Emdeon Q4 and Year End 2005 Earnings Call Transcript (HLTH)
February 28, 2006
Kevin Cameron, Chief Executive Officer
Marty Wyngod, Chairman of the Board
Andy Corbin, CFO of Emdeon Corporation and Chief Executive Officer of Emdeon Practice Services
Wayne Gattinella, Chief Executive Officer and President of WebMD
Bill Midgette, Chief Executive Officer of Porex
Risa Fisher, Vice President of Investor Relations
Dane Kumple, Frideman Billings Ramsey
Christopher McFadden, Goldman Sacs
Sean Wyland, Piper Jaffray
Anthony Venzetti of Axom Group
Jack Kelly, Smith Barney
Steve Marlboro, Thomas Weisel Partners.
Corey Kelvin of William Blair and Co.
Risa Fisher, Vice President of Investor Relations:
Good afternoon and welcome to our 4th quarter earnings call. I will read the following statement regarding forward-looking disclosures.
All statements made today, other than statements of historical fact, are forward-looking statements, including those regarding our guidance on future financial results and other projections or measures of our future performance; the amount and timing of the benefits expected from acquisitions and other transactions, from new products and services and from other potential sources of additional revenue. These statements speak only as of today and are based on our current plans and expectations, and they involve risks and uncertainties that could cause actual future events or results to be different from those described including those relating to: market acceptance for our products and services; relationships with customers or strategic partners; difficulties in integrating acquired businesses; changes in economic, political or regulatory conditions or other trends affecting the healthcare, Internet, information technology and plastics industries, including matters relating to HIPAA and the previously announced profit for the with respect to the Emdeon Business Services and Emdeon Practice Services and its affect on those segments. Many of risks and uncertainties are described in our SEC filings.
We expressly disclaim any intent or obligation to update these forward-looking statements. The earnings release issued today is available at www.emdeon.com in the “About Emdeon” section, and is also being included in a Form 8K filing today. Form 8K and our other SEC filings are available on our website and the SECs website. for the Form 8K to be filed today include the reconciliations between GAAP and non-GAAP financial measures to be presented in this call.
I would now like to turn the call over to our Chief Executive Officer Kevin Cameron.
Kevin Cameron, Chief Executive Officer
Thanks Risa. Good afternoon and thank you for joining us today. Joining me on the call today are Marty Wyngod, Chairman of the Board, Andy Corbin, CFO and Emdeon Corporation and Chief Executive Officer of Emdeon Practice Services; Wayne Gattinella, Chief Executive Officer and President of WebMD; and Bill Midgette, Chief Executive Officer of Porex.
After my opening remarks, Andy will review our financial results for the December quarter and full year 2005. I will then review the business segment results and discuss some initiatives for 2006. Andy will review our guidance for 2006 and Marty will make some closing comments and then we’ll take .
As previously announced, Emdeon’s Board of Directors has authorized commencing a process to evaluate strategic alternatives relating to our Emdeon Business Services and Emdeon Practice Services divisions. The goal of this review is to maximize stockholder value with respect to business segments. We retain Blackstone and Citigroup as financial advisers to assist us in this evaluation. We have also modified our existing tax share agreement with our 85.5% owned subsidiary, WebMD Health pursuant to which Emdeon will compensate WebMD for our use of WebMDs net operating losses a were a sale of Business Services and Practice Services to occur.
Since WebMD NOLs are some of our oldest and therefore would be used first in any such transaction, it would be appropriate to compensate WebMD Health in the event that Emdeon uses their NOLs. So, with that let me return to a review of the quarter.
We made progress across our business in Q4. At Business Services we favorably resolved many of the issues I referenced in our November call related to certain vendors diverting volume in violation of certain contracts. We also are enthusiastic about the momentum we are seeing in the market with respect to payers increased interest in our electronic remittance advice (ERAs), payment and unified payment services.
At Practice Services our initiatives, hard work, and investments have resulted in improved customer service, improved operating efficiencies and improved financial results. Practice Services has now achieved three consecutive quarters of double digit margins enabling us to double our year over year earnings.
At WebMD Health we are very pleased with our accomplishments during the quarter and 2005 overall. We continue to increase our market position as the leading source of online health information to physicians and consumers. We delivered several new products and grew our customer base for both our published and private portals.
At Porex, we continue to introduce new products and deliver consistent results. At this time, Andy will walk you through a financial review of the quarter and full year results.
