EXHIBIT 99.1
PROXYMED, INC.
SECOND QUARTER 2002 FINANCIAL RESULTS CONFERENCE CALL
Moderator: Michael Hoover
July 24, 2002
11:00 a.m. EDT
Operator: Good morning. Ladies and gentlemen, thank you for standing
by. Welcome to ProxyMed's first [sic] quarter earnings
conference call. During the presentation, all participants
will be in a listen-only mode. Afterwards, we will conduct
a question and answer session. At that time, if you have a
question please press the 1, followed by the 4 on your
pushbutton telephone. If you wish to withdraw your
question, please press 1, followed by 3. As a reminder,
this conference is being recorded on Wednesday, July 24,
2002. Your speakers for today are Michael Hoover, Chief
Executive Officer and Chairman of the Board; Nancy Ham,
President and Chief Operating Officer; and Judd Schmid,
Chief Financial Officer. I would now like to turn the
conference over to Judd Schmid. Please go ahead, sir.
Judson Schmid: Thanks, Heather. By the way, this is our second quarter
results, which are even better than the first quarter. So
we'll start on that note. Good morning, everyone. Thanks
for joining us for today's conference call to discuss the
company's results for the second quarter of 2002. I'm Judd
Schmid.
Before we begin our discussion, let me take a minute to
reference the safe harbor statement under the Private
Securities Litigation Reform Act of 1995: "This conference
call may contain forward-looking statements that are
subject to risks and uncertainties, including but not
limited to, assumptions, beliefs and opinions related to
ProxyMed's growth strategy based on ProxyMed's
interpretation and analysis of healthcare industry trends
and management's ability to successfully develop, market,
sell, cross-sell and implement its clinical and financial
transaction services and software to physicians,
pharmacies, laboratories and payers as well as its ability
to identify and successfully integrate acquisition
candidates. These and other risk factors are detailed in
the company's filings with the Securities and Exchange
Commission, which we strongly urge you to read. ProxyMed
expressly disclaims any intent or obligation to update any
forward-looking statements."
Leading today's conference call is Mike Hoover and
providing an operational summary will be Nancy Ham. I would
now like to turn the call over to Mike. Go ahead, please
Mike.
Michael Hoover: Thank you, Judd. Good morning, everyone, and welcome to
ProxyMed's second quarter 2002 results conference call.
Today we will discuss and review our second quarter results
and then we will review our outlook for the balance of the
year.
Since our last conference call, we've continued to move
forward in all areas of our business. As we announced
during the quarter, we closed on a $25 million investment
from General Atlantic Partners; completed the acquisition
of a regional competitor in the lab services space; saw
four analysts initiate coverage with their highest "buy"
recommendations; and signed a national
connectivity services agreement with Aetna. Most
importantly, this quarter culminated in ProxyMed reporting
positive earnings per share of $0.06 - the first ever in
the history of the company. Reaching positive EPS has been
the major goal of the company since I arrived in late 2000.
So it gives me a great deal of satisfaction that ProxyMed
is one of the few companies in our space to report honest
to goodness earnings per share.
As you'll hear from Judd in a moment, our revenues and
EBITDA are up substantially from last year. And we have
exceeded our new analyst's consensus numbers. We continue
to gain momentum in our transaction based business and,
with our recently signed agreement with Aetna and our
efforts toward HIPAA compliance, we continue to position
ourselves as one of the key players in the healthcare
connectivity marketplace.
We will take the next few minutes to give you our update
and we will open the lines up for any questions that you
may have. Let me turn it back over to Judd, who will take
us through the financial results for the quarter. Judd?
Judson Schmid: Thanks, Mike. As Mike just pointed out, our most
significant financial metric for the quarter is that we
reported positive EPS for the first time in the company's
history. It's taken a lot of hard work to get to this point
and I want to thank all of the associates for their
excellent efforts to help us get there.
This quarter has another milestone, in that we now have
significant analyst coverage. We welcome Sean Wieland of WR
Hambrecht; Sean Jackson of Avondale Partners; Dave Francis
of Jefferies; and Anthony Vendetti of Ryan Beck. With this
milestone comes, of course, a new standard of performance.
