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| MDAS > SEC Filings for MDAS > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Three Months Ended March 31,
2009 2008 Change
Amount Amount Amount %
(In millions)
Non-GAAP gross fees(1) $ 92.4 $ 71.1 $ 21.3 30.0 %
Non-GAAP revenue share obligation(1) (13.4 ) (12.3 ) (1.1 ) 8.9
Total net revenue 79.0 58.8 20.2 34.4
Operating income 8.0 7.7 0.3 3.9
Net income $ 1.9 $ 2.7 $ (0.8 ) -29.6 %
Non-GAAP adjusted EBITDA(1) $ 23.3 $ 16.0 $ 7.3 45.6 %
Non-GAAP adjusted EBITDA margin(1) 29.5 % 27.2 %
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(1) See "Use of Non-GAAP Financial Measures section" for additional information.
For the three months ended March 31, 2009 and 2008, we generated non-GAAP gross
fees of $92.4 million and $71.1 million, respectively, and total net revenue of
$79.0 million and $58.8 million, respectively. The increases in non-GAAP gross
fees and total net revenue in the three months ended March 31, 2009 compared to
the three months ended March 31, 2008 were primarily attributable to:
• the Accuro acquisition;
• organic growth in our Revenue Cycle Management segment exclusive of Accuro due to increased demand for our reimbursement technologies, revenue cycle services and decision support software; and
• offsetting the RCM increase, our Spend Management segment results for the current period do not compare favorably to the prior year period due primarily to two timing related events.
First, our annual customer and vendor meeting occurred in the first quarter of 2008 contributing approximately $2.9 million in revenue; the 2009 annual customer and vendor meeting will occur in the second quarter of 2009 and related revenue will be reflected in our results of operations for that period. Second, we recognized approximately $2.1 million additional performance fees in the first quarter of 2008 based on customer acceptance timing as compared to the first quarter of 2009.
For the three months ended March 31, 2009 and 2008, we generated operating
income of $8.0 million and $7.7 million, respectively. The increase in operating
income compared to the prior year was primarily attributable to the net revenue
increase discussed above partially offset by the following:
• increases in the amortization of acquired intangibles;
• expenses related to the ongoing acquisition integration efforts at our Revenue Cycle Management segment; and
• higher general and administrative costs associated with our expanded infrastructure and increased personnel.
For the three months ended March 31, 2009 and 2008, we generated non-GAAP
Adjusted EBITDA of $23.3 million and $16.0 million, respectively. The increase
in non-GAAP Adjusted EBITDA during the three months ended March 31, 2009
compared to the three months ended March 31, 2008 was attributable to the net
revenue increase discussed above offset primarily by approximately $2.4 million
of increased corporate expenses excluding interest, income taxes, depreciation
and amortization, and other non-recurring or non-cash expenses.
The non-GAAP Adjusted EBITDA Margin increased due to the significant impact of
increased revenue from our Revenue Cycle Management segment which was primarily
attributable to the Accuro acquisition.
Recent Developments
Certain significant items or events must be considered to better understand
differences in our results of operations from period to period. We believe that
the following item has had a material impact on our results of operations for
the periods discussed below or may have a material impact on our results of
operations in future periods:
Long-Term Performance Incentive Plan
On January 5, 2009, the Compensation Committee of our Board of Directors granted
equity awards totaling 3.6 million underlying shares to certain employees at a
fair value of $14.74 per share, of which approximately 36% of the total grant
was allocated to the Company's named executive officers (or "NEOs"), under the
Company's new Long-Term Performance Incentive Plan. See Note 7 of the Notes to
our Condensed Consolidated Financial Statements herein for further information.
Segment Structure and Revenue Streams
We deliver our solutions through two business segments, Revenue Cycle Management
and Spend Management. Management's primary metrics to measure segment financial
performance are net revenue, non-GAAP gross fees and Segment Adjusted EBITDA.
All of our revenues are from external customers and inter-segment revenues have
been eliminated. See Note 10 of the Notes to our Condensed Consolidated
Financial Statements herein for discussion on Segment Adjusted EBITDA and
certain items of our segment results of operations and financial position.
Revenue Cycle Management
Our Revenue Cycle Management segment provides a comprehensive suite of software
and services spanning the hospital revenue cycle workflow - from patient
admission, charge capture, case management and health information management
through claims processing and accounts receivable management. Our workflow
solutions, together with our data management and business intelligence tools,
increase revenue capture and cash collections, reduce accounts receivable
balances and improve regulatory compliance. Our Revenue Cycle Management segment
revenue consists of the following components:
• Subscription and implementation fees. We earn fixed subscription fees on a
monthly or annual basis on multi-year contracts for customer access to our
software as a service ("SaaS") based solutions. We also charge our customers
upfront fees for implementation services. Implementation fees are earned
over the subscription period or estimated customer relationship period,
whichever is longer.
• Transaction fees. For certain revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members.
• Software-related fees. We earn license, consulting, maintenance and other software-related service fees for our business intelligence, decision support and other software products. We have certain Revenue Cycle Management contracts that are sold in multiple-element arrangements and include software products. We have considered Rule 5-03 of Regulation S-X for these types of multiple-element arrangements that include software products and determined the amount is below the threshold that would require separate disclosure on our statement of operations.
