like we are in very good shape.

David MacDonald - SunTrust Robinson Humphrey

What is the head count that was associated with maintaining all of those systems still on board? Is it gone, is it partially gone, where are we there?

Jeffrey Park

Yeah. At the beginning of May, actually May 1, the former headquarters of National Medical was closed down. That was where the majority of the administrative finance and IT infrastructure resided.

David MacDonald - SunTrust Robinson Humphrey

Okay. And then just two last questions. One, Jeff the stock-based comp is a little lower than we were looking for. We were expecting about four million for the year, it looks like its running about 2.5. Which one is closer to reality?

Jeffrey Park

Yeah. If you look a last year, our full year was roughly four million. So David, it won't be the run-rate that we have in Q1, it will be closer to 36, 38 so that's what you should be expecting.

David MacDonald - SunTrust Robinson Humphrey

And then just last question on the one-time gross profit pick-up, the specialty pharmacy pick-up I would assume is that synergist and if it is, why shouldn't we, that's something that I would expect we see in 4Q and 1Q am I correct?

Jeffrey Park

Yes.

David MacDonald - SunTrust Robinson Humphrey

Okay.

Jeffrey Park

It is. A big chunk of it is synergist but the rest of it is sort of normal cold and flue season, really my comments are related to not annualizing the Q1 numbers and Q2, Q3.

David MacDonald - SunTrust Robinson Humphrey

Okay. And that season is normally October to above the beginning of April, is that fair?

Jeffrey Park

Yeah.

David MacDonald - SunTrust Robinson Humphrey

Okay. Thanks, guys.

Operator

Your next question come from Amanda Murphy from William Blair. Please go ahead.

Amanda Murphy

Hey, good morning. Some questions here; first on utilization. Can you give us an idea, it sounds like the... on the PBM side of the business claims were basically flat year-over-year. How are the utilization trends in your base business trending and then sort of what is the piece that's coming from that new business?

Jeffrey Park

Sure Amanda. This is Jeff. As you mentioned overall, the scripts were flat in the quarter for the PBM, but as we look deeper into the results, we see some of plans with year-over-year and quarter-over-quarter growth of two to 3% and others that have negative trend. Also see mails scripts lower in Q1 versus Q4 modestly and for some of clients and this is perhaps due to people filling at mail in the fourth Q in advance of the new planned year and new deductible starting January 1. As you know, we've been targeting mail to help client save overall drug span and these new mail scripts have started to come in nicely and we expect to expand that through the year as I mentioned in my prepared remarks.

Amanda Murphy

Okay. And then switching to the selling season for a second. The 150,000 lives you added, just to confirm, that's all 2009 start? And is that in line with your expectation?

Mark Thierer

The bulk of them are in fact 2009 starts, a bunch for July 1, some September and October starts. In terms of being in line with our expectations, we have a bunch of business in the pipeline and we're active with... in every single market we service with live and qualified opportunities. So we're not done.

Amanda Murphy

Okay and just as we think about, as you are competing in the selling season, how do you... may be you could provide some examples of how you leverage your strength in IT to win new business or compete for new business on the PBM side?

Mark Thierer

Well that's a great question, and a lot of time on these calls we talk about the financial results, but in terms of what we talk about with our clients. As the technology enabled PBM, we bring a whole new model to helping them save money in pharmaceuticals. And our level of insights and analytics around the recording and the recommendations on the right therapies, I think is the best in the business. One of the areas where we're focused is the new application that we acquired called Integrail, which is a merged pharmacy claims and medical claims database that really allows you to save serious money with high risk individuals.

So, it's kind of a... it's a high end prediction tool, risk management prediction tool for health plans and larger employers to get serious about saving money. So when we are invest in finals we're leveraging the technology footprint that we have in some of our superior products as a key part of the selling process.

Amanda Murphy

Okay. Thank you very much.

