NightHawk Radiology Holdings Inc. Q1 2008 Earnings Call Transcript

NightHawk Radiology Holdings Inc. (NHWK)

Q1 2008 Earnings Call

May 7, 2008 4:30 pm ET

Executives

Andrea Clegg - VP of Finance

Paul Berger - Chairman and CEO

Tim Murnane - COO

Analysts

Shelley Gnall - Goldman Sachs

David Veal - Morgan Stanley

Alan Robinson - RBC

Sean Weiland - Piper Jaffray

Sean McMahon - Kennedy Capital Management

Nicole Viglucci - Accipiter Capital Management

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the NightHawk Radiology Holdings first quarter 2008 Earnings Call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, May 7, 2008.

And at this time, I would like to turn the conference over to Andrea Clegg, Vice President of Finance. Please go ahead.

Andrea Clegg

Thank you. Good afternoon, everyone, and thank you for joining us. I'd like to welcome you to the NightHawk Radiology conference call to discuss the company's results for the first quarter 2008. By now, you should have received a copy of the press release which was sent out a short while ago. If anyone still needs a copy, you can access it on the Investor Relations section of our website at www.nighthawkrad.net.

On the call this afternoon we have Dr. Paul Berger, our Chairman and Chief Executive Officer, Tim Murnane, our Chief Operating Officer, and myself, Andrea Clegg, Vice President of Finance. After management completes their prepared remarks, we will be opening the lines for your questions. Please note this afternoon's conference call is being recorded and will be available for three weeks on our website.

I want to remind you that management will be making certain forward-looking statements in their remarks. All statements, other than statements of historical facts that address activities, events, or developments of the company, believes, anticipates, intends, estimates or projects and similar expressions are forward-looking statements. These forward-looking statements are based on assumptions and assessments made by the company's management based on factors they believe to be appropriate in light of their experience.

However, these forward-looking statements are subject to risks and uncertainties that could cause actual results and business decisions to differ materially from those contemplated by these statements. We describe these uncertainties and risks in the Risk Factor section of our periodic reports filed with the U.S. Securities and Exchange Commission. The Company undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events or otherwise.

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

Now at this point, I will turn the call over to Dr. Berger, our Chairman and Chief Executive Officer.

Paul Berger

Thank you, Andrea. Good afternoon, everyone, and thank you for joining us. We have a lot of news to talk about today. Shortly, I will introduce you to Tim Murnane, our new Chief Operating Officer. Tim has been on board for almost two months now and has immediately made a positive impact upon the organization. He will provide an overview of his observations on where our challenges and opportunities lie and, most importantly, what we will do about them. Andrea will then provide color on the quarter and our revised guidance.

I'd like to discuss two significant announcements we've made. Last week, we announced the appointment of Mr. David Engert to our Board of Directors. David's background is one of a seasoned executive in predominantly healthcare IT organizations. We welcome David's breadth of experience and talent. With this change, the company has regained compliance with a NASDAQ listing standard that requires the company's audit committee to have at least three independent directors.

Now, onto the announcement we released today of our plan to repurchase up to $50 million of our stock through a Dutch auction tender offer. The tender offer demonstrates the confidence that we have in our business and will provide our stockholders an opportunity to tender their shares and, if they choose, to receive a return on their investment. We expect that we will initiate the tender in the next one to two weeks, at which time we will announce the number of shares for which the company will tender and the price range at which we will offer to purchase the shares. At that time, the offer to purchase and the related materials will be distributed to stockholders and filed with the SEC.

Before we get into details of our first quarter, I'd like to highlight three points that will be reflected throughout our prepared comments. One, we are not satisfied with our recent execution and financial performance. Two, we have identified key areas where we have underperformed and have already begun to improve our execution in these areas. And three, we remain very excited about the market in which we operate and the strategic opportunities that lie ahead. Today, I am reporting that we have not met our own expectations regarding the first quarter performance. And judging by our stock price, this has been anticipated by Wall Street.

What have been the fundamental problems? First is a failure of our sales operations and execution during the last two quarters. Primarily related to this, we are revising our revenue guidance down for 2008 to $171 million to $181 million. Tim will discuss this in more detail momentarily.

Secondly, during the last year, we ramped up our infrastructure which resulted in increased costs and SG&A to support a larger company. We also had some additional unanticipated professional services expense related to physician scheduling challenges during the quarter. The net result was higher professional service expense, higher SG&A, and lower earnings. As a result of this and the revenues we talked about, we are now lowering adjusted earnings per share to be in the range of $0.70 to $0.82. More details will follow on this as well.

Then, why am I so excited about our future? Well, first, I'm very confident that we are in an excellent business with great opportunities ahead. The problems we face can clearly be overcome by proper management and solid execution.

In mid-March, Tim Murnane was appointed COO. He has brought a great, fresh view to our organizational structure and operations, has undertaken a very rigorous analysis of our spending, and I am confident he is the person to bring our cost structure, management team and the service excellence in line. You will hear from Tim in just a bit.

Next, we have looked at our sales process and done some work refocusing our sales team. Importantly, we hired a consultant, Chris Anthony, to review our entire sales operation. He has been with us approximately one month and, after a thorough analysis of our sales operation, Chris has concluded there is much cause for optimism, though work to be done.