So I'm happy to report that we have exceeded our analysts'
consensus estimates, which were $12.5 million in revenue,
EBITDA of $799,000 and diluted EPS of $0.04.
Turning now to our high level results, ProxyMed is
reporting quarterly revenues of $12.6 million, up 30
percent over the same period a year ago; and EBITDA profits
of $901,000, an increase of 115 percent over that same
quarter. Most importantly, we generated net income of
$446,000, which equates to earnings of $0.06 per share on a
diluted basis.
As just noted, our consolidated revenues were $12.6 million
in the second quarter, compared to last year's second
quarter revenues of $10.2 million. Both of our business
units contributed to the increase, with Healthcare
Transaction Services revenue increasing 31 percent from
$4.1 million last year to $5.3 million this year, and
Laboratory Communications Solutions revenue growing 19
percent from $6.1 million last year to $7.3 million this
year. The 31 percent year-over-year revenue increase in
Healthcare Transaction Services was led by a 31 percent
increase in transactions processed over the second quarter
of 2001, as we processed 28.5 million clinical and
financial transactions through ProxyNet, our secure
national healthcare information network. We are currently
on an annualized run rate of 114 million transactions for
2002, clearly making us the second-largest physician
connectivity company in the country.
Looking now at sequential growth, our overall revenue was
up 10 percent over the first quarter. Lab Communications
Solutions revenue led the way,
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increasing by 17 percent over a somewhat weak first
quarter, as we experienced a predicted rebound as delayed
orders were received and processed. In addition, our
acquisition of KenCom closed on May 6th and contributed to
the quarter. In contrast, Healthcare Transaction Services
revenues only increased 1 percent, although on the
transaction side we processed 8 percent more transactions
than the 26.4 million transactions processed in the first
quarter.
So why did revenue increase at a slower rate than
transactions? You may recall that we mentioned last quarter
that a large strategic partner moved from gross to net
billing in March. While this has no meaningful effect on
the profitability of the relationship, it did reduce gross
revenue by around $300,000 for the quarter and will have
the same effect in Q3 and Q4. Nancy is going to speak more
to this point shortly.
As we have mentioned in the past, our goal for 2002 is to
achieve a 50/50 revenue split, as we emphasize growth in
our transaction processing business, which offers recurring
revenues and substantially higher operating margins. We
have made good progress year-to-date, with approximately 44
percent of our revenues coming from our transaction
processing segment, versus only 39 percent from this
segment for all of 2001.
Turning now to profitability, while we don't emphasize
gross margin, since we are positioning ourselves as a
transaction-based business, I do want to point out that we
had a favorable $198,000 cost of goods pricing adjustment
in our Lab Services business unit. This was immaterial to
our overall costs and increased our Lab Services quarterly
gross margin by approximately 280 basis points.
Turning to SG&A expenses, as noted in our last quarter
call, we started to add associates in our transaction
business sales and marketing teams to drive our core
revenue growth, and have continued to add personnel in our
technical and development areas as it relates to our HIPAA
compliance efforts. Incrementally, we also dedicated funds
for our internal HIPAA education activities. As a result,
our SG&A expense levels are up sequentially and include
approximately $150,000 spent on our HIPAA efforts. Core
SG&A expenses in our Laboratory Communications Solutions
segment were actually down sequentially but were offset by
KenCom operating expenses and non-capitalizable expenses
related to that acquisition. Overall consolidated SG&A
expenses were $5.9 million for the quarter, up from $5.1
million in the second quarter of last year and up 8 percent
sequentially from the first quarter. SG&A dollars are
expected to rise for the balance of the year.
EBITDA dollars continue to increase, and we reported an
EBITDA profit of $901,000 for the quarter, an increase from
last year's EBITDA of $420,000 and a 43 percent increase
over the last quarter's EBITDA profit of $631,000. As we
said in the past, in all areas of the company we
continuously strive for operational efficiencies as a way
to improve our EBITDA margins on a trendline basis. Given
that a relatively large portion of our cost structure is
fixed or semi-fixed, it can be a challenge to make this
trend line perfectly smooth one quarter to the next, but we
are very confident in achieving expanding EBITDA margins on
an annual basis. Consolidated EBITDA margins for the
quarter were 7.1 percent.