Operator

Your next question comes from Brooks O'Neil from Dougherty and Company. Please go ahead.

Brooks O'Neil - Dougherty and Company

Yeah good morning guys. Congratulations on a really terrific quarter. I have a couple of questions. Number one just following up on David. I just want to be sure, I think you referred to non-recurring EBITDA benefit of two million in your press release and if I heard you correctly, it's really not non-recurring, its just not something you expect to see in 2Q and 3Q. Is that... am I hearing you right?

Jeffrey Park

Yeah, partially Brooks. We talked about in the PBN segment roughly a 1.5 million that related to a strong specialty including synergies and you've got the comments correctly on that. On the HCIT side, we talked about $0.5 million in the quarter that was really related to increasing reprocessing activities and as you can see a pick up on the maintenance side. So, that's the total of two million and the caution I was giving was with respect to using the Q1 results and annualizing it.

Brooks O'Neil - Dougherty and Company

Yes, that's helpful. I understand that well. And then again if I heard you guys correctly, the revenues particularly the PBM revenues, were consistent with your expectation, but I think maybe 10 or $15 million below consensus. I just want to be sure there wasn't anything unusual that you guys weren't expecting in the quarter in the PBM revenue side.

Jeffrey Park

No, there wasn't and that's one of the reasons we moved guidance up.

Brooks O'Neil - Dougherty and Company

Yes. Okay, that's good. And then obviously, you continue to benefit from the synergies related to NMHC. Can you in any way estimate where you are in terms of capturing those synergies both on the... I guess the cost side and the purchasing side? Would you say you're nearly there or is there still quite a well to tap?

Jeffrey Park

Yeah, we're obviously. We feel good about where we are Brooks. We're ahead of our initial plans and the expectations we had set. The biggest piece that we have as we face 2009 is consolidating the remaining two facilities. With those consolidations, we'll actually see some increase in head count in the near term as we double up in some of the capacities before those facilities are closed. And then -- so we really see more of those savings in the last half of the year. But we feel very good about our ability to drive the cost synergy side of this business and you'll see that project really completed in 2009 and some of benefits continue to carry through 2010 and beyond.

Mark Thierer

But Brooks the answer to your question regarding ongoing leverage in this business especially in the cost to goods area will be something that we'll benefit from for a long time and the fact is we're a larger business, we've got the right people in the right jobs on the cost of goods side here, acquisition cost in the network and with pharma, and so we feel much better positioned certainly than we were last year in that area and the acquisition, that was a big piece of the pieces going in to it.

Brooks O'Neil - Dougherty and Company

Great. Can you just talk a little bit about mid-year starts and sometime costs related to launching new business in the middle of the year can impact profitability. How do you feel about that as you look forward in to 2Q and 3Q?

Jeffrey Park

Yeah, we obviously have a number of pieces of business that are going to be going up in 2009, but I don't really see a significant impact with respect to those goals.

Brooks O'Neil - Dougherty and Company

Are you seen any material pricing pressures in your segments in the marketplace?

Mark Thierer

Brooks I think we underwrite every single case that leaves SXC here, and Jeff and I personally approve every one. I think the pricing is very rational out there right now and it is obviously competitive and you've got to hustle to win, but it's rational.

Brooks O'Neil - Dougherty and Company

That's good, and then just two quick final ones. I'm curious if you've had any success. I know it's very early but, in terms of Zynchros cross selling, anything you could point to?

Mark Thierer

We have. We put our first, we call it pelt on the wall. We have a win. We're not going to announce the client. In general going forward, we're going to be a little less specific about the names of customers. As you may know that can get you into trouble on occasion and so, we do have a win that we feel great about. More importantly, Zynchros was really, think of it is a Trojan horse with these 45 health plans, each running their Part D reporting area relative to formulary management creating HPMS reports.

Those are all selling opportunities to pull through the balance of the product line. So, while we bought the industry's leading application platform, we really bought 45 high profile customer relationships, almost all of whom are very happy with this tool.