We have been extremely impressed with Chris and, today, I am pleased to announce that Chris has joined the company as our Vice President of Sales. We are confident that we will see a major improvement in our sales operation and execution.

Mark Kleinschmidt, as you know, is a leading business executive and brings tremendous knowledge of our industry to Nighthawk. I've asked Mark to focus to his efforts on what are very new and very exciting strategic initiatives, lend his expertise in special sales situations, and continue on in his role as President of Nighthawk's Business Services Division.

I'd like also to provide you an update on our CFO search. We have retained an executive search firm and have interviewed several high-quality candidates to date. At this point, we are in the process of interviewing our final candidates and, given the experience and fits we've seen so far, expect to make an announcement on a CFO hire soon.

So, the good news, and the bottom line I want to communicate to you today, is that this is a great market. We are the very best at what we do. We do it with high margins and strong cash flows. And yet, I know we can and will do it better. In support of our belief regarding market opportunities, we recently completed a survey of our own customers that showed a high portion of them are either using temporary staffing solutions or seeking to recruit physicians or a need of subspecialty solutions. And we can provide all of these. As I've said before, we are driving the transformation of the professional practice of radiology.

Finally, and my excitement is related to my sense that this is like a new beginning for us at Nighthawk. The problem is not with the market or market opportunities, but rather one of our own execution. We have put together an outstanding management team which has already had some early successes and has the skills, drive and dedication to meet all challenges that lie ahead, with a goal of maximizing shareholder value.

With that, I'd like to turn the call over to Tim.

Tim Murnane

Thanks, Paul. I'm very pleased to be part of the Nighthawk team and to be speaking with you this afternoon about our results and plans. I've been with Nighthawk now since March 13 and, during my first few weeks with the Company, my objective has been to discover where we can improve, so that our results are better and more predictable, and to put plans in place to assure that these improvements happen.

With the help of the talented team at Nighthawk, I focused my attention on three key areas during these first few weeks. First is sales. As Dr. Berger mentioned, we retained Chris Anthony to help us in this effort beginning in early April. Chris is now with us full-time and has relocated to Coeur d'Alene.

Chris and I have worked together before, and I can vouch for his expertise in managing a sales force for maximum impact. He has held significant sales and marketing management positions at companies such as Computer Associates and EMC Corp.

Among our first tasks was taking a very detailed look at our sales pipeline. We concluded that the pipeline does not support the prior revenue guidance. We have also taken a very close look at how we are selling and at how our sales force is organized, compensated and deployed in order to maximize our effort in bringing in new customers and increasing revenue from existing ones. Chris has already generated a significant momentum shift in our sales force.

Second, we have taken a very careful look at our expenses. Our expense run rate in the first quarter was ahead of our revenue growth, and we've identified several specific areas where we can reduce expenses while, at the same time, improving service to our customers. These expense reductions are being implemented and, we believe, will allow us to achieve a 28% to 30% adjusted EBITDA margin for the year.

The third area of focus has been scheduling our physicians for optimum coverage during the hours expected by our customers. It was very clear that this process required automation and a more tightly-run approach in order to maximize service for our customers, while reducing our costs for professional services.

Unoptimized scheduling added incremental costs of approximately $600,000 in the first quarter. This month, we introduced a new scheduling system that moves us well along the automation path. All of our physicians, as well as our key employees who participate in the scheduling process, have been trained on this new system.

In addition, with the help of several of our key positions, we've restructured our scheduling process and guidelines, and have put these improvements in place. These changes have already had a positive impact, and we expect that our customers will see the results of these improvements as we move through the Summer. As a result, we expect our professional service expense to be more in line with previous experience.

So, how did we arrive at our revenue guidance? First, we concluded that our sales operations and execution, including our forecasting ability, have not been up to par and need improvement. Second, there are pricing pressures in the market that need to be addressed. Third, though our volume retention rate year-over-year is 91%, it's not as high as we would like, and we are confident that we can improve this. With respect to these issues in our guidance, we are taking a conservative approach.

So, in summary, my first few weeks here have confirmed my optimism about Nighthawk. With improved execution in a few key areas, we will do better and deliver results that our investors deserve and that we expect. It is apparent to us that management has lost credibility with investors. Our intention is to rebuild that credibility by executing on our guidance consistently.

With that, I'll hand the call over to Andrea.

Andrea Clegg

Thank you, Tim. Let me jump right into some specifics on our first quarter results. First, on revenues, our first quarter revenues grew 61% from first quarter '07 to $41.7 million. This includes organic growth of 15%, or $3.8 million. New services represented 21% of revenues, or $8.7 million, including final interpretations of $4.6 million, or 11% of revenue.

Included in our revenue is contribution of approximately $800,000 resulting from an amendment of the ERS acquisition agreement with St. Paul Radiology. This amendment allows the company to now recognize revenues consistent with all other professional services revenues.

Now, volumes, first quarter volumes grew 54% to 745,000 scans as compared to 484,000 in the first quarter of 2007. Our organic scan volume grew 21% over the first quarter of 2007, and same-site volume growth was strong at 19% year-over-year. The table attached to our press release provides historical scan volumes by quarter for your reference, including a breakout of the TDS and Radlinx volumes.