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Below the EBITDA line, as we noted again in our last
quarter call, starting January 1st we adopted the new
accounting rules regarding goodwill amortization. As a
result, our depreciation and amortization has been reduced
by roughly $800,000 per quarter from our year-end 2001 run
rates. We are currently evaluating the value of the
intangible assets that were purchased in our acquisition of
KenCom and, as a result, depreciation and amortization may
begin to increase slightly per quarter as we begin
amortizing any of these "other intangible assets" and also
begin depreciating our other capital expenditures.
Additionally, with the cash received from General Atlantic
Partners, we have added interest income of $128,000 for the
quarter, earning 2 percent on our invested funds while
keeping them highly liquid.
The result of all of the above is that we reported our
first-ever net income and positive EPS as projected. Net
income was $446,000 and diluted EPS was $0.06, exceeding
our analysts' GAAP consensus of $0.04 per share. I must say
that going through the calculation of EPS was certainly a
long time coming.
Just a couple of comments now on the balance sheet and cap
structure: we are in the best financial position ever, with
almost $27 million of cash, strong working capital led by
our accounts receivable DSO's of 48 days, and no debt.
Although this is the most cash we have had at ProxyMed in a
long time, we are being very careful to invest it
prudently. During the quarter, we spend $278,000 in capital
expenditures across the organization for various projects
and also added to the balance sheet a modest $62,000 in
capitalized software development related to HIPAA and other
products. We will continue to capitalize appropriate
development expenses and expect the rate of capitalization
to increase for the balance of the year. Our consolidated
capitalized software development is expected to be between
10 and 15 percent of our research and development costs for
all of 2002.
Looking now to the capital structure, we have the following
breakdown: 6.7 million shares outstanding; 20,000
underlying common shares for our preferred stock; 732,000
warrants; and 933,000 stock options; all totaling 8.4
million fully diluted shares.
As you may know, our shareholders approved our new 2002
stock option plan for an additional 600,000 shares at our
annual meeting held in May. In light of public interest
regarding disclosure of option based activities, our
compensation committee adopted a more formalized strategy
related to the granting of our stock options and as a
result (and included in the 933,000 options just noted), we
did issue a total of 161,000 options to directors and
associates across the company this past quarter. At the
current time, we will continue to watch the changes in
legislation regarding stock option rules but have no
current plans to include the compensation cost of options
in our earnings.
The other note from the annual meeting was that our
shareholders approved the right of General Atlantic
Partners to exercise their warrant for 549,000 shares
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at any time between April 2003 and April 2004. And when
exercised, this warrant will bring in another $8.8 million
in cash.
Finally, in addition to increasing institutional ownership
and new analyst coverage, ProxyMed was also added to the
Russell 3000 and Russell 2000 indices on June 28th.
In summary, we continue to be in the best financial
position ever, and with almost $27 million of cash
currently in the bank and no debt on our balance sheet, we
strive to continue to drive shareholder value. Thank you.
I'll now turn it over to Nancy for an operational review.
Nancy Ham: Thanks, Judd. ProxyMed entered 2002 well-positioned as the
nation's second-largest provider connectivity company and
the largest provider of both pharmacy and lab to physician
connectivity solutions. In the second quarter, we were able
to execute deals and partnerships to advance our business
in each of these three areas.
Let me start by discussing the successes in our Healthcare
Transaction segment, which includes our Payer Services and
Prescription Services divisions. The big news in Payer
Services was, of course, the signing of our new national
contract with Aetna. Aetna is one of the nation's largest
health plans, with over 15 million members and a provider
network that includes more than 318,000 physicians and
3,200 hospitals. Under our new contract, we will be
providing these physicians and hospitals with a complete
suite of Aetna transactions: claims, ERAs, eligibility,
claim status inquiry, and referrals and authorizations.
Claims will be live by late September, with all the other
transactions coming live in the fourth quarter. In
addition, Aetna will become our largest partner to date for
our FOCUS program, which is our battle-tested approach to
converting paper-submitting physician offices to successful
electronic submitters.
