Jay Higham - President and CEO
John Hlywak - EVP and CFO
Greg Williams - Sidoti
IntegraMed America, Inc. (INMD) Q3 2009 Earnings Call Transcript November 5, 2009 10:00 AM ET
Good morning. My name is Kimberly, and I will be your conference operator today. At this time I would like to welcome everyone to the IntegraMed third quarter 2009 investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions). Thank you.
I will now turn the call over to John Hlywak.
Good morning. This is John Hlywak, Executive Vice President and CFO of IntegraMed. Thank you for participating in today's call. Joining me today is Jay Higham, President and Chief Executive Officer.
Before we begin, I'd like to caution that comments made during this conference call by management may contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of IntegraMed. I encourage you to review the Company's filings with the Securities and Exchange Commission, including without limitation, the Company's Form 10-K and Form 10-Qs, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
The content in this conference call contains time-sensitive information that is accurate only as of today, August 6, 2009. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.
With that I'll now turn the call over to Jay, President and CEO of IntegraMed. Jay?
Thank you John, and good morning to everyone on the call and thank you for joining us today. Overall during the third quarter we continue to perform well despite emerging evidence of a challenging environment for consumers in the self-pay components of our business. Although historically our business has proven to be remarkably resilient to economic fluctuations, we saw increasing signs in the third quarter that we not completely immune to the impact of a prolonged economic contraction as the ability of perspective patients to pursue fertility treatment in particular was ultimately impacted. Despite a few key factors that I’ll review in greater detail shortly, our overall business achieved revenue growth of 3%, a 1% increase in total contribution, a 12% increase in net income and an 8% improvement in reported EPS. But before reviewing our results in more detail, let me take a few minutes to address the restatement of our financial results that we referenced in this morning’s press release. As you may remember fom earlier in the year at our tri-annual revue, the SEC approached us regarding our revenue recognition methodology within our Consumer Services Division. At that time after an extensive dialogue with the SEC and our auditor we reversed the recognition of approximately $3.5 million in the revenue in the Consumer Services Division with the expectation of spreading the timing of these revenues over a longer period, while also increasing a loss reserve we book for patients who achieve pregnancy but who may require further treatment or a refund in the event of pregnancy lost.
The changes affect not affect cash flow or the ultimate profitability of the program, which is fully funded by patients at the time they enroll. Fast forward to last week and upon closer review of our new revenue recognition methodology within this division, it became clear that we had restated approximately $2.3 million more in revenue then we should have. We over corrected.
The basic issues that we discovered was in the case of patients who drop out of treatment and are entitled to have received a refund within the Attain IVF program. We had not recognized the remainder of the nonrefundable portion of the program payment, which was the seating in differed revenue. The nonrefundable portion is approximately 30% of the total fee.
Given an upgrade in our Attain IVF patient accounting systems that we've implemented over the past few quarters, we are now able to take a much more detailed look at revenue recognition on a per patient basis and it was through this capability that we are ultimately able to identify the issue.
Having identified this issue we’ve restated our financial results to reflect this correction within 2008 and all effective prior periods. As for the impact on 2009 financials, it's nominal and so we're able to leave Q1 and Q2 results unchanged.
Candidly, it's both frustrating and somewhat embarrassing to be in this position again and we regret any confusion this may have caused, but given the unique nature of the Attain IVF Program there are not a lot of precedents on to which to base our accounting treatment.
I can assure you we take our financial reporting very seriously and have tried to make this incident and its correction as transparent as possible to our shareholders.
Now, let's move on the performance of each our three segments in a bit more detail, our Fertility Center segment was an area where we indeed saw some economy driven challenges. Revenue declined by 1% versus last year as we experienced some reduction in demand due to consumers, shrinking purchasing power, as well as the loss of a third party payer contract in one our larger centers earlier in this year that we've discussed in the past.
Absent of contract loss, estimated at approximately $2 million, we would have achieved continued modest top line growth. We are also seeing a continued shift in the mix of our patient cases with a slightly lower overall proposition of patient revenue coming from higher cost IVF treatment as some patients are choosing alternative lower cost treatment that have a higher degree of insurance coverage. This trend contributed to the overall revenue decline, as well as the slight decline in IVF cycles performed during the quarter.