Now, on to gross margins, our adjusted gross margins, which exclude non-cash IB&R malpractice reserves as well as stock compensation, was 60.6% of revenue versus 64.6% in the first quarter of 2007. I'd like to highlight a few dynamics within our gross margins that should help you better understand the year-over-year movement.

The margins in our core Nighthawk Preliminary Business have been impacted by the effects of our first quarter scheduling challenges, yet remain above 60%. Additional year-over-year margin pressure comes from, one, lower Radlinx and TDS margins at 51%; two, a higher percentage of organic Finals business at margins of 52%; and three, year-over-year price decline of 5%. Partially offsetting these pressures is the benefit from our Business Services margins.

Now, I'd like to make some comments on the improvement in M&A margins from 2007. Looking at the TDS and Radlinx acquisitions, we are experiencing improvements in the cost structure, as expected. Combined gross margins on the Radlinx and TDS revenues were 51% during the first quarter versus 43% in 2007.

This is a reflection of the migration to the new compensation model and workflow system in late 2007. As we continue to cross-credential these physicians and as they gain more experience on the platform, we believe we can further improve these margins.

Now, onto SG&A. For the first quarter of 2008, our SG&A expense, excluding stock comp, was $15.8 million compared to $7.6 million in the first quarter of 2007. The year-over-year increase of $8.2 million includes the impact of the Business Services acquisition for $2.5 million, nonrecurring costs of $1.1 million which is primarily severance, the timing of higher costs incurred early on in 2008 for approximately $400,000, and infrastructure growth of $4.2 million.

The primary driver of the $4.2 million increase year-over-year was additional staff hired in the last six months to support projected growth. This included management and support staff to facilitate a larger company that we now predict we will be in 2008.

First quarter adjusted earnings per share of $0.14, which includes severance and related costs of $900,000, was down from $0.19 in the first quarter of 2007 due to the factors we've discussed. GAAP net income for the first quarter of 2008 was $700,000, or $0.02 per diluted share, compared with GAAP net income of $4.3 million, or $0.14 per diluted share, in the first quarter of 2007.

In addition to the drivers I have already mentioned, the company incurred higher non-cash charges year-over-year of which approximately $1.2 million is non-recurring in nature. Specifically, $700,000 in stock compensation expense related to the departure of the prior COO and $500,000 in incremental IB&R expense related to the Radlinx acquisition. Cash flow from operations was $5.8 million in the first quarter, down from $8.2 million in the first quarter of 2007. The company incurred higher prepaid amounts in the 2008 quarter along with higher interest expense.

Now, I'd like to take a minute to walk or talk you through the outlook in the remainder for 2008 and make some modeling comments. As Dr. Berger mentioned, we have adjusted our full-year guidance for revenue to be in the range of $171 million to $181 million and adjusted earnings per diluted share of $0.70 to $0.82. Included in this guidance are the following primary assumptions.

First, for the top-line here. Total revenue growth is forecasted at 13% to 19% with organic growth estimated at 3% to 9%, same-site volume growth of 10% to 17%, price declines of 4% to 7% year-over-year, and volume retention of approximately 95%. Finally, the full-year impact of the 2007 acquisitions we expect to contribute an incremental $14 million in 2008.

The revenue breakdown by product line is as follows. Preliminaries, $137 million to $142 million; Finals, $17 million to $21 million or 10% to 12% of our total revenue; Business Services of $16 million to $17 million; and Other Revenue of approximately $1 million.

On gross margins, we have assumed conservative improvement in the realization of integration synergies associated with the TDS and Radlinx acquisitions and modest improvements to scheduling constraints we experienced in the first quarter.

On SG&A, we've assumed a reduction off of Q1 absolute spend levels, largely due to the nonrecurring and front-loaded expenses I've discussed, plus some reduction in ongoing SG&A expense. We are targeting SG&A spend, excluding stock comp, to be approximately 32% to 34% of revenue. This does include the effect of the nonrecurring cost in the first quarter.

The result is that we're targeting adjusted EBITDA of approximately 28% to 30% of revenue in 2008 with a goal of margin expansion in 2009 and forward. Our adjusted EBITDA excludes the effects of stock comp, IB&R and the nonrecurring severance and related. One final note is that the impact of the tender offer on our earnings per share is not considered in this guidance. Hopefully, that helps those of you when modeling our company going forward.

And with that, I would like to turn the call back over to Dr. Berger.

Paul Berger

Thanks again, Andrea. To summarize, we believe we're in a great business with large opportunities ahead. We are the market leader in teleradiology and business solutions today with a presence in over 25% of the hospitals across the United States. In addition to this, the reason for my optimism and enthusiasm are the key additions to our management team and a renewed commitment towards fiscally prudent operations, management and service excellence.

Today, we are demonstrating our confidence in our future opportunities and our ability to execute with an announcement of a tender offer to buy back up to $50 million of our stock. Going forward, we pledge to be informative and transparent regarding our operations, do everything in our power to execute on our plan, to regain lost investor confidence, and maximize shareholder value.

With that, I'd like to thank you, all of our listeners, for your interest in our business. And we'll open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator Instructions.) Our first question is from Shelley Gnall from Goldman Sachs. Please go ahead.

Shelley Gnall - Goldman Sachs

Thanks, for taking my questions. First of all, I guess on the customer retention rate, I think, Andrea, you had said it was 91% at the quarter. Could you remind us what it was at the end of last quarter?