Andy Corbin, CFO of Emdeon Corporation and Chief Executive Officer of Emdeon Practice Services
Thank you Kevin. I would like to point out that our press release with comparative financials is available on our website. Also we have attached our press release and furnished it as an exhibit to a Form AK, filed with the SEC today, a summary of our 2006 guidance.
Before we get into the numbers I would like to highlight a change in how we are presenting one measure of our operating result, historically that measured and reported our operating results using the term income before restructuring taxes, non-cash and other items. As you know, on a consolidated basis, this measure includes net interest income. Going forward we exclude net interest income extends from this sub-total and accordingly will report earnings before interest, taxes, non-cash and other items which we will refer to as adjusted EBITDA. This presentation is consistent with our publicly traded subsidiary WebMD Health Corporation whose operations now include interest income due to the proceeds received from their recent IPO.
This revised presentation is reflected in the results we are reporting today and our 2006 guidance and in any comparable prior year figures that are discussed. Our previous financial guidance did not consider this modification so you will need to add that net interest income of approximately $3.5 million or $0.01 per share and $5.2 million or $0.02 per share respectively to the Q4 2005 and full year 2005 results we are reporting today to be on a comparable basis with our previous guidance. This change only impacts the calculation of consolidated operating results and does not change the calculation of the operating results of the individual business units. As a reminder, the AK that was filed today includes the reconciliation between adjusted EBITDA and net income for both the Q4 and 2005 results and the comparable prior years as well as for our 2006 guidance.
I will now summarize our financial results for the 4th quarter relative to the same quarter a year ago and then highlight some additional financial items to assist you in understanding our financial performance. Consolidated revenue for the December 2005 quarter was $327.2 million compared to $307.6 million a year ago, an increase of 6.4% and at the upper end of our guidance range. Adjusted EBITDA was $52.3 million or $0.15 per share compared to $47.4 million or $0.14 per share in the prior year, also at the upper end of the guidance range we provided on December 16th. Our previous guidance for income before restructuring, taxes, non-cash and other items included net interest income. I mentioned before, the adjusted EBITDA does not include net interest income which is $3.5 million or $0.01 per share in the 4th quarter. Net income was $32.9 million or $.09 per share compared to $19.7 or $.06 per share in the prior year. Net income for the December 2005 quarter reflects $3.5 million in expenses related to the investigation, a $2.7 million loss on investments for the liquidation of investments related to the tender offer and payroll adjustments to our tax provision of $8 million, primarily related to the earlier than expected completion of an IRS review. None of these items were included in our previous 4th quarter guidance.
Consolidated cost of operations was $180 million or 55% of revenues for the December 2005 quarter compared to $171.3 million or 55.7 percent of revenues a year ago, an improvement of 70 basis points. Consolidated sales, marketing, general and administrative expense was $85.3 million or 26.1% of revenues for the December 2005 quarter compared to $79 million or 25.7% of revenues a year ago. Excluding non-cash items, consolidated ST&A * was $80.2 million or 24.5% of revenues for December 2005 quarter compared to $73.5 million or 23.9%, an increase of 60 basis points.
Turning to our balance sheet, our cash position on December 31, 2005 was approximately $427 million consisting of cash, short term investments which primarily consisted of US Treasury notes; $154 million of the $427 million is attributable to WebMD Health.
Other items impacting our cash balance during the quarter included capital expenditures of $13.4 million. Operating cash flow in the December 2005 quarter was $62.2 million compared to $10.8 million for the same quarter a year ago. As previously stated our operating cash flow can be negatively or positively impacted by the timing of the cut off of compensation accruals, other expense accruals, and the collection of receivables in relation to the quarter’s end.
To quickly summarize 2005. Revenues were $1.28 billion, an increase of 10% year over year. Adjusted EBITDA was approximately $183.7 million or $0.52 per share compared to $143.5 million or $0.43 per share in the prior year. Net income was $73 million or $0.21 per share compared to $39.3 million or $0.12 per share in the prior year.
Notable items for the full year 2005 – capital expenditures were $62.6 million compared to $38.8 million in 2004; cash flow from operations was $161 million compared to $90 million last year; stock repurchasing in 2005 including the tender offer completed in December totaled 69.4 million shares at a total cost of $570.5 million. I’d like to turn it back to Kevin to give you some color on the individual business segments.