On a brighter note Fertility Centers continue to show healthy contribution growth increasing by 9% over Q3 '08. The growth in contribution despite the decline in revenue reflects our continued emphasis on managing operating cost and driving efficiency and productivity at our centers. Gains made in this area were the key drivers behind the improvement in contribution margins to 8.3% in the third quarter versus 7.5% in the year ago period.
Having laid out the major economic challenges confronting our Fertility Center business, we remained optimistic regarding the long-term prospects for this business, as well as the potential to grow this business through accretive acquisitions of Fertility Center contracts.
We believe the current state of the fertility market is causing Fertility Center physicians to consider now more than ever, the benefits of aligning themselves with IntegraMed to help them overcome their growth and profitability challenges.
Each deal tends to have its own unique characteristics and the dialog proceeds at its own pace making it very difficult to predict the exact timing or even likelihood of closing a particular opportunity. Fortunately, we have a good pipeline of prospects, as well as substantial experience in working with physicians. We understand their objectives and confirms in this negotiations, which help us to move the process along towards closure. As a result, we remained optimistic, when closing a transaction or two by the end of this year.
Let me now turn to the consumer services segment. This segment principally comprised of our Attain IVF Program, continues to demonstrate strong consumer interest. As I just reviewed results in this segment for the prior year period has been restated with the net result being a recognition of deferred revenue, which increased revenue and contribution in those periods.
I must underscore that this change has no bearing on the ultimate revenue, cash flow or profitability of the program. It’s also important to point out the very favorable cash flow characteristics of the Attain IVF Program, which is fully upfront funded in cash, sheltering IntegraMed from any consumer credit risk.
Now, let’s review the results. Q3 F2009 consumer services revenue, declined by 7% to $5 million, while contribution declined 21% to $1.1 million versus $1.4 million in Q3, 2008. A number of factors were behind this decline in performance.
First, historically third party financing has accounted for roughly 32% of Attain IVF programs annual volume. However, with the withdrawal of Capital One from this line of lending earlier in the year, we were unable to secure comparable patient funding right away. As a result, during the second and third quarter only 8% of our patient volumes were able to utilize third party financing support, which led to reduction in enrollments during those periods.
With yesterday's announcement of our new partner Springstone Patient Financing, we believe we have solved this funding issue. We know the principles of Springstone very well as they have previously run the fertility lending business, we utilize the Capital One. We now believe we have the right partner, strategy and products in place to support patient seeking to enroll in the Attain IVF program. We expect Springstone to initiate the lending activity by the end of this month and by early next year we believe they will be fully up to speed.
The second factor in the slowdown in growth and contribution resulted from a decline in pregnancy rates versus last year as well as sequentially. Success rate were at the high end of the normal range during those period, so it was to be expected they would revert back to the mean. As pregnancy is a primary driver of revenue recognition within the consumer services segment, fluctuations in pregnancy rates can have a material impact on quarterly comparisons as we have discussed in past periods.
I should also mention here, that the new revenue recognition policies have the unfortunate fact of magnifying the impact of pregnancy rate fluctuations.
The third factor in the drop in revenue and contribution was the case mix, which more heavily favored donor egg services versus traditional IVF. In Donor Egg Attain program, the patient is provided with 100% refund and this factor prevents us from booking any revenue until pregnancy is achieved.
In the donor segments, pregnancy rates and price points are higher than conventional Attain IVF. So, it is ultimately a very profitable segment. However, the growth in this segment, has tempered near-term results, a trend that we expect to be moderated as donor services stabilize and success rates materialize.
Moving on to Vein Clinics, this segment turned in a very strong performance in Q3, growing revenues by 22% to $12.6 million and growing contribution by 12% to $1 million. These improvements reflect both internal same-store gain as well as the benefit of four new clinic additions over the past year. As always, it’s important to note that new clinic growth in this segment meant the startup cost create a drag on operating performance during the initial stages of operations.
Despite the growth achieved on the top line, contribution margin from Vein Clinic segment declined 70 basis points to 7.9 % compared to 6.8% in the year ago. This reflects the impact of higher marketing cost for new clinic launches as well as the entry into new markets with marginally lower insurance reimbursement rates then in our historic markets.
As with our other business lines, we continue to look for opportunities to further expand this business and given the continued strong performance in financial return we are achieving, we plan to accelerate our pace of new clinic during 2010. We have opened two clinics so far in 2009 and plan to open one more this year. In 2010 we are now targeting eight new products.