Andrea Clegg

The number I quoted, Shelley, 91%, is a volume retention number year-over-year.

Shelley Gnall - Goldman Sachs

Okay.

Andrea Clegg

It's just an interesting tidbit, that year-over-year. From fourth quarter, our volume retention was closer to 97%. The customer retention, I don't even calculate that right now, Shelley.

Shelley Gnall - Goldman Sachs

Okay. That's fine.

Andrea Clegg

We're really looking at volumes.

Shelley Gnall - Goldman Sachs

I just wanted to make sure that's comparable to the guidance, the volume retention of 95%.

Andrea Clegg

Oh, that's an annual volume retention assumption built into the guidance. Like I said, the quarter-over-quarter was 91%, and movement from fourth quarter was 97%. So, I think 95% is a prudent assumption for guidance.

Shelley Gnall - Goldman Sachs

So, you're hoping to slow down the volume loss. So, you're hoping to improve retention through the rest of the year.

Paul Berger

Correct.

Shelley Gnall - Goldman Sachs

Okay, great. And then, I guess on the tender offer, why a Dutch tender instead of a traditional share repurchase?

Paul Berger

A major reason is that it's more efficient when you buy back shares under a tender as opposed to an open purchase. We'd like to accomplish this in a relatively short timeframe, and this is easily the best and most efficient way to do that. Another point, which is a smaller point, is that investors can sell without paying any kind of commissions as well.

Shelley Gnall - Goldman Sachs

Okay, great. And then, on the interest expense, it came in higher than our expectations. Can you talk a little bit about what you saw in interest expense this quarter?

Andrea Clegg

Sure, Shelley. And this is a point for many folks who model our business. Our interest on our $100 million debt facility, if we swapped and locked in an effective rate of 7.4% for about a two-year period, on top of that we incur a small amount, we have some amortized closing costs that we have. So, our fourth quarter interest expense is what it will be every quarter for the rest of this year. It is fixed.

Shelley Gnall - Goldman Sachs

Okay, great. Thanks.

Andrea Clegg

Yeah.

Shelley Gnall - Goldman Sachs

And then, a few questions on the sales force. It sounds like the sales force is having some trouble bringing in new business. Can you talk a little bit about what the challenges are there specifically? Is it the fact that the prelim business was on a flat rate and we're moving to a modality-based fee schedule in the Finals? Or is it pushback from customers that maybe the pricing is still too high relative to what others are charging out in the market? I'm looking for what is the inadequacy of the sales force. Where are they having the big challenges here?

Tim Murnane

This is Tim Murnane. In my view, it is primarily management of the sales force. Let me just talk about a few things that we're looking at. We've changed the way that we're comping in our sales force. We've reorganized, so that we put more commission sales people in the field and less support people here. We've looked at our account coverage model so that we can do things to make sure that we're touching our customers and our prospects more frequently. And we've changed the process of escalating the management approval process to deal with important decisions, particularly around exceptions that might take place.

And in my view, this is almost entirely a management issue and a deployment issue. And it's not an issue with our sales people being incompetent. That's not the issue at all. So, we're pretty excited about what we are able to do and what we will be able to do going down the road.

Shelley Gnall - Goldman Sachs

Okay, thanks. And then, I guess I'll hop over to a guidance question. And looking at the discount the industry's applying to growth right now, have you considered, Dr. Berger, putting out maybe quarterly guidance or maybe nearer-term targets or milestones to maybe help investors regain confidence? I think that for each of the last several quarters, the annual guidance has been revised. I'm just wondering if you've thought about going to quarterly guidance.

Paul Berger

We haven't really, Shelley. We're trying to, this like I said is pretty much a new beginning for us, and there is an excitement about that. But one of my concerns is and always will be that if we start managing to quarterly guidance it may tend to push us in directions that might not be as prudent for the long-term as they would be for the short-term. And as such, I think it's, at least for us at this point in time, not a healthy thing to do.

Shelley Gnall - Goldman Sachs

Okay.

Paul Berger

I understand your point. I think your point is well-taken with respect improving investor confidence, but I think we can do that and accomplish that by as much and as open a communication line as we possibly can have to our investors.

Shelley Gnall - Goldman Sachs

Okay, fair enough. And then, if I could, just one more with Tim on the sales, I guess I had one follow-up. Back to my pricing question, I'm wondering if you had though about offering some sort of a blended pricing model, bundling in Business Services or Prelims plus Finals or something along those lines.

Tim Murnane

We absolutely have. And what we're doing is making sure that our sales team is well-trained in being able to speak to those points because we think that that's a good opportunity for us given the breadth of offerings that we have. And that's specifically, in most cases, how we're trying to address the pricing issues.

Shelley Gnall - Goldman Sachs

Okay, great. Thanks. I'll jump back in queue.

Operator

Thank you. Our next question is from David Veal from Morgan Stanley. Please go ahead.

David Veal - Morgan Stanley

Hey, Andrea, I thank you for the detail on the guidance. Could you speak to the sequential progression? I mean, if I just work the numbers, it looks like there's not a lot of sequential growth. Should we expect the sort of normal seasonality in there? What are you thinking there?

Andrea Clegg

There is seasonality in there. We've chosen to be conservative on many fronts in our guidance because of some of the pressures we've talked about. One of those is, of course, the seasonality, then in the price decline assumptions of 4% to 7%. You will still see increased seasonality effects in the second and third quarter with that drop off in the fourth quarter.