Brooks O'Neil - Dougherty and Company

Great. And then lastly speaking of acquisitions, obviously you provided some color on your thinking there. But I'm just curious if you could sort of quantify or give some color to how strongly you're pursuing acquisition, whether there is a likelihood we'd see something in the near term or was it your just keeping your eyes open strategically for opportunities?

Jeffrey Park

Brooks, this is Jeff. I'll answer that. With respect to the acquisition of NMHC, it did take us sometime to negotiate, find, source, close and these things take time. We are very focused on integrating the acquisition in 2009 and being complete with that piece. It's a very important task and that's our focus. We continue to look at opportunities in the market actively and as you can imagine, the economic environment has created some interesting opportunities but it also has created a lot of uncertainties for people from a selling perspective.

And so I think it's an interesting year. We've got our eyes open and we're having discussions to the areas that markets outlined. We feel we've got a good platform. We think we've been able to demonstrate and we feel good about our chances to repeat success.

Brooks O'Neil - Dougherty and Company

That's great. Thank you very much.

Operator

Your next question comes from Lawrence Rhee from Blackmont Capital. Please go ahead.

Lawrence Rhee - Blackmont Capital

Hi guys, a great quarter. I just want to maybe Jeff firstly just quantify where you stay with respect to the cost synergies realized from amenities so far? I guess you're at the 6 to 8 million number prior to this quarter. Can you just quantify where we are today?

Jeffrey Park

Sure. Lawrence we're... when you look at the 11 months to date we're roughly 8-5. So that's ahead of the plan that we had and we feel good about the ability to drive additional synergies through 2009.

Lawrence Rhee - Blackmont Capital

Got you. And when you originally tried to over cost savings you expect another six to eight incremental in the following 12 months. Is that kind of estimate based on these expected facility consolidations or the two facilities expected to consolidate over the next little while. Will that makeup the bulk of the 60 incremental?

Jeffrey Park

Yes.

Lawrence Rhee - Blackmont Capital

Okay. That's great. And with respect to the one-time EBITDA bump and gross margin bump in the quarter, you also had a similar sized one time bump in Q4. Can you just help explain the difference?

Jeffrey Park

In Q4 we talked about having a pick up on rebates.

Lawrence Rhee - Blackmont Capital

Okay.

Jeffrey Park

So that's different that what we have in the first quarter.

Lawrence Rhee - Blackmont Capital

But to pick up a rebate deal that's not necessarily a seasonal thing and that's more of a pure one-time item as you categorize where this Q1 bump was more seasonal?

Jeffrey Park

Correct, so if you look at the gross margin in Q1 was roughly $600,000 higher than it was in Q4 with that pick-up. So that's a certainly, it means we've done a lot to move the bottom line up. And it really just talks to the testament of the business model when you can help clients generate savings you are going to grow your profitability and build longevity.

Lawrence Rhee - Blackmont Capital

Sure Jeff. And lastly you've probably seen I guess intention of Wal-Mart to go and manage benefits for enterprises, I presume that's going to be targeted at the high-end of the enterprise market. Do you expect that to cause a spurt then to the big three PBMs and therefore maybe cause some opportunity or create some opportunity for SXC?

Jeffrey Park

Yeah. That's a great question and I do see this move that Wal-Mart has made as being a good opportunity for our company. I mean I think at the end of the day they've kind of put forward what appears to be a restricted network model driving traffic into the stores in exchange for what looks like on the surface to be a direct contract model. So, I view this is as a serious cost savings opportunity for our clients. And that's the business we are in. So, I do believe it'll create opportunity for our company and we're obviously active evaluating it and throwing our weight behind that initiative.

Lawrence Rhee - Blackmont Capital

That's great. Great quarter, guys.

Jeffrey Park

Thank you.

Operator

Mr. Rhee, do you have any more questions?