Thanks Andy. Emdeon Business Services revenue was $191.1 million in the 4th quarter versus $182.1 million a year ago. This 4.9% increase is attributable primarily to growth in our paid claims communication services and our government business, partially offset by anticipated declines in traditional EDI revenue. Additionally, our Dakota inbound scanning and imaging business, while strategically important, has not met our expectations. Emdeon Business Services adjusted EBITDA of $39.9 million represents a 3.4% decrease from $41.3 million in the prior year. Operating margin declined to 20.9% in the December 2005 quarter compared to 22.7% a year ago. Operating margins declined as a result of revenue mix and higher sales, marketing general administrative expenses.
With respect to the more traditional EDI portion of our business, our last earnings call in early November, I referred to certain vendors submitting volume around us or otherwise in violation of payer contracts. We closed many of these holes during the quarter and these claims are now being submitted through Emdeon on favorable terms. We continue to see interest in our managed gateway series and there is a trend towards payers reducing many vendor connections in favor of a more efficient process with a single partner to maintain and manage one electronic gateway on its behalf.
Also on the payer front, we are enthusiastic about our electronic remittance communication and payment services for payers. These services generate substantial savings for payers and providers by eliminating postage and paper costs while facilitating automated posting and other information services. Over the past months we have seen increasing interest in these services from the payer community and a growing in sales operations.
Given our extensive health care connectivity network, Emdeon is uniquely positioned to deliver on its value proposition for the payer community. Currently, Emdeon provides Electronic Remittance Advice (ERAs) on behalf of over 300 payers. Our postage coop, Health Payers USA, serves over 600 payers. In combination, this level of penetration provides unique marketing and physician recruitment opportunities and importantly enables us to drive provider adoption for our payer customers by offering the provider a more complete payment solution.
On the provider portion of our business, we are committed to offering products and services that improve on customer’s revenue cycle. We continue to enhance the capabilities of our traditional client’s management applications and to expand our capabilities within our revenue cycle management products suite. We will be releasing a new management application in the first half of this year. Additionally, we are also excited about our progress towards delivering a comprehensive revenue cycle management portal. This portal will serve as a single source for customers to access all of our revenue cycle management services. Additionally, we believe we are uniquely positioned to provide solutions that will better equip providers to determine reimbursement level by procedure as well as planned and member financial responsibility. We are currently delivering these solutions in conjunction with certain payers.
Also on the provider front we also recently released a new product called Emdeon Patient Account Center which is an online offering which allows patients to review their bills, make electronic payments, find answers to their billing and insurance questions and communicate with their personal account representative through Emdeon secured network. This will be offered through WebMD. Our product integrates directly into a hospital’s or physician’s existing billing system.
Turning to Emdeon Practice Services; revenue was $77.1 million compared to $76.4 million last year, a slight increase year over year. Adjusted EBITDA was $9.2 million compared to $5.6 million last year an increase of 64%. And operating margins were 11.9% compared to 7.3% in the prior year. We worked hard in 2005 to improve margins and our infrastructure at Practice Services. Our recent performance and 2006 guidance illustrates the leverage that we have in this business. We are on track to continue to expand margins through 2006. In 2006 we will focus on the release of new products like Energy EHR 3.0, a new pricing structure, a reorganization of our sales delivery and support organizations to increase efficiency and effectiveness and add enhancements to our operating platform’s infrastructure and web service customer solutions. Many of these initiatives have already begun and are expected to further improve our financial performance. We continue to position our business to take advantage of the growth expected in the electronic health record market.
Turning to WebMD Health, revenue for the 4th quarter was $49.1 million compared to $39.1 million year ago, an increase of 25.5% driven by continued growth in online services. Adjusted EBITDA was $12.4 million compared to $8.7 million a year ago. WebMD continues to grow its lead in the public health portals market. Traffic to the WebMD network averaged 25.7 million unique monthly users during the 2005 quarter, accessing more than 598 million pages, an increase of approximately 21% and 26% respectively. WebMDs reach to physicians and healthcare professionals also continued to significantly expand in the December quarter; 424,000 continuing medical education programs were completed on MedScape, an increase of 57% over the same period a year ago. We believe WebMDs client list continues to represent virtually every leading pharmaceutical, biotech, and medical device company as well as a growing list of major consumer packaged goods companies focused on reaching health-involved consumers.