David Veal - Morgan Stanley

So, we should expect seasonal up for two, sequential effort second and third quarter.

Andrea Clegg

Yes.

David Veal - Morgan Stanley

And then, sequential down for the fourth quarter.

Andrea Clegg

Yes.

David Veal - Morgan Stanley

Okay. And when we think about the earnings, would that be sort of similar?

Andrea Clegg

I'm sorry. Repeat that, could you?

David Veal - Morgan Stanley

When you think about the earnings, would the earnings progression be fairly similar to that?

Andrea Clegg

Oh, no. I think first quarter, the message I really wanted to get across here is we had some significant non-cash charges in the quarter that were nonrecurring. And then we had significant nonrecurring SG&A spend in the quarter along with the pressures in the gross margin we talked about from scheduling constraints. So, I think we will see progression in earnings to make our guidance here after the first quarter.

David Veal - Morgan Stanley

Okay. And also, can you speak to cash flow? I mean, it seems like we're a little bit on the weak side relative to what we saw last year. Can you speak to what you’d expect?

Andrea Clegg

Yeah. Lower earnings drive some of that cash flow. We also had a significant amount of prepaids in the quarter. Our malpractice policy renews once a year, which is a very large payment, and our D&O insurance went up this year. So we had pretty large first quarter outflows of cash relative to last year. And part of that is the interest as well. We had interest expense of roughly $2.2 million this year, and we had none last year.

David Veal - Morgan Stanley

Right, okay. And just one last question, just in terms of the covenants on your debt, I mean, you'll be paying out cash to shareholders. At what point does the covenants start to become an issue? Is there an area we should think about there?

Andrea Clegg

Sure. We have a very good debt facility. We secured that deal just prior to some of the credit market woes here. So, our covenant is a leverage-based shield of four times EBITDA. And we're well within that constraint. Last year, we did roughly $50 million in EBITDA, and we had $100 million in debt, so we were a little under two times leverage. And we have a four times cap, so we're fine there. That is the only covenant that we really watch. There's no others that would. It's a very covenant-light facility.

David Veal - Morgan Stanley

Right. Is that net debt or total debt to EBITDA?

Andrea Clegg

Total debt to EBITDA.

David Veal - Morgan Stanley

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from Alan Robinson from RBC. Please go ahead.

Alan Robinson - RBC

Good afternoon. With the Dutch auction, what proportion of the Dutch auction do you intend to fund with cash on hand, and how much new borrowings do you think you'll have to take out for this?

Paul Berger

We intend on doing the auction and the tender with cash on hand.

Alan Robinson - RBC

Okay. And you, presumably, are confident that the cash you'll have remaining is enough to keep you going through the ups and downs of the working capital.

Paul Berger

Yes.

Alan Robinson - RBC

Okay. Just generally speaking, you were alluding earlier to the fact that your customer highly value your services, and yet we're still seeing a lot of pricing compression. Could you just speak to what kind of pricing power you might have further down the line or, perhaps more specifically really, why there's so much pricing competition going on out there?

Paul Berger

It's relatively easy, Alan, and simple for competitors to get into the business we're in, or a portion of the business we're in. If they just want to set up their own shop, four, six, eight radiologists can do this kind of work and provide the preliminary nighttime work. And they can do it because they have no real super infrastructure. They can do it at a lower price. And there's been a fair amount of that coming into the market.

We don't think of them as primary or, at least, intermediate or long-term competitors because with the way we see the market going is that there will be an increasing amount of emerging Finals type work done at night, an increasing amount of daytime Finals work being done, the fact that we can offer revenue cycle management, technology opportunities and help increase doctors' efficiencies in their own practices. By bundling these things, we think that we are a bit of a different animal. In the meantime, there is a certain inroad that's smaller player can make, and have to some degree.

Alan Robinson - RBC

So, it sounds like, to paraphrase you, you just have to kind of grit your teeth while these new upstart competitors come in and wait for the market to shake them out perhaps.

Paul Berger

I think that's correct, Alan, and I think what we've seen is some of the smaller players offering their businesses to be purchased because they either think they've had enough or whatever. But, we view the trend as one that will be making it much more difficult for the smaller competitors or smaller players to contain and remain in the market in the long-term.

Alan Robinson - RBC

Okay. And then, moving on to the Finals market, we've talked about this being a much larger potential market. What are the main problems you've experienced in penetrating this market, and how are those problems different to problems you've experienced with the preliminary market?

Paul Berger

Yes. It is absolutely day and night, another really good question. Succinctly, the nighttime market, the emergency Preliminary market itself was picking low-hanging fruit. The doctors ultimately needed a way to change what they were doing. It was very difficult to work their ridiculous hours and be called several times during the night, and then work the next day. So, picking the low-hanging fruit was something that was very easy to accomplish.

When we talk about some of the Preliminary type work that we do will transition to Finals type work on an emergency basis because some doctors don't want to read it or don't have the staff or, from an economic perspective, they would prefer it to be done on a Finals basis. In our world today and it's a very small percentage of our overall workload. It's probably 5% or 10% and it makes up about 30% of the Finals work that we do.