In the first year of the agreement, we anticipate sending
Aetna over 7 million electronic transactions. Previously,
we reported that over 92 percent of our outbound
transaction volume goes directly to one of our payer
customers. When our connection to Aetna goes live in late
third quarter, this means we will have direct connections
to all of the national payers and our direct connection
percentage will improve to over 95 percent of our volume
going directly to our 354 payers. This very high percentage
of direct connects clearly distinguishes us from
clearinghouses and allows us to provide better service to
both our providers and to our payers.
One of the primary reasons we were selected by Aetna was
our unique FOCUS methodology under which we work with the
health plans to identify and to convert small physician
practices from paper-based to electronic transactions. As
these practices convert to electronic claims submission,
ProxyMed then works with the health plan to cross-sell
ProxyMed's other electronic transactions such as claim
status, eligibility verification, ERA, referrals and
authorizations. We are so confident of our ability in this
area that we actually provide our payers contractual growth
and conversion commitments, signing up for incentives when
we beat our goals and penalties if we don't. This is
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pretty unique among our competitors. Our track record gives
us the confidence to make these commitments.
Our sales team had another great quarter, being once again
over quota on both the number of new physicians and the
number of services sold. In the second quarter we added
over 1,800 new physicians to our network and these new
physicians signed up for over 3,800 services, or 2.1
services per physician. This continues our trend of
gradually increasing our metrics of services used per
physician. Over the past few quarters, our overall usage
has improved from 1.3 services to physician to 2.0 services
per physician. We still have a long way to go to get to our
five-year target of over 8 services per physician but I'm
pretty please with our progress to date.
In addition to this direct customer expansion, we added 17
new electronic commerce partners, representing almost 5,000
indirect physicians in multiple markets and bringing our
total of active partners to 158. As a result of all these
activities, we ended the quarter with direct relationships
with almost 64,000 physicians and indirect relationships
with another 47,000.
In addition to Aetna, we signed up another six new payers
in the quarter, bringing our total of direct payer
connections to 354. And we are in final negotiations to
sign up several additional existing payers for our FOCUS
program. The strong linkage from our 64,000 direct
physicians to our 354 direct payers is the core of our
strategy.
Looking now at the financial results for the quarter, as
Judd mentioned, we had another good quarter of transaction
growth, with transactions up 31 percent over last year and
up 8 percent over the first quarter. Revenue year-over-year
increased over 30 percent, but only 1 percent sequentially
over the first quarter. As Judd has already discussed, a
large part of the difference between transaction growth of
8 percent and revenue growth of 1 percent was due to the
conversion of a large partner from gross to net billing.
There were two other reasons that contributed to the
relatively flat revenue growth. The first has to do with
our relationships with clearinghouses. As we have
mentioned, in the past about 8 percent of our overall
transaction volume has historically gone through other
clearinghouses and we received a share of the revenue from
those transactions. With the signing of our Aetna contract,
we will be able to send over 95 percent of our volume
directly by late Q3. With this new contract and an
alignment with our often-stated goal of sending 100 percent
of our volume directly, we decided not to enter into a
contractual relationship for the future with one particular
clearinghouse. Although this did depress revenue and EBITDA
modestly, about $73,000 in the quarter, this ensures that
we are able to vigorously pursue our goal of 100 percent
direct connects.
The second issue affecting the quarter is that the mix of
our transactions does shift from quarter to quarter,
especially with regard to encounter volumes, which were
unpredictably "clumpy". Encounters are reporting
requirements with providers, but they don't generate
revenue for them. So accordingly, providers chose to
periodically catch up on their submissions, and this
creates monthly and quarterly swings in both the number of
encounters we process and
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what percent of our overall transaction mix they represent.
Since encounters are at a significantly lower price point
than claims, a quarter in which we have a surge in
encounter submissions will generally be one in which
revenue growth lags behind transaction growth.
On the expense side, in preparation for HIPAA and to drive
revenue growth, we did increase our SG&A by almost $300,000
in the quarter. This investment came a little earlier in
the year than we had originally planned, but we believe
that it's positioned us well with our large payer and
provider customers. As a result, EBITDA was up 147 percent
over the same period last year, but down sequentially from
$516,000 to $260,000. We expect EBITDA to rebound over the
rest of the year, as new sales resources deliver at full
capacity and as we hold our HIPAA-related expenditures to a
more even level.
