ADVH Conference Call August 8th, 1998
(Comments of Zebra are in italics)
Presenters:
Jonathan Edelson, MD President & CEO,
Alan Maserek, COO,
Jeff Sauerhof, VP - Finance.
Sauerhof: Usual disclaimer, "forward looking statements", blah blah etc.
Edelson: Objective is to return to positive cash flow by end of 1st qtr 1999.
Maserek: INCOME STATEMENT
Revenue 16.8 mm Q2 vs. 24.2 mm Q1.
Decline was due to software sales revenue dropped to 0.2 mm with 16.6 mm in PPM revenues. 12 IT (Software) contracts were signed in Q2 but revenues from these will fall into Q3. Also one PPM contract was lost and there was no recognition of PPM "gain sharing" in Q2.
Operating loss of 13.6 mm. Includes: Non-recurring operating expenses, restructuring charges and non-capitalizable software development costs which totaled 9.6 mm in the aggregate or 0.96 per share in one time charges.
Net loss after tax was 16.3 mm which includes a 3.2 mm reversal of a tax benefit taken earlier. (This is also a one time charge.)
BALANCE SHEET
A/R declined by 6.8 mm from Q1, half was related to restructuring (i.e. write down of uncollectibles) and half from stepped-up collection efforts. This decline is net of the consolidation of Integrated Medical Management's (IMM, acquired in Q2) accounts receivable.
Intangible assets increased by 8.7 mm from Q1, principally from the acquisition of IMM. Investments in affiliates increased 5.5 mm as the company exercised an option to increase its ownership interest in Patient Care Dynamics and another company (tape failure here included an outline of current accounts payable)
After these losses and expenditures the quarter still ended with strong financial position. 33 mm in cash and cash equivalents and 9.7 mm in A/R vs. current liabilities of 8.1 mm. (Quick ratio is 5.3, very strong solvency)
Management's principal focus now is to return the company to positive cash flow from operations by the end of Q1 1999. Significant cost reductions have been made in Q3 including:
1.) Broad layoffs in both arms of the business; AHT and AHM. 19% personnel reduction resulting in 17% reduction of total payroll costs.
2.) Other identified discretionary spending cuts that total 23% of non-payroll operating expenses.
Both of the above that were instituted (at the time of the conference call August 8th) would cut annual operating expenses by 6.4 mm.
Next, all customer contracts are being reviewed to ensure positive cash flow from each one.
Finally, certain acquisition opportunities are being evaluated that could bring the company to scale more quickly, particularly in the management of certain ancillary services (ancillary services are usually Lab, X-Ray, Physical Therapy, Occupational Therapy, etc.)
Edelson: Acknowledges "significant disappointment in Q2 results". The question now is, "Has ADVH assembled the necessary ingredients for success going forward?" The mission remains the same, to provide physicians with the tools necessary to be successful. The two lines of business will remain the same, physician practice management services and clinical information technology. We still believe there is opportunity and growth potential in these areas. But changes must be made to improve our customer services and profitability.
We are a young company operating in a young industry. ADVH has learned from the marketplace. Specifically, we must change how we configure the sales and delivery of our services, both outsourced services (PPM) and information technology (Dr. Chart and others).
Let me first review the PPM industry. The need for consolidation of the management of physician practices began with the rise of managed care. Physicians needed professional management to gain greater revenue and to operate more efficiently. Many physicians consolidated into larger groups and sought that professional management, this was true five years ago and remains true today. The PPM industry grew in response to this trend. Wall street accelerated this industry growth by rewarding PPM companies for acquiring large physician practices and adding the practices' revenue and earnings to their own. (Note: this is true of MDM and the late FPAM, Phycor does not count all physician revenue as its own, PHYC only counts its management fees as revenue, so, in truth MDM may not be bigger than PHYC if they both had the same method of recognizing revenues.)A series of challenges facing these companies has hurt the PPM industry and currently, the industry is in disfavor with Wall Street.
Against this industry backdrop, let me comment on ADVH plans. The good news is that ADVH has not purchased the assets of physician practices. Nor have we been significant holders of capitated risk. (obvious contrasting reference to FPAM) Hence, by design, we have avoided the major problems current with the PPM industry. In fact, we don't look much like other public PPMs. In fact, ADVH has focused from the beginning on what physicians in the health care industry have truly needed from the inception of the industry, value-added services for the physician practices, growth of revenue, and operational efficiency. And the reality is that, with or without the Wall Street phenomenon of PPMs, physician practices still need to consolidate, to gain scale and still need business services to run these large practices, in order to survive and be successful in the current managed care / health care environment. We believe we have been successful in delivering the value-added services that these practices need. The challenge is that we need to be more successful in both selling and delivering these services.
The best model for management services delivery cannot be found in the PPM industry. It can be found in other health care industry service sectors that are called "outsourced services organizations" "OSOs" which offer professional services. For example, I'm speaking about the success of the Contract Research Organizations, the so-called, "CROs", serving the Pharmaceutical industry, and the information-management and consulting companies, serving the Hospital industry. We plan to take our company, which has been and will be a services company, and better model our service delivery based upon these successful health care sectors.
Regarding the health care information technology business, ADVH is at an exciting place in the development of the industry. From its inception, ADVH targeted the development of tools that could automate clinical orders in the physicians office. In 1998, moving into 1999, we are seeing an acceleration in the number of health care organizations that want the capability to assist and communicate with physicians around these clinical orders, particularly the laboratory and prescription orders. These organizations are found nationally in both leadership and rank-and-file health-care companies, that include hospitals, clinical laboratories and pharmacy benefits managers.