In summary, despite some growth challenges driven by the tepid consumers' economy in IntegraMed continues to toward a solid financial performance and we continue to move our business forward. We are particularly excited about the opportunities we see to expand our business via new Fertility Center contracts, new Consumer Service affiliates and a build out of new Vein Clinic.
Let me now turn the call back to John Hlywak, our Chief Financial Officer to discuss the third quarter results in more details. John.
Thank you Jay. As Jay alluded to, despite some new-term challenges the overall strength diversity of our business model enabled us to weather the challenging economy as deliver modest top line growth and stronger bottom line growth.
Overall, total revenues grew to 3% to $53.6 million compared to Q3 of 08, while net income grew 12% and earnings per share grew 8%. At the divisional performance level, Fertility Center revenues declined 1% to $36 million in the third quarter, reflecting some slowdown in consumer demand as well, the impact of the loss of a third-party payer contract that represent approximately $2 million foregoing revenue for the period.
Absent the contract loss, we believe Fertility Centers would have turned in a modest revenue increase. As Jay has reviewed in previous statement the third-party lending transaction and the declining pregnancy rates I will not comment further.
Reflecting these issues as well as the impact of the challenging economy on consumers' ability technology interoperability to pursue fertility treatments, Consumer Service revenues declined 7% in the third quarter to $5 million. However, it matched the revenues on a sequential basis confirming that the demand remains healthy but there it is being effective by available funding. Patient applications increased modestly compared to the prior year as well as compared to the prior quarter.
Our Vein Clinics division experienced positive top line trends during the third quarter with revenue growing 22% to $12.6 million with a 16.7% same-store growth providing $1.7 million of the increase and revenues from new clinics providing the remainder.
Organic revenue growth in this division reflects the benefit of our patient recruitment programs and stimulating good patient demand. Importantly, the leading indicator for this business new consults achieved a 37% increase in the third quarter compared to the last year showing continued strong demand. However, it did moderated a little or just a little from the second quarter levels.
Moving on to contribution or segment operating income for each business unit, Improvement in both the Fertility Centers and Vein Care businesses offset the decline in the consumer services contribution and it enabled total contribution to rise 1% to $5 million in the third quarter.
We are able to manage general and administrative expenses to a 3% decrease compared to the third quarter last year and a 19% increased compared to the second quarter of this year. This was mainly due to reduced marketing expenses and lower compensation cost for income related incentives.
Net interest expenses declined 16% year-over-year principally due to the lower average interest rates and reduced outstanding balances. On the bottom line the third quarter net income grew 12% to $1.2 million in 2009, yielding an 8% increase in earnings per share to $0.14 per share on a 1% increase in diluted shares outstanding.
Day sales outstanding for the consolidated company improved to 36 days in the third quarter 2009 from 40.5 in the fourth quarter of 2008 and 39.5 days in a year ago period. This all reflects our continued effort in this area. This discipline is particularly significant given the marked shift in some of our businesses from cash based procedures to insurance based ones.
Finally, turning to the balance sheet IntegraMed remains in a strong financial position as we were able to increase our cash position by $3.7 million to $35.2 million, compared to our June 30 cash position of $31.5 million and our yearend cash position of $28.3 million.
This increase principally reflects improved cash flow from operations as Fertility Centers accounts receivables were reduced by $3.1 million and Consumer Services and our Vein Clinics had an increase in patient deposits over the whole nine months of the year. We continue to expect the company to build cash from operations for the balance of 2009.
With that let’s turn the call over to the operator and open the floor to questions. Operator.
(Operator Instructions).Your first question comes from the line of Greg Williams of Sidoti.
Greg Williams - Sidoti
Good morning guys, there’s a couple of quick questions. Jay you mentioned the modest decline in the IVF cycles, do you have a feel or do you think that this segment sort of bottomed out in the third quarter, you think there is a little bit more softening that you're going to be working through them?
It's really hard to say Greg; I mean it all depends on what happens with consumer credit, employment. I guess I am focused a little bit more on the Consumer Service side of it, because where this situation played out in much higher relief then if did in the Fertility Centers business where we just look at IV of cycles themselves. In the Consumer Service segment our feeling is that we've bottomed out, from an enrollment point of view we bottomed out in the second quarter. Enrollments in the second quarter if you recall were down 15% compared to the prior year. We]'re only down 6% in the third quarter compared to the prior year and I was just informed by the head of our Consumer Service business as I walked in here this morning that we had record month of applications in the Consumer Service business last month. So it feels like that’s bouncing back. Certainly the credit financing situation with Springstone was going to contribute to that. I also thing that our product development capability in that business where we’ve introduced a lower price point product in that businesses is really helping as well. I mean here is a variety of issues ongoing that I think are going put us in good stead in that business. Almost regardless of what happens with the economy. I mean, if the economy back fasted that will certainly help. we feel confident that we are going be able to grow that business regardless.