Lawrence Rhee - Blackmont Capital

No, I'm done.

Operator

Okay. Thank you. Your next question comes from Mr. Charles Rhyee from Oppenheimer. Please go ahead.

Charles Rhyee - Oppenheimer

Hi, thanks for taking question guys. Just a couple of follow-ups here actually may be for Jeff just to talk about the guidance. You just talked briefly about the synergy captured if I heard you correctly, you said you're annualizing at about 8.5 million, is that right?

Jeffrey Park

Not annualizing, we realized.

Charles Rhyee - Oppenheimer

Oh, you realized. Okay. I think last quarter so you talked about sort of an annualized run-rate, can you give us a sense of where you are at now?

Jeffrey Park

Well, like I said, we are definitely on track to hit our targets that we outlined. In the last quarter I talked around roughly 6.5 million of realized synergies and so, we have moved that up as we got to the 11th month mark.

Charles Rhyee - Oppenheimer

Okay. So, I mean... I guess my question is does the increase in guidance make any assumptions for a new level of total synergy capture, or we still there is new guidance were still based on the original synergy estimates?

Jeffrey Park

No. it's based on our current view.

Charles Rhyee - Oppenheimer

Okay. And because I think in your prepared remarks you talked a little bit about you are tracking ahead of plan and the potentially to capture more than say (ph). At what point do you think we could talk about, we might be hearing about a new level of synergy capture, if things go as you expect?

Jeffrey Park

Yes, sure. We'll continue to update you as we kind of move through the year. But it's fully reflected in our guidance, the revised guidance that we've given more into 2009 view.

Charles Rhyee - Oppenheimer

Okay. And so when I look at the increase in guidance, it looks like roughly from the midpoint range about 13, $0.14. When I look at your $0.38 relative to consensus excluding the deal amortization, it looks like about 15, $0.16 increase. It seems like its captured most of the kinds, any reason why, am I thinking about that correctly and if so, any reason to think about what will impact the back half of the year that we wouldn't think the numbers would be a little bit higher?

Jeffrey Park

No, I am not sure that I followed the math with you exactly. But we expect to be going through the year and continuing to go live with some of these accounts. So we should continue to see some improvement. And we have different types of mix of business that we bring on as we talked about previously where we've got combination of pricing activities whether it's traditionally priced or capacity priced business. And so that will have different impacts on our gross margin percentages.

But no we feel good about the view which is really why we moved up gross margin, moved up revenue, moved up the EBIT estimates and moved up the EP.

Charles Rhyee - Oppenheimer

Okay. Yeah, I mean I'll talk to you offline that's fine. Thanks.

Jeffrey Park

Thank you.

Operator

Your next question comes from Mr. Blair Abernethy from Thomas Weisel Partners please go ahead.

Blair Abernethy - Thomas Weisel Partners

Thank you. Nice quarter, guys.

Jeffrey Park

Thanks Blair.

Mark Thierer

Thank you.

Blair Abernethy - Thomas Weisel Partners

Just a follow-up on the guidance question. Mark last quarter you talked when you gave your year, your year view for '09 you said sort of a low-end was on the assumption or on the potential that your macroeconomic environment is up to a point where the unemployment's around 10% in the U.S. is that still your... should we read that same thought through on this new guidance?

Mark Thierer

Yeah. Blair, we've taken a conservative approach and made some assumptions on employee and head count accounts in our current installed base. And so, we've tampered utilization growth as well as just the life comp that we'll be managing to reflect the current down draft in the economy.

Blair Abernethy - Thomas Weisel Partners

Okay, great. Switching gears, you haven't talked that much about the state Medicaid market and your pipeline there. I wonder if you can give us some color on that Mark. And also if you would sort of expand a bit on what you're doing in Virginia?