Shifting now to Prescription Services, during the quarter
we announced a new partnership with Availity, a Florida
joint venture between Blue Cross/Blue Shield of Florida and
Humana, under which Availity is distributing a private
label version of our web-based prescription refill service,
which we call Prescribe. Availity has already approximately
5,000 physicians using their services and projects to have
15,000 Florida physicians by the end of the year. Availity
is marketing our refill service to all of these existing
and prospective physician customers.
We are really excited about this partnership, which brings
together in the state of Florida two of the largest payers,
the largest base of web-enabled physicians, and ProxyMed's
statewide pharmacy network which reaches over 80 percent of
all of the pharmacies in Florida. With Availity, our ideal
model in Florida, ProxyMed is pursing other distribution
relationships for our refill services. Although the overall
rate of growth for e-prescribing services remains moderate,
we do continue to expand the reach of our ProxyNet online
pharmacy network. During the quarter, we transmitted
electronic prescriptions to over 6,200 pharmacies in 40
states. This represents a 12 percent increase in the number
of individual pharmacies that we communicated with, as
compared to the first quarter. And these 6,200 pharmacies
represent over 10 percent of all retail pharmacies in the
country.
Turning now to Lab Communication Solutions, the major
operational event of the quarter was, of course, our May
6th acquisition of KenCom Communications. KenCom had been
our foremost competitor for intelligent results reporting
devices and related services in several strategic accounts,
so we are delighted to now have them as part of our team.
As a result of the acquisition, we estimate that we now
serve 90 to 95 percent of the intelligent remote reporting
device market.
We had three primary goals with this acquisition and I'll
give you a quick update on each. First, of course, we
wanted to contribute accretive results for our current
operations through additional revenue opportunities and
synergistic cost savings from the integration of KenCom's
operations. So far, we have been able to combine
substantially all of KenCom's operations into our Indiana
facility, resulting in a total reduction of half their
prior FTEs. The two major aspects of the integration were
production, which was easily foldable into our facility,
and product management engineering. The team has made great
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progress to combine the features of both the ProxyMed and
KenCom core product lines. The resulting integrated product
line will clearly provide a superior product platform for
lab devices and will be rolled out for general release here
in the third quarter.
In addition, this product line combination will allow us to
report overall lowered research and development expenses in
the third and fourth quarter. Since KenCom has been so
quickly and thoroughly integrated, we will not be able to
report it on a separate basis going forward. But I can tell
you, for the second quarter it contributed revenue of over
$500,000.
Our second goal with the acquisition was to expand our
customer base and to create the opportunity to cross-sell
ProxyMed's services to KenCom's current customers. One
already completed example of this is the development of
FleetWatch software extensions for the KenCom ECP products
such that we're now gearing up to market FleetWatch
services to the former KenCom customers.
Our last major goal was the further penetration of the
anatomical pathology laboratory market with our collective
innovative products. And we're seeing positive early
results in building this important segment of the lab
market. Our newly enhanced product line is helping
anatomical pathology labs offer their physician clients an
unprecedented high level of lab results report delivery and
support services.
Looking now at the financial results for the quarter, we're
pleased to report that revenues grew by 17 percent over a
somewhat weak first quarter, and they grew 19 percent over
the second quarter of last year. As you may recall, in the
first quarter we did eliminate certain non-strategic and
lower margin services. And we also experienced some delays
in orders from a large partner. Our experience over 25
years had been that, while orders can shift from quarter to
quarter, they're merely delayed and not lost. So we're
pleased to say that the strong revenue growth in the second
quarter shows that this has held through once again and
that our repositioning to focus on core revenues is paying
off.
On the EBITDA side, we saw a nice improvement from the
first quarter as a result of the combination of our
previously announced cost controls, resurgent revenue
growth and the operational synergies from the KenCom
acquisition. Our EBITDA of $1.3 million was our best on a
whole dollar basis in over six quarters. And the margin
percentage rebounded as well, from 12 percent in the first
quarter to 18 percent in the second. And this compares
pretty favorably to a margin of 16 percent for all of 2001.
Our results in this business unit do move around a little,
quarter to quarter, given the relatively fixed costs and
manufacturing nature of the business, but we're quite
pleased with our performance in the second quarter.