The rise of the Internet has, no doubt, contributed to the interest of these organizations in automated clinical orders. We are excited by our opportunity to participate with our products in the significant electronic commerce that could potentially occur in the automating of these clinical orders through the Internet. We are restructuring our product and sales efforts to focus on these opportunities. We are reducing development expenses until more sales materialize. (The Dr. Chart and other products are already Internet or intranet capable) Alan will now discuss the specifics of our strategy.
Maserek: Before I review those specifics, I'd like each of you to know that, this management team is committed to the success of this company. Our strategic plan for growth is compelling and we are making significant cost reductions to fix the negative cash burn. As we've said before, we are committed to returning to positive cash flow by the end of the first quarter.
Let me explain our restructuring strategy, starting with Advanced Health Management (AHM - The PPM side of the company) Our strategy calls for us to better align with our customers by restructuring AHM into four business lines:
1) The provision of management and consulting services for large
hospitals, to assist in the management of their affiliated physician groups.
2) Management and consulting services for select, large, independent
practices.
3) Ancillary management and development services for physician groups
and hospitals.
4) Administrative risk management services for Independent Physician
Associations and hospital-based integrated delivery systems.
Underpinning these strategy points is a simple commitment; it is our
intention that these services will be priced competitively and provided profitably.
Let me further emphasize two additional key points relative to our strategy. First, we are going to focus on larger customers, and second, we are changing how we contract for services. We are placing greater focus on hospitals and large physician groups. While our focus to date has been more on independent physician groups, this restructuring places greater focus on hospitals as prospective customers. Today hospitals have an immediate financial need to better manage the tens of thousands of doctors that they have now employed through practice acquisitions. They are actively seeking outsourced solutions to stem the huge losses generated from their own physician practices. In fact, on average hospitals lose greater than $100,000 per year on each "owned" physician. We are also focusing our sales efforts on large independent practices that have more
than twenty, and ideally, more than forty physicians. These larger groups tend to have more business infrastructure and better governance allowing them to be more effective and profitable customers for us versus smaller groups. There are more than 500 of these groups in our target geographies representing more than 37,000 physicians.
Regarding our new contracting approach, we intend to allow more
flexibility for our customers in how they contract for our services. We believe that customers want both results and flexibility from a service organization and they will pay a premium to have both. We will provide a range of service offerings that extend from the complete outsourcing of the management of the physician practice, to management consulting, including the selling of our information technology products and services. We are switching from a management services organization, the MSO model, to a more flexible pure contracting service offering that charges customers on a usage-based fee.
Sorry, folks, at this point the tape became non-functional.
The gist of the rest was that they are getting smarter about not comitting to "unlimited services" contracts which is IMO the best news of all. Many docs have been used to getting unlimited management services from hospital MSOs. The hospitals generally ate these costs in the past, it was sort of a "soft kickback" to the docs for their loyalty to the facility and the hospital considered it a form of marketing expense to keep the beds full. It is this attitude that led to the write-downs of A/R in the past, and ADVH doesn't intend to let it happen again.
Bottom line is that they are a going concern that the Street has lost trust with due to the A/R writedowns and primarily one board member's and Maserek's insider sales.
They are targeting positive cash flow in 1st Qtr 1999, and will probably see positive earnings before that, but initially on a smaller revenue base as they move to an a la carte pricing structure. Remember positive earnings are not the same as positive cash flows and positive earnings are more reachable. I've heard it said that 65% of bankrupt businesses show positive earnings, i.e.. are "profitable", when they go bankrupt I have to say most companies would forecast earnings in this situation to placate the Street, but to focus on cash flows is more important to the business viability in the long run.
As far as the class action shareholder's lawsuit(remember there is only one suit, no matter how many lawyers are trying to collect clients), the usual "without merit and vigorously defend" stuff, otherwise no comment.
So, you pays your money and takes your chances. I'm betting that these guys have the right approach to the PPM idea and they are able to go there with the flexibility and tools that the majors don't have.
In fact, somewhere in the future I could see the majors wanting to buy out ADVH for their software tools if nothing else. The Physician management literature is full of the question now, "How do PPM's add value to the practice of medicine under managed care?" In fact the July-August issue of The Physician Executive, (the publication for members of The American College of Physician Executives) has The PPMC Debate on page 6. Participants in this panel discussion are:
Jonathan Edelson, MD. (CEO, ADVH)
Lloyd Everson, MD. (President AORI, a PPM)
Jeff Goldsmith, PhD.
Barbara LeTourneau, MD, MBA, FACPE (pres ACPE)
Ronald Loeppke, MD. (Chief Medical Officer, PHYC)
Uwe Reinhardt, PhD. (formerly chaired HCFA, s PPRC)
So you can see that the CEO of ADVH sits at the table with some heavy
hitters. The disgruntled shareholders who cry for Edelson to resign, don't realize that Edelson IS the company. There are only about 100 people nationwide who could begin to try to replace him and they are busy right now.
It's a complex business, and though you really shouldn't invest in a business you don't understand, I understand the business. I'm long ADVH, and I made a pile shorting PHYC from 23 to 12 last spring. IMO this company is way oversold, I understand why and don't expect a quick rebound, but I think the value is there and it will become more clear as the PPM industry matures.
But this is not GE, it is micro-cap investing with all the risk that that entails.
Best of luck in your investing
Zebra |