Mark Thierer

Sure. We continue to really like this market. And I think it's safe to say we have now emerged as a major contender in the space. The pipeline that I described of half a dozen opportunities for 2009 remains totally live. And the sell cycle on these Medicaid deals is sometimes hard to predict. And that's the nature of dealing with state governments. The flip side and the good news is once you get them, you tend to keep them for a long time.

So, as I said before we are active on a number of large deals. The one that we just won in Virginia is a set of services where we're actually managing the rebate management for the state. We are not actually clearing the pharmacy claims in this circumstance. But we are getting paid of fee-for-service contract structure to provide them federal supplement rebate management. The good news here is; it's a nice entry into building relationship with the state. And many of the state procurements are not just for the pure claims processing.

They can include clinical programs, rebate management, they can include a wide range of solutions that are really brought on a allocate card (ph) basis. My long-term hypothesis is other markets will begin to look like this market. And we're just very well positioned with our unique menu of technology services that you can peel off and customize in any given setting.

And that's what we're doing under Dan Harden's leadership in our state team with the fee-for-service Medicaid. We continue to really be very bullish about the space Blair.

Blair Abernethy - Thomas Weisel Partners

Okay. Great, and sitting here today, what is your sense on what the 2010 state Medicaid market might look like versus '09. Do you think the opportunities set is about the same or gets bigger or smaller?

Mark Thierer

I think it's consistent. It's a nice pipeline over the next two or three years of states that have indicated an interest to take their business out to bid. One thing I will mention is we have seen an uptick in our current installed base on the state Medicaid. In the first quarter, obviously when people loose their jobs many of them go onto the fee-for-service Medicaid roles. And so we do benefit from the expansion in both utilization and lives. And so, that's one of the things about the business model that I think our diversification is helpful.

Blair Abernethy - Thomas Weisel Partners

Okay, great, thank you. That's very helpful. Just last question. Can you expand a little bit on now that you've had almost a year under your belt with NMHC; on your progress in driving mail order and specialty levels up to the more towards industry norms?

Jeffrey Park

Sure Blair. This is Jeff. We've actually been working really two different initiatives. First of all is a retail to mail conversion. With respect to the client's interest and appetites in this market more than ever, the clients are looking for ways to save money and with relatively low mail penetration in the book it's a great opportunity inside these clients to help them understand what that is. And so that's the first fold of what we've been working on. That process does take time. Once you set up mail as an alternative you need to communicate with the members and start to initiate some behavior changes. But once those behavior changes began and people become accustomed to receiving their maintenance medications through mail, the pickup starts to improve pretty dramatically. So we're looking forward to the seeds that we've sown in those areas.

On the second side, we've continually focused on the previous book of business that we had prior to the acquisition of NMHC, and driving increased mail and specialty utilization in those plans and really utilizing the full assets of the acquisition. So, on that front we've been successful at half a dozen opportunities and again starting to see the seeds of those successes.

Blair Abernethy - Thomas Weisel Partners

Okay. That's great. That's it for me. Thanks guys.

Jeffrey Park

Thanks Blair.

Mark Thierer

Thanks Blair.

Operator

Your next question comes from Michael Baker from Raymond James. Please go ahead.

Michael Baker - Raymond James

I was wondering Jeff if you could kind of ballpark what synergies contributed in the fourth quarter of '08 roughly?

Jeffrey Park

I'd rather not Michael if you wouldn't mind. I don't want to get to that level of detail but it's consistent over the years. I'm not sure if you've followed what the NMHC patterns have been, but it's a continuingly increasing book of business for us. We've really demonstrate a good reputation with the delivery of that with the doctors and that's continued to be a good growth area for our specialty business. On the specialty side, we've continued to expand really the service offering that we have and broaden the footprint. As you now with the oncology medication are really continuing to drive over significant piece of the specialty business and so we've been really building up our service practice in that area.

Michael Baker - Raymond James

And then I was wondering if you could provide some update around claim seasonality that typically occurs in the second quarter and given what you've seen so far whether you expect any meaningful deviation from that?