Greg Williams - Sidoti
Okay, and you mentioned Jay, I'm sorry I missed it that Springstone is now a partner, when did
We just launched it. We announced it yesterday, so we just launched it and we're just gearing that whole program up and like I said in my comments, we expect lending to begin flowing later this month and we will accelerate through the balance of the fourth quarter.
Greg Williams - Sidoti
Okay, I may have missed it or may be you didn't issue, but did you guys give a same-clinic sales for your partnership?
I'm sorry, I missed the question.
Greg Williams - Sidoti
The same-store sales.
Same store sales for…?
Greg Williams - Sidoti
For fertility, okay all of the revenue they see there is same-store because, we haven't a deal, a transaction in the year. I might mention in this, I run the risk here of confusing people a little bit slightly but we don't, in that business we don't report patient billings. What we report is management fees and patient billings in that business have actually increased, despite the fact that we lost that big payer contract that we mentioned earlier, our patient billings are actually up 2%.
So, that business is remarkably resilient. It is resilient and resistant for a couple of reasons, one being just the nature of the service that we're providing, which has a high emotional component for patients when they want to have a baby they generally figure out how to do that.
Second reason that there is some resilience in that business is that we're completely dependent on self-pay. We have a broad range of services, half of our revenue is self-pay in that business but the other half is insurance reimbursed and we've seen that insurance reimbursed pieces of business growing over the last years as patients have begun to be more price sensitive and substitute insurance reimbursed procedures for those that are more self-pay.
Greg Williams - Sidoti
Got it. Then then switching over to the Vein Care, Jay I think you mentioned that there’s some fresher in reimbursement from insurance companies, is that a isolated markets or just a systemic issue?
I don’t want to say, we haven’t received a reduction in reimbursement in any these markets we’ve been in. What happens is the core of that business is the Chicago market, which is where the company was founded, we tend to have better reimbursement in that market than in some other markets. As we entered new markets we begin to get more exposure to other reimbursement rates and what we have noticed is that in some markets those reimbursement rates are somewhat lower but no, we haven’t had a reduction in reimbursement.
Greg Williams - Sidoti
Okay. Thanks. Then switching over to the equity loss, can you just help me out in terms of the timeline that the pricing, road show and the placement?
Sure. Okay, well you know we do have a registration statement out there. So I have some significant limits on what I’m able to say here.
Greg Williams - Sidoti
I guess what I would say is that, this is a strategic issue for the company. It's not an operational issue. We have sufficient capital available to continue pursuing our business strategy. We are out there with that registration statement because we are identifying through a confluence of events really. The economy being one of them that there is a opportunity to accelerate our business development, principally, in the Fertility Center segment of our business, and we would like to be able take advantage of that.
We have fair amount of cash in the balance sheet. We do need a certain amount of that to run the company, so really what is available to us to pursue these acquisition opportunities may be half of what you see there on the balance sheet, and some of the bigger, there are some bigger transactions out there that we would like to pursue and would need to raise funds to be able to do that. With that said, I really don’t want to speculate on timing at the moment.
Greg Williams - Sidoti
OK understandable. Just want to question on the new accounting treatment. I was hoping that you guys will provide me, like a full year 2008 EPS if I am reading it right it looks like the first nine months you are at $0.33 cents, which is actually a nickel ahead of the prior statement?
Greg, the way to do this is, we will be filing our revised 10-K obviously, but let me just give you the order of magnitude here. There was about $780,000 of additional revenue that we needed to book. Take out the deferred revenue and put back into Consumer Services in 2008 and virtually all of that goes right down to contribution.
Greg Williams - Sidoti
Okay, so it is material upside on EPS.
Greg Williams - Sidoti
Okay. Thank you.
(Operator Instructions). There appear to be no further questions at this time.
Well, thank you everybody for joining us here on today’s conference call. We look forward to seeing you in the future and updating you on our progress. Thanks very much.
Ladies and gentlemen, this concludes today’s conference. You may now disconnect.
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