Part of our confidence for the rest of the year is the
result of a very successful CLMA show in New Orleans in
June. This is the only major trade show for labs and so
it's a critical bellwether even for us. At the show, we
were focused on the announcement of KenCom, cross-selling
our Fleetwatch service to existing accounts, and showing
our new ProxyLab order entry product. All three generated a
lot of interest, especially the packaging of ProxyLab with
our
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national deployment services, which is an often-overlooked
component of implementation. We also announced our fist
annual In-VISION Award, designed to recognize innovation in
hospital lab outreach. The award, which is co-sponsored by
our partner, ARUP Laboratories, is designed to heighten
awareness of ProxyMed's critical role in providing products
and services for outreach programs and to strengthen our
brand in the lab industry.
And finally, we had a great turnout for our educational
presentation, entitled "Labs and Physicians Communicating
Under HIPAA." We've been pretty successful in using
speaking opportunities like this, as well as industry
articles, to strengthen our position as a trusted partner
for labs as they work their way through their HIPAA
compliance program.
And with that, I'll turn it back over to Mike.
Michael Hoover: Thank you, Nancy. As Judd and Nancy have discussed, we
continue to make tremendous progress on our 2002 financial
and operational controls with our focus on continuing to
gain penetration in the small physician connectivity
marketplace, ProxyMed will become the premier provider of
healthcare connectivity. A testament to these efforts was
our recently signed national connectivity services contract
with Aetna. We believe that we won this contract because of
our superior product and service offerings, as well as our
unsurpassed service levels. I want to personally thank all
those individuals who are involved in making this happen.
Our $25 million investment from General Atlantic Partners
has already been put to good use. In May, we completed the
acquisition of KenCom and, as Nancy discussed, clearly
positioned ProxyMed as the nation's largest provider of lab
connectivity solutions. As always, we continue to research
other acquisition candidates that will add product, service
and geographic synergies to our business.
While I'm happy with the operational and financial
successes that culminated in the reporting of our
first-ever positive earnings per share, I have to admit
that I'm disappointed that our stock price is not
reflective of our true value. I realize that these are
tough times in the stock market and ProxyMed has been
caught up in the downturn. Our potential is being proven by
six consecutive quarters of increasing earnings and we
expect this growth to continue.
One of ProxyMed's largest opportunities for growth is from
cross-selling our services that we currently offer to our
existing 100,000 direct and indirect physicians. As we
stated before, if over the next four to five years we can
increase the current number of services utilized by each of
these physicians up from the current level of two to over
eight (and we currently offer 10), we believe that we will
generate revenue of approximately $400 per physician per
month. This represents an opportunity of close to $500
million in revenue per year just from our existing
customers. Therefore, you can understand that one of our
key initiatives for 2002 is to monetize this cross-sell
opportunity by telemarketing, innovative new pricing and
packaging, and driving our customers to an integrated Web
offering. As evidenced by our contract with Aetna, we are
being introduced at the practice level by our partners and
we
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have proven that we are experts at converting those
introductions to successful transaction customers.
In closing, I continue to be pleased with ProxyMed's
performance in all business units. We completed several
major deals this quarter and grew revenues and transaction
volume by almost 30 percent over the last year. Although
the word "strategic" is often overused, the three major
deals that we announced this quarter were truly strategic
in nature:
By signing Aetna, we completed our nationwide list of
health plans that we serve and cemented our place as the
fastest growing provider of physician connectivity
services; In prescription, our distribution partnership
with Availity in Florida has the chance to be the most
successful e-prescribing network ever, creating a
replicable template for other markets; And with our
acquisition of KenCom, we increased our overall leadership
in the lab market and created a tremendous cross-selling
opportunity and the right platform for the emerging
Anatomical Pathology market.
With the reporting of the first-ever positive net income
and earnings per share and our raising of $25 million in
capital from an incredibly high quality partner, General
Atlantic, we are well positioned to become the leading
provider connectivity company.
That completes our formal presentation for second quarter
results. And operator, we would now like to open up the
lines for any questions.
[Questions from participants and answers from management omitted]
Michael Hoover: That concludes the call for today. I want to thank everyone
for their time and we look forward to having you back for
the ProxyMed third quarter results call. Take care. Have a
good day.
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