Jeffrey Park

Sure. If you look at what I mentioned a little earlier, one of the things that we have seen, different clients have different impacts. So, we've seen year-over-year increases and quarter-over-quarter increases in some of those clients and others that have negative trends. As Mark just mentioned, we do see on the state business and the fee-for-service enrolment is continuing to increase due to the recession. So historically, if you look back at our results for 2007 and on the HCIT business in 2008, you actually could see a 2 to 3% decline from Q1 to Q2 in the claim count and that was really relative to this season of fluctuation. I'm not sure that there will be a very significantly difference in that, that we see going forward and with respect to the go lives that we expect to see overall increases through the year.

Michael Baker - Raymond James

Okay and then Mark I was wondering you made a comment about looking at some acquisition opportunities and specifically mentioned state Medicaid from that perspective. Are you seeing more opportunities? Are people looking to sell properties in that space that's picked up recently?

Mark Thierer

We have. I would say the state fee-for-service Medicaid market as it relates to managed pharmacy is nowhere near as refined or sophisticated as the commercial market. So its one of those markets that we've kind of coined as a messy market that give us a lot of room to run and there are a lot of things that state's break apart for procurements and look at separately. So, audit capabilities, obviously clinical capabilities, clinical intervention capabilities, there is a wide range of things that states do that today we either partner or don't do. And so there are opportunities in the fee-for-service Medicaid market that we like.

Michael Baker - Raymond James

Are you seeing that those are looking to sell are primarily kind plan and claims processors that are seeing an increasingly complex evolution in the market given the fact that they are now demanding more healthcare pharmacy management capabilities or you also seeing some people that have maybe smaller businesses kind of consolidated providers that do have some healthcare capability, but just don't see it as core and looking to sell that?

Mark Thierer

We're seeing both. It's a complicated market. This is why the Big Three aren't in it. You need to have strong technology capability and obviously you need to know managed pharmacy and pharmacy benefit management. So, just a claims processing capability there are properties available in that space, but the thing that's more interesting to us are the higher value add, the higher margin capability that you can provide great value to the state and price appropriately and really differentiate your services. So, I know that's not totally specific but that's how we're looking at that space.

Michael Baker - Raymond James

Thanks a lot.

Operator

The next question comes from Michael Minchak from JPMorgan please go ahead.

Michael Minchak - JPMorgan

If you could talk a little bit about your long-term care business maybe first with respect to Omnicare? I think in the past you talk about 50% penetration within that account. Can you provide any update there and then maybe more broadly, can you comment on whether you're seeing any successes in additional services into the long term care beyond pre and post work?

Jeffrey Park

Sure Michael, this is Jeff. Following to the first piece, actually we have talked about our penetration in Omnicare. They have done a great amount of work themselves with respect to driving more pre and post-dated at work to try to drive additional revenue cycle management from them. Their focus is on ensuring they correctly build to long term care facilities and then correctly collect from the Part D providers. So our penetration in that is actually higher than 50%. It's probably closer to the 80 or 85%. And as you know we recently announced the deal with PharMerica. We're very excited about had (ph) work with them and generating some additional opportunities for them to save money in their near differentiated business model.

Mark Thierer

And Michael I'll just add that more broadly, this space is the second messy space that we like a lot. There's not been a lot of consolidations. It's very fragmented. We don't think anybody yet has shown with any PBM capabilities that actually line up with ours. So we are looking at the GPO space, the institutional pharmacy space, revenue cycle management as it related to long-term care. If you look at the DSOs in this market, managed pharmacy is not showing up in long-term care and there is a lot of room to run in terms of both acquisition target and candidly we're building inside our business, service offerings to help solve problems that we'll own and operate.

So we're active in that space. We've hired an executive with years and years of long-term care experience and we've got a small team very focused in growing that market.