During the quarter, WebMD began to deliver a new technological infrastructure that is designed to increase search engine traffic to its site, create new sponsored revenue opportunities and deliver new online solutions that help consumers make more informed health decisions. Initial milestones include the first phases of WebMD Health Search, a redesigned home page and site navigation and broadband programming. Additionally, WebMD continues to increase its market lead in providing private health and benefits portals to large employers and health plans and during the quarter had a record number of new client implementations.
We expect the demand for new health benefit applications will continue to accelerate as major employers and health plans seek a consumer facing platform in order to move towards consumer driven healthcare. We are very excited by the tremendous opportunities in this area. Please refer to WebMD Health’s press release which was issued on February 23, as well as their earnings call which is available on their website for more in-depth detail on WebMDs quarterly results and outlook for 2006.
Turning now to Porex; Porex revenue was $18.5 million for the December quarter, flat with the prior year. Adjusted EBITDA was $4.7 million versus $5.5 million in the prior year. The year over year decline in margins was due to delays in customer orders and the mix of sales delivered.
Turning to corporate; corporate expenses for the December 2005 quarter were $13.9 million or 4.2% of consolidated revenue compared to $13.7 million or 4.5% of consolidated revenue last year. Please note that both this year and last year reflect a corporate allocation to WebMD Health representing the cost of service that Emdeon provides to WebMD Health. The offset to this allocation has been reflected in the expenses of WebMD Health. Andy will now walk you through our financial guidance for 2006.
Andy Corbin, CFO.
On our last call we provided preliminary guidance which . Since then we have developed more detailed strategic and financial plans for 2006. Today’s guidance is generally consistent with our previously issued guidance. Again, the guidance I am about to review is attached to the press release we issued today so you can refer to that document as I proceed.
First, I would like to briefly review our assumptions relative to our guidance for 2006. our guidance does not include any expenses related to the Department of Justice investigation. I do want to note that as previously announced, 10 former employees of Medical Manager Health Systems were indicted in December 2005 as a result of a DOJ investigation. We have notified the applicable insurance carriers and expect these carriers to cover the legal expenses of these individuals. Our guidance does not reflect any potential repurchases of shares or outstanding securities beyond the 4.1 million shares repurchases for $37.4 million so far during this fiscal year.
Cash and GAAP earnings per share are both calculated based on an assumed weighted average share count of approximately 300 million shares to the full year 2006. The items underlying this detailed guidance are: the impact on shares and interest as a result of the tender offer completed in December which resulted in a 66.9 million reduction in shares and approximately 20 million deduction in interest income; the incremental impact on non-cash compensation due to FFAS Form 123r estimated to be approximately $43.5 – $45.5 million; the acquisition of EMedicine in Q1 2006 by WebMD Health; updated assumptions relative to the resolution of vendor issues Kevin discussed earlier; anticipated savings from certain technology initiatives and improved performance of our direct provider solutions; the impact on depreciation and amortization due to the finalization of our capital plan and finally the change in presentation of net interest which as I said earlier is not included in adjusted EBITDA.
2006 consolidated revenues are expected to be between $1.365 billion and $1.415 billion, an increase of approximately 7% to 11% from 2005. Timing of these revenues is expected to break down as follows throughout 2006: approximately 24% in Q1, 25% in Q2, 25% in Q3 and 26% in Q4.
We expect adjusted EBITDA to be between $200 - $230 million with $0.67 - $0.77 per share with the timing as follows: approximately 20% in Q1, 24% in Q2, 26% in Q3, and 30% in Q4, including the impact of FFAS 123r we are expecting 2006 net income of $45 - $65 million or $0.15 - $0.22 per share. The timing is as follows: 13% in Q1, 22% in Q2, 27% in Q3 and 38% in Q4.
More specifically by segment: Emdeon Business Services is expected to represent approximately 59% of consolidated revenues in Q1, declining sequentially to 56% in Q4. We expect operating margins to be about 19% in the first half of the year and 20% in the second half of the year. Anticipated that FIPs will represent approximately 12.5% of Business Services’ revenues and 13.5% of Business Services’ adjusted EBITDA. Emdeon Practice Services is expected to represent approximately 23% of consolidated revenue throughout the year. Consistent with prior years, Q1 traditionally has lower system sales than the rest of the year. We expect operating margins of about 10% in Q1, improving sequentially through out the year to around 13% in Q4. WebMD Health is expected to represent approximately 14% of consolidated revenue in Q1 increasing sequentially to approximately 18% by year end.