The big ticket that I think the investment public focuses their attention on, or should focus their attention on, or what we talk about at least, is the $15 billion Finals market, a lot of which is daytime. And the question that needs to be asked, I think, is why would the radiologists who are doing this throughout the country and making $15 billion from it turn over some of their bread and butter to folks like us?

And that requires a number of things. It requires a paradigm shift to understand that in the long run, we will solve all of their staffing solutions forever. And we can offer subspecialty services. We can offer the ability for them to get cardiac services. We can offer to do the billing and revenue cycle management for them. We can offer a whole host array of services.

And by partnering with us, essentially, they have eliminated all of those concerns for the rest of their practice. The horse that the radiologist rides on today, and has been for ever since I've been one for 30 something years, has been one hell of a horse. And people would prefer to stay on that horse to some degree, unless the wind start blowing such that the horse gets a little bit wobbly.

My perspective is that a couple of things will take place. One, there are pressures on radiology practices from both non-radiologists wanting to do the imaging work and the government getting involved in some sort of pressures on revenues.

As a result of that, I believe that these groups will look upon people such as us, and specifically Nighthawk Radiology, as a great opportunity to practice and bring long-term stability and success to their organization. But, that's a bit more of a paradigm shift, and it takes time.

In the meantime, the daytime work that we're doing is what I would call issues that are somewhat larger in scope, that is that there are maybe big problems between a hospital groups, either internally or with the hospitals that they associate with. Something happens, and we try and help out those radiologists to keep those practices going, to allow them to expand and, as such, do a fair amount of the work that they need us to do.

Those things are a bit more volatile. The contracts are larger, but they're less predictable. And as a result of that, it's very, very tough to predict exactly how much of that work is going to come our way. Given the somewhat, wavy or difficult or some of the tremors out there in the world of radiology, there is a fair amount of that type of daytime work available, and that's what we're doing.

There is a trend toward some of the nighttime work being Finals type work, and we will do that as well. But, the exact it's difficult predicting this and, as such, we believe that in the course of this year, we'll probably double, or close to double or maybe more, our Finals work.

Actually, one of the things that was good about this quarter is that in this quarter, we did $4.6 million worth of Finals interpretations compared to $3.4 million in the fourth quarter of '07, and that was an 11% of our revenues as compared to 8% of our revenues in '07. And so, we're moving in that direction, but the exact pace at which that movement occurs remains to be seen.

Alan Robinson - RBC

Okay.

Paul Berger

Sorry about how wordy that was, but that.

Alan Robinson - RBC

No, that was useful. Clearly, one of the key motivators you have for your radiologists is the share price and stock price appreciation options. To what extent have you started to see issues with your radiologist retention since over the last couple of quarters since we've seen this weakness?

Paul Berger

We see no weakness at all, 0.0. I think the radiologists are not any more happy than anybody else who, they're certainly not any more happy than I am. But, the point is that the amount of stock that they have is a very, very small percentage of their annual income. And they are highly compensated professionals. They deserve to be.

But, the stock issues are not a huge amount, it is probably less than their usual retirement plans would be and, as such, it causes no major concern. And I haven't heard that there's a concern, in general, about the stock market and our stock price, but not in any way, shape or form that would concern them or us about retention.

Alan Robinson - RBC

Okay, thanks. And the last question for Andrea. Are you prepared to give a stab at where you think your guidance comes out in terms of GAAP earnings?

Andrea Clegg

Not at this moment, Alan, no.

Alan Robinson - RBC

Is that?

Andrea Clegg

I think.

Alan Robinson - RBC

A policy you're considering maybe going forward?

Andrea Clegg

Yes, that absolutely is. So, the amortization of the intangibles should be something you can extract. IB&R is one charge that does tend to fluctuate with our acturial analysis. And I think until we have a better run rate history in terms of predicting that, that number has bounced around a little. It's currently estimated at about $0.45 a study. And then, the third component that's variable is the stock compensation.

Alan Robinson - RBC

Okay, thank you.

Andrea Clegg

Okay, sure.

Operator

Thank you. Our next question is from Sean Weiland from Piper Jaffrey. Please go ahead.

Sean Weiland - Piper Jaffray

Thanks. A question on the scheduling of radiologists in the quarter, can you give us a little bit of a dynamic of what happened there? The scheduling issues, was it related to Talon? And what was it specifically in the quarter that happened this quarter that didn't happen in prior quarters?

Paul Berger

With the size and complexity of the coverage and the relatively short lead times with respect to our previous scheduling process, we had difficulty meeting the demands at appropriate times. We were scheduling our doctors too late in the process. They had a great deal of flexibility, still do. But, as a result of that, we had to pay significant additional compensation to meet the customer demands.

In a given weekend, for example, we might not have had enough radiologists scheduled. And they're independent contractors, and our scheduling process was such that the lead times to schedule them was not what it should be. Again, those were very costly things, and we wanted to make sure that customer service was satisfied, so we had to pay higher premiums to get those physicians to be there at the times that they didn't expect to be there.

Now, we have, as Tim well, I'll let Tim talk about some of the solutions.

Tim Murnane

Yes. One of the things to point here is that our physicians have helped us enormously over the last month or month-and-a-half in resolving these issues. And it's had a very positive impact for us in the month of April. We've seen that additional physician comp come down pretty materially.