Michael Minchak - JPMorgan

Great, and then switching gears a little bit. With your systems sales down sequentially this quarter, I know your provider business is reflected in that number. Can you maybe comment on the longer term strategic sit (ph) in that provider business where you're selling the software systems in the retail pharmacies, especially as we are seeing independents with smaller chains either closing or being consolidated by the larger chains?

Mark Thierer

Sure. With respect to the system sales, the system sales are a mix of different pieces and this quarter was 1.3 million, Q4 was 1.5, Q3 last year was 1.4. So it's relatively consistent to what we've seen. There really have been a good momentum for the provider side of that business. We've been actually net up in the quarter with respect to the new accounts we've been winning and we feel good about the investments we've made in that footprint with their Version 10 release. They've been getting a lot of new winners to convert over to the new accounts. We're just pleased with what's going in that market.

Michael Minchak - JPMorgan

Great. Thanks for the comments.

Jeffrey Park

All right.

Operator

Your last question comes from Tony Perkins from First Analysis. Please go ahead.

Tony Perkins - First Analysis

Good morning. Just curious what you're seeing in the market place in the way of traction and your transparent revenue model versus your traditional revenue model in this economic environment. Do you see more traction in the transparent model?

Jeffrey Park

Sure, Tony this is Jeff again. We do see both. So, one of the things that... we've big proponent of transparent, As you know it's the calling card that SXC carries. And certainly in this markets to your point, we've had a lot of clients that are much more interest in understanding what it means and what it means to them. I think it will be... continue to be a growing trend in the industry as clients demand greater and greater visibility into this very complicated supply chain. And it's certainly one of the reasons why our business has continued to generate good growth and good expansion for our market opportunities.

Mark Thierer

So, Tony we're almost every underwriting, we're asked to bid both transparent and traditional. And there are still a good number of clients who want to buy traditional offerings, principally driven by how the consultants have done it for years. But our sales team is very equipped to really shine a flashlight on this selling process and focus on transparent versus traditional and where the money is. So, I like our position in terms of being able to respond, however, the client wants to do it.

Tony Perkins - First Analysis

One more question, I know I realized it's early but if you could highlight your focus on 2010 selling season I know, you talked about Medicaid programs, fee-for-service, and you've also talked about the long-term care pharmacy space. But, if you could maybe talk a little bit, are those the two areas you're most focused on? And then I don't know if you could possibly size that opportunity in the 2010 selling season?

Mark Thierer

Yeah. I can Tony. We have five areas that we are focused on, these are our targets. The first is, the small to intermediate sized employer base. Those range anywhere from 2,000 to 20,000 lives. The way we're getting there is principally through consultants, some direct marketing. We also in that segment to target the TPA and labor union or tap targeting market. That's a very large segment in terms of opportunity and something like 40% of our current active bids are in that space.

The second segment that we target is the health plan segment for full service informedRx. And that segment is typically in the 250,000 life regional health plan with typically managed Medicaid, perhaps of offering and commercial insurance. That's a hot space for us and we have a lot of current active bids and represents, what I would say is our second largest total available market.

The third space is Medicaid. We spend a lot of time on that this morning. And it's the smaller space obviously, there is only 50 states and we've got five of them. But again that's the higher margin driver in our business and that's a dedicated market segment for us.

The fourth market segment is our typical HCIT technology segment. And we continue to be active with a handful of technology only type deals with a number of large payors. And, again just getting one or say two of these in any given year is really a good year for us and is something that you can feed on for a long time.

And then the last segment that we're targeting on is this long-term care segment which we did address earlier. So, you can tell that we are disciplined about the markets that we are trying to win in and we're no bidding if it's outside of those segments.

Tony Perkins - First Analysis

Wonderful. Thank you very much gentlemen.

Mark Thierer

Thanks Tony.

Operator

Mr. Thierer, this concludes the question-and-answer session. Please continue.

Mark Thierer

Well, I thank everyone for joining us and we look forward to an update this coming quarter. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!