As we’ve communicated in the past, the business experiences some seasonality resulting in Q1 revenues that are lower than Q4 but up year over year. And the operating margins that in Q1 are expected to be at their lowest of the year at approximately 12%, increasing to about 30% by year end. Additional details on WebMDs guidance can be found in the press release and Form 8k issue by WebMD on February 23.
Porex is expected to represent approximately 6% of consolidated revenue through the year. Operating margins are expected to be approximately 27% for the year except for the seasonally strong 2nd quarter where margins will be slightly higher. Corporate overhead is expected to be approximately 3.6% of consolidated revenue throughout the year.
I’ll give you some additional data points to help you complete your models. Intersegment eliminations are expected to be approximately 2.5% of revenues. Net interest expense is expected to be approximately $3 - $4 million for 2006. Capital expenditures are expected to be between $75 - $90 million in 2006. Depreciation and amortization is expected to be approximately $80 - $85 million the timing as follows: approximately 23% in Q1, 24% in Q2, 26% in Q3 and 27% in Q4. Non-cash content and distribution services is expected to be approximately $7.3 - $7.5 million with the timing as follows: approximately 21% in Q1, 24% in Q2, 21% in Q3 and 34% in Q4. compensation expense including the impact of FFAS 123r is expected to be between $49 - $51 million for the year with the timing as follows: approximately 25% in Q1, 27% in Q2, 27% in Q3, and 21% in Q4. The estimated NOL balance at December 31, 2005 is approximately 2.1 billion with 69% at Emdeon and 31% at WebMD. Our estimated tax expense in 2006 is approximately $16 - $17 million which equates at an effective tax rate of 23%.
Now turning to our 1st quarter 2006 guidance. We expect revenues of approximately $328 - $338 million with adjusted EBITDA approximately $0.14 - $0.15 per share, and net income approximately $0.02 - $0.03 per share. These estimates are based on the same assumptions mentioned earlier. Also in Q1 we expect a cash out of approximately $100 million which reflects acquisitions, earn outs, stock repurchasing, capital expenditures and other changes in working capital. I would now like to turn the call over to our Chairman, Marty Wyngod.
Marty Wyngod, Chairman of the Board
Thanks Andy. I just wanted to briefly expand on Kevin’s comments with respect to the evaluation of strategic alternatives for Business and Practice Services. As Kevin mentioned, we engaged Blackstone and Citigroup as financial advisers to assist the board in evaluating alternatives as a result of received on potential strategic buys expressing an interest in acquiring Emdeon Business Services and Emdeon Practice Services. Our business unit and Porex business unit are not included in the evaluation process.
Additionally, the Board does not have any plans to reduce its 86% ownership in WebMD. The Board decided to engage in this evaluation process based in part on the expressed interest of several strategic buyers. With the Board to sell Business and Practice Services to make a 388H 10 election, the buyer would effectively receive the benefits of the relevant portion of Emdeon’s NOL enabling Emdeon to monetize that asset. Additionally, such instruction would permit the buyer to acquire developing assets without taking into account corporate expenses or other risks and liabilities. Such a transaction will be made possible by our substantial NOLs. And our unique corporate structure would be highly efficient for both the buyer and Emdeon shareholders.
While we are working quickly to evaluate strategic alternatives related to Business Services and Practices, I am not able to give you any definite timing for a conclusion of this process. As we stated in our earlier release, we are not going to give updates with respect to this process until its conclusion. Obviously, we are just exploring strategic alternatives and no decisions have been made as to whether or not to proceed with a transaction. We also do not expect to bring on a new Chief Executive Officer or CFO until this evaluation is completed.
I would like to take this time to thank the management teams and employees of all our subsidiaries for the effort they are putting in and the progress they are making. I would like to issue a special thanks to Andy Corbin for doing both the job of CFO of Emdeon and Chief Executive Officer of Practice Services and for setting Practice Services in the proper direction to facilitate higher top line and substantially higher bottom line growth.
Most of all to Kevin Cameron for his super human effort in coming up with the right strategy and implementing it in such a way to put our businesses into an extremely advantageous position going forward. This concludes our comments and we are happy to turn this over to your questions.
Dane Kumple with Frideman Billings Ramsey has the first question.
Can you talk a little about the gateway metric. Late in 2004 you announced a slew of deals and I was wondering if you could highlight what percent of claims are represented within your gateway relationships and if you could give us a sense of trend lines on the relationships with your top 50 payers in the country.