So, we think that we understand what it is that we need to do. This is a combination of having, as I mentioned earlier, an automated approach where we can have a longer view that is able to give us a good view of not only how we're scheduling our radiologists, but how we're scheduling them vis-à-vis historical piece in volume on a particular shift. And that's what we have put in place.

And in addition, it helps us to understand where there are gaps in the schedule with a longer view, so that we can get people to work during those periods of time, not on an emergency basis or on a call basis, but with a well-planned look far enough down the road.

So, those are things that we have initiated over the last 30 days, and I think we're going to see a very positive impact not only to our cost for compensating the physicians, but also to the service that we provide to our customers because we'll be able to have a much longer view and a better plan schedule going forward.

Sean Weiland - Piper Jaffray

Okay, that's helpful. And just a quick follow-up question on David's earlier question on the guidance. Basically, we're looking at, give or take some seasonality, flat sequential revenue for the rest of the year. Help me connect that with your outlook and your optimism for this industry being a growth industry. Why would your revenues suggest growing slower than the market? Is that an internal execution issue or is it a timing issue or what?

Paul Berger

Well, it's a number of different things I think, Sean. First, the sales performance, that has to get better, and that is going to take a bit of time. We think that the impact of improved sales should help us in the later part of this year certainly, but it won't have a huge annual impact. And that's one issue.

Another issue is it's pricing pressure. We're looking at these things from a very conservative approach and are assuming that the pricing pressure may be more substantial than we would like it to be. The SG&A costs are elevated, and maybe Tim will want to talk about those sort of things to keep that in line as well. But, why don't you go ahead, Tim?

Tim Murnane

Yes. Let me talk a little bit about the expense reduction. We've identified $2 million in expense that we're taking out of the business for the period May to December. So, if you looked at that on an annual basis, annualized, it's a run rate of about $3.2 million.

And this is coming out we've looked at all areas very detailed, all areas of the business. It includes personnel expense. It includes T&E expense and a variety of other things, none of which do we think will have any impact at all on service to our customers. In fact, we think that our service to our customers will improve as a result of some of the other things that we're doing.

So, all of those expense reductions will be in place during the month of May. That will all be completed. And a one-time cost associated with those expense reductions are built into the number that I've discussed.

Paul Berger

And this, I want to emphasize, is a new management team. They looked at these things in a very, very thorough way, and they are basically here to execute and, going forward, want to deliver good news to everybody, and I'm confident they will.

Sean Weiland - Piper Jaffray

Okay. What do you think the growth of the industry is?

Andrea Clegg

Well, quarter-over-quarter, Sean, we saw 19% growth in our same-site volumes, which is the same rate we saw on an annual basis last year. So, we still see incredible growth potential in this market. Frankly, it's internal execution.

And we're sitting in May here and, given the lead times on closing contracts and implementing them, we are where we are unfortunately. And I think we all are very bullish on the future of this organization and this industry. It's just not going to happen in 2008 for us.

Sean Weiland - Piper Jaffray

Okay.

Andrea Clegg

I think we're rebuilding the fundamentals of the sales organization and how we approach the customer and sell our services. We've been conservative on many fronts in our guidance because, frankly, we just don't want to disappoint again.

We've taken conservative looks at pricing and volume growth and new sales closing and seasonality, and we've built all of that in. Now, hopefully, all of it doesn't go at the low end and we come in somewhere in the range we've given, and we will move on to a great '09.

Paul Berger

One other thing I want to emphasize is that I, for one, have just stopped drinking the Kool-Aid. We've talked a pretty good game. We've lost investor confidence. And it's now time to play the game the way the game needs to be played.

And for the most part, not for the most part, we have what is a solid management team. And it's easy to come and tell you the good news and keep drinking the Kool-Aid but, again, now I'm from Missouri, and it's a show-me type of deal.

The one issue that I want to emphasize, however, is that we are very confident, and I am very confident and we're exercising that confidence by buying back our stock. We are confident in the opportunities ahead. We're confident in the ability for us to execute. And as a result of that, we felt that a good use of our cash was to show our confidence and issue the tender.

Sean Weiland - Piper Jaffray

Okay, all right. Thank you very much.

Andrea Clegg

Thanks.

Operator

Thank you. Our next question is from Sean McMahon from Kennedy Capital Management. Please go ahead.

Sean McMahon - Kennedy Capital Management

Hi, Andrea. I apologize, but can you quickly go over the one-time expenses? I missed that.

Andrea Clegg

Sure. We had one-time expenses in our SG&A of approximately $1.1 million. About $800,000 of that was due to severance for our prior COO and outgoing CFO. We had $100,000 in search fees for a new CFO. And then, we had $200,000 in a labor audit settlement that we had with our Australian division.

Sean McMahon - Kennedy Capital Management

Okay, all right. And then, kind of going on to guidance, can you help me understand how much new business you need to win to hit the low end of your guidance?

Andrea Clegg

Sure. Well, we won a lot of that, that we've already included in our guidance because if I don't have the contract signed really in the next 30 to 60 days, I'm not going to recognize a lot of that in 2008. We have an assumption in new contracts signed and implemented within the year of roughly $8.5 million to $11.5 million.

Sean McMahon - Kennedy Capital Management

So, that $8.5 million to get to the low end of your guidance?

Andrea Clegg

Yes.

Sean McMahon - Kennedy Capital Management

Okay, all right.

