If you can't see the whole post on the Conference call, continued here. Zebra's comments in italics. If you are an SI member logged in, you can see the whole post the first time, I'm repeating the ommitted segments for the sake of non-members
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
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