For a number of reasons, including competitive reasons, we haven’t updated that. We do have a continuing interest in the gateway relationship from payers and we have added new ones over the last year. It is a strategy we believe in; we believe it works for the industry; it works for us, and that the payers who are doing it like it as well. That’s about as much as I can say.
Can you comment a little about the flare up the controversy in 4th quarter which you obviously got resolved. How much business do you currently do with Misys. I ask that as they just acquired PayerPath and would presumably be looking to build their own business in that arena.
I think you are confusing it a little bit. PayerPath has some provider facing solutions that bolt onto the side of practice management systems, in part. They don’t generally act as a clearing house. What they did is they had a contract with Aetna which they, they basically used that contract to drive a lot of claims through it. That was a dispute they had with Aetna. We closed down the holes that were out there during the 4th quarter. I referred to them on the 3rd quarter conference call. As a result, certain vendors dropped Aetna. Some other payers to paper which essentially means that they took their customer’s claims. Those customers who were paying them to deliver electronically, they dropped them to paper. We resolved that situation in a very favorable way and all of those claims are coming to those payers through Emdeon.
Can you comment a little bit about how much of the Business Services revenue comes from license or license?
I really can’t other than to say most of the vendors in the industry use us for a substantial portion of what they do.
Andy, if you can comment on some of the trend lines you’ve seen on the electronic medical record sales. If you can give a sense of the percentage of new system sales that represent.
I think it is pretty much the same story. Everybody that we pitch wants to look at our EHR product. Probably only about 30 people purchased it today, but they want to know it’s out there and they can migrate to that. We did release Energy EHR 3.0 which has had pretty good reception in the market place. So I think we are getting a little bit of momentum out of that today.
The next question is from Christopher McFadden of Goldman Sachs
Two questions. One, you mentioned the application for DNO coverage. Should we assume the $20 million, give or take, that some portion of that is recoverable and if so can you give a sense of what that recoverable portion might be?
Could you clarify why you specifically held the business out as part of this strategic review process?
I am going to refer the first question over to Charlie, our Emdeon counsel
With respect to our coverage, right now we are working on the details with our insurance carriers and we hope to be in a position to address some of the prior expense. But the immediate affect I think it will see is reduction in the amount of expenses we have going forward.
Is there a premise that some of the expenses over the last 2.5 years are recoverable?
These are issues that we are working through right now.
We can’t give you an answer on that yet. It’s possible, but we can’t give you and answer on that yet. [regarding the second question] The reason we held it back; number one, it’s not as strategically integrated with Business Services and the rest of the businesses. And there are specific businesses we want to retain in the parent corporation for a number of reasons which basically means the company remains in operation and we are not selling substantially all of our assets.
In your comments, Kevin, you talk about Dakota being below your objectives. Is there a remedy there and if so, can you expand operationally what you are trying to do to improve the performance of that business?
Yeah, there’s a remedy there. From a strategic perspective we believe Dakota’s important. We believe that we have a unique offering the marketplace. Specifically that we can go to a payer, we can take in their paper claims and turn them electronic. We can take in their electronic claims and we can apply the same edits and rules to all of those claims which provide the benefits to the payer. That’s a unique value proposition in the market. The way it’s underperformed has really been from an operational perspective. It was a small BPO business with some great software and we scaled it in the BPO arena. There have been operational issues that have led it to be less profitable than we would have hoped. Having said that, it’s, you know the remedy is operations and execution there and scale in that business.
The next question comes from Anthony Venzetti of Axom Group.
I was wondering if you could talk a little bit about services to margins to increase substantially at the half. I think did you expect this type of event to continue in ’06? Just talk about how do you expect to do that?
I think if you go back in time, a lot of the way we were running the business was as a software company. We moved into a service business and a lot of what we focused our attention on are the handoffs between the product management, product development to sales, implementation to service down the line. So we focused on efficiencies in all those handoffs and those efficiencies have allowed us to create customer satisfaction and also increase the economics. So we have become much more efficient in the business as we continue into and through 2006.
Was there any restructuring there?
We have brought headcount down substantially through attrition and through reductions in areas where we had built up our efficiencies.
Jack Kelly with Smith Barney, you may ask your question.
Marty, to assume that close to $400 million of additional value was going to the purchase as a result of the NOL being transferred?
I think the way to look at it is that we have tax bases in those businesses of approximately 4800 million and the value that would accrue to any buyer would be approximately 35% of whatever they paid above that basis.
Duane Feniworth of Raymond James you may ask your questions.