Andrea Clegg

For contracts we have signed and some of them have already gone live. Others are going live, and that is the impact to 2008.

Paul Berger

We shouldn't need spectacular execution to get to where we need to go, but we are not taking things for granted. And just.

Sean McMahon - Kennedy Capital Management

That's what I just wanted to try and understand. So, the $8.5 million and these contracts are signed today and you're implementing for the rest of the year.

Andrea Clegg

That is the effect on 2008. So, the annual value of those contracts is something much more.

Tim Murnane

Yes, this is Tim. One of the things that we're, there's a lot of moving parts here, as mentioned earlier, and relative to the guidance. We have a new management team. We've got a new sales person. We're taking a new approach to sales. We're trying to deal with a lot of things here at the same time. But, keep in mind that as we build our sales pipeline and get that to where we want it to be, which is happening as we speak, the sales that come in the door, the contracts that we close as the year moves on, obviously has a lesser and lesser impact on this year's revenue.

So, we expect to, and are seeing an improvement now and expect that to continue throughout the year. But the revenue impact this year we don't expect to be that much additional to what Andrea mentioned.

Sean McMahon - Kennedy Capital Management

I'm sorry, just to make sure. So, to hit the low end, you already have it signed and then just obviously, that's not the annualized effect, but that's what I want to make sure I understand. Am I hearing that correctly?

Andrea Clegg

We have signed and implemented some of the $8.5 million. Other is in the queue to be implemented, and we're watching it to make sure it gets implemented in the timeline to recognize it in 2008.

Sean McMahon - Kennedy Capital Management

Okay. But, it's not like I need to go out and find this business. I have it today.

Andrea Clegg

Yes.

Sean McMahon - Kennedy Capital Management

Okay, all right, perfect. And then, secondly, Dr. Berger, I know traditionally you're under a trading program, but you've been a seller of the stock. Any thoughts about buying stock here, since this is kind of a new beginning for you as you've talked about on the call?

Paul Berger

The answer to that is I had a 10b5-1 that ended in November, and there are constraints against buying back the stock for a period of time. I think it's at least six months. And clearly, buying back the stock at prices that they are today has entered my mind.

Sean McMahon - Kennedy Capital Management

All right. Thank you very much.

Operator

Thank you. (Operator Instructions.) Our next question is from Nicole Viglucci from Accipiter Capital Management. Please go ahead.

Nicole Viglucci - Accipiter Capital Management

Yes. Hi, thanks. I'm just wondering how your 2008 free cash flow will compare to the adjusted EPS guidance.

Andrea Clegg

Good question, Nicole. We're not guiding to cash flow for 2008, but the primary difference in our free cash flow per share and adjusted net income is our working capital change. Just let me give you an example. In 2007, our GAAP EPS was $0.47. Our free cash flow was about $0.61 per share. A similar phenomenon in '06.

So, we're going to have and the difference between our adjusted net income, let's see, last year, adjusted net income was $0.91 and that free cash flow was $0.61 due to the change in the working capital.

I really can't guide you to '08 at this point other than say it's a very strong cash flow-generating model, and the difference there is really the assumptions in our working capital requirement.

Nicole Viglucci - Accipiter Capital Management

Okay.

Andrea Clegg

So, I'd have to leave it to you to model that.

Nicole Viglucci - Accipiter Capital Management

Great, thanks.

Operator

And our next question is from David Veal from Morgan Stanley. Please go ahead.

David Veal - Morgan Stanley

Hey, thanks. Just a follow-up on the pricing, and I'm sorry if you've answered this in a different way. But, a couple of years ago, you were materially above market, just given the history of the industry and, over time, your pricing converged to market rates. Are we in that situation again today where there's a material difference between where you are in your average book of business and where the rest of the business is that you need to eventually converge to again?

Paul Berger

With respect to the smaller companies, I think there is a significant difference, David. I think with respect to the larger companies, there's very little difference.

David Veal - Morgan Stanley

And how big would you say that difference is today?

Paul Berger

In the smaller companies or the larger companies?

David Veal - Morgan Stanley

Amongst the smaller ones.

Paul Berger

10% to 20%.

David Veal - Morgan Stanley

Okay. Do you care to give us a dollar figure on that, and is there an average price point?

Paul Berger

I don't know, to be honest, what people are charging out there. And my guess is that the new startups would be somewhat desperate to get business and come in at a 20%, 30% lower price than folks like us, but I don't know that for sure. I know what we get, but I don't know what a lot of the folks are getting.

David Veal - Morgan Stanley

But, is it safe to say that you could contract with a smaller provider for under $40 though?

Paul Berger

I think that's your starting to cut it close there.

David Veal - Morgan Stanley

Yes, okay. That's helpful, thank you.

Operator

Thank you. That concludes the question and answer session. At this time, I would like to turn the conference over to Dr. Berger for any closing remarks.

Paul Berger

Well, basically, again, we have a commitment. We've made a commitment. We feel very confident about that commitment as evidenced by the stock buyback that we discussed. I want to thank you all for joining us today, and we hope that today's call was informative and insightful, and please feel free to contact any of us if you have any further questions. Thank you very much.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude today's conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000, or 800-405-2236, with access code 11113270 followed by the pound sign. We thank you for your participation and, at this time, you may now disconnect.

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