I was just wondering if you were successful in selling both of those businesses what would be your priorities for the cash.
We haven’t made a decision with relation to the priorities for the cash at this time.
In the past what types of companies, I’m guessing by industry, have expressed interest in those assets and have any expressed interest in a combination of the two?
Actually, companies have expressed and these companies are closely related to us.
And then lastly, on the DOJ front, is there any milestones we can look to that would suggest that we’re closer to the end than the beginning?
Wayne do you want to comment on that?
Sure. I think we’ve made significant progress for continuing our cooperation. I think the best that I can say at this point, I think we’re winding down and we see the light at the end of the tunnel in the whole process.
Is that basically out of your control now and you’re waiting on other parties?
Is it reasonable to expect that the ’06 event?
It’s hard to say ’06 or ’07.
Thank you very much.
Sean Wyland of Piper Jaffray.
Hi thanks. Can you tell us a little bit more about and the progress in the quarter as well as the full year ’05, the progress that that business is making in the marketplace?
You know, we don’t really disclose that business independently.
Can you talk about business that you’re doing or certain things that you’re doing in that business.
The business has been growing substantially on the government side. We announced earlier in the year the first three contracts that had ever gotten as a prime contractor. Two of those contracts were multi-year agreements that totaled over $30 million apiece. And that’s been driving substantial amount of their growth.
And then can you help me understand looking forward to possibly after the sale of the two business units, what this company’s going to look like from and investment standpoint with the various assets? What will then be the story?
Again, we’ve entered into an evaluation process. No decisions have been made yet whether or not to proceed with the transaction. But you can draw your own conclusions. Were we to go forward with the transaction what the company will look like and we’re going to for the shareholders.
Thanks a lot.
Steve Marlboro of Thomas Weisel Partners.
Hi, if you look at the business services operating margins, it looks like you’re expecting a decline in the margin in the first half of ’06 and then a recovery in the second half. What’s behind the deterioration in the first half of the year?
First of all, that deterioration as you call it is, there is a certain amount of seasonality in that business and each year we see the first quarter as being the lowest margin quarter and then it grows through the year and if you look at our guidance overall, we’re not necessarily presenting a decline in margin in that business. So I think your question is incorrect to begin with. But, what accounts for that is that there in the first quarter of the year you have payroll increases you have , you have tax and FICA reductions and there is also investments that we’re continuing to make in those businesses going forward.
So was the 20.9% down to 19%. So we’re not going to argue over that. How much…
That’s not the guidance that we gave out, Steve. We gave 19% early in the year going to 20% by mid-year.
Right and last quarter you’re at 20.9%, in ’05. anyway, so my next question was the resolution of the vendor issues, did it help your margins at the bottom compact?
Relative to having holes in our network and having certain vendors violating contracts and therefore not having that volume coming through us, vs. having all that volume come directly through us now, I’m not going to comment on the margin, but yes that enhances revenue and profit.
Great thank you.
Corey Kelvin of William Blair and Co.
A couple of things. With respect to some income backlog in the operating divisions, can you comment on how it’s trending?
Yeah, we actually finished the fourth quarter very strong in sales. And drove our back log up. Sales were strong, deliveries were strong. We weren’t able to recognize it all into revenue, so it went into backlog for 2006.
Okay fine. And then, finally, one last clarification, Marty you said on this call and on the last call that there was no interest in selling, no intent at this point in selling an interest in the business. Just to clarify I’m assuming that that comment is direct toward the current strategic review. And then if you were successful in closing sales across divisions that that would be reconsidered, is that correct?
No, it’s not. Because there’s no
Duane Feniworth of Raymond James, you may ask your question.
Just a couple of follow ups. I’m just wondering what legacy EDI is as a percent of business services?
You know I don’t have that number handy to tell you the truth. what we put out previously. It’s been a while and the last number we put out was that that number was trending into the low 20’s. 20% of business services and we’re very comfortable with the trend. On the next call I can give an update to that number.
Great. And then when you talk about management solutions, to what extent are you marketing that directly to physicians and is a physician model different from practice services? So sort of vendor diagnostics.
Well this is a substantial business for us in business services. We offer independent solutions to the institutional market, to hospitals and also to providers. And, we also offer those solutions to some of our vendor partners because they don’t have that functionality or want enhanced functionality. They’ll take our products and incorporate them into their systems.
Any sense for what the percent of that revenue would be?
It is not something that we put out there, but it is a substantial revenue source for us.
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