• Service fees. For certain revenue cycle management solutions, we earn fees based on a percentage of cash remittances collected.
Spend Management
Our Spend Management segment provides a suite of technology-enabled services
that help our customers manage their non-labor expense categories. Our solutions
lower supply and medical device pricing and utilization by managing the
procurement process through our group purchasing organization's portfolio of
contracts, our consulting services and business intelligence tools. Our Spend
Management segment revenue consists of the following components:
• Administrative fees and revenue share obligations. We earn administrative
fees from manufacturers, distributors and other vendors of products and
services with whom we have contracts under which our group purchasing
organization customers may purchase products and services. Administrative
fees represent a percentage, which we refer to as our administrative fee
ratio, typically ranging from 0.25% to 3.00% of the purchases made by our
group purchasing organization customers through contracts with our vendors.
Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.
Some customer contracts require that a portion of our administrative fees are contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until the customer confirms achievement of those contractual performance targets. Prior to customer confirmation that a performance target has been achieved, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we would be contractually obligated to refund some or all of the contingent fees.
Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, or revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer's purchases from our vendors. Our total net revenue on our consolidated statements of operations is shown net of the revenue share obligation.
• Other service fees. The following items are included as other service fees in our Condensed Consolidated Statement of Operations:
• Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and implantable physician preference items, or PPI, and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with a duration of three to nine months, and the related revenues are earned as services are rendered.
• Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.
Operating Expenses
We classify our operating expenses as follows:
• Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers. As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue derives from third-party products and services, and client reimbursed out-of-pocket costs. Cost of revenue does not include allocated amounts for rent, depreciation or amortization, but does include the amortization for the cost of software to be sold, leased, or otherwise marketed. As a result of the Accuro acquisition and related integration, there may be some reclassifications primarily between cost of revenue and operating expense classifications resulting from the implementation of our accounting policies that could affect period over period comparability.
• Product development expenses. Product development expenses primarily consist of the salaries, benefits, and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services.
• Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs (including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses.
• General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses.
• Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use.
• Amortization of intangibles. Amortization of intangibles includes the amortization of all intangible assets (with the exception of software), primarily resulting from acquisitions.
Results of Operations
Consolidated Tables
The following table sets forth our consolidated results of operations grouped by
segment for the periods shown:
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Table of Contents
Three Months Ended March 31,
2009 2008
(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management $ 47,020 $ 25,106
Spend Management
Administrative fees 40,932 39,887
Revenue share obligation (13,446 ) (12,342 )
Other service fees 4,478 6,107
Total Spend Management 31,964 33,652
Total net revenue 78,984 58,758
Operating expenses:
Revenue Cycle Management 45,523 26,251
Spend Management 18,201 19,899
Total segment operating expenses 63,724 46,150
Operating income
Revenue Cycle Management 1,497 (1,145 )
Spend Management 13,763 13,753
Total segment operating income 15,260 12,608
Corporate expenses(1) 7,307 4,879
Operating income 7,953 7,729
Other income (expense):
Interest expense (4,993 ) (4,317 )
Other income 214 1,033
Income before income taxes 3,174 4,445
Income tax expense 1,269 1,746
Net income 1,905 2,699
Reportable segment adjusted EBITDA(2):
Revenue Cycle Management 12,326 4,241
Spend Management $ 16,252 $ 16,028
Reportable segment adjusted EBITDA margin(3):
Revenue Cycle Management 26.2 % 16.9 %
Spend Management 50.8 % 47.6 %
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(1) Represents the expenses of corporate office operations. Corporate does not represent an operating segment of the Company.
(2) Management's
primary
metric of
segment
profit or
loss is
Segment
Adjusted
EBITDA. See
Note 10 of
the Notes to
Condensed
Consolidated
Financial
Statements.
(3) Reportable
segment
Adjusted
EBITDA
margin
represents
each
reportable
segment's
Adjusted
EBITDA as a
percentage
of each
segment's
respective
net revenue.
Comparison of the Three Months Ended March 31, 2009 and March 31, 2008
Three Months Ended March 31,
2009 2008 Change
% of % of
Amount Revenue Amount Revenue Amount %
(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management $ 47,020 59.5 % $ 25,106 42.7 % $ 21,914 87.3 %
Spend Management
Administrative fees 40,932 51.8 39,887 67.9 1,045 2.6
Revenue share obligation (13,446 ) (17.0 ) (12,342 ) (21.0 ) (1,104 ) 8.9
Other service fees 4,478 5.7 6,107 10.4 (1,629 ) (26.7 )
Total Spend Management 31,964 40.5 33,652 57.3 (1,688 ) (5.0 )
Total net revenue $ 78,984 100.0 % $ 58,758 100.0 % $ 20,226 34.4 %
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Total net revenue. Total net revenue for the three months ended March 31,
2009 was $79.0 million, an increase of $20.2 million, or 34.4%, from total net
revenue of $58.8 million for the three months ended March 31, 2008. The increase
in total net revenue was comprised of a $21.9 million increase in Revenue Cycle
Management revenue partially offset by a $1.7 million decrease in Spend
Management revenue.
Revenue Cycle Management net revenue. Revenue Cycle Management net revenue
for the three months ended March 31, 2009 was $47.0 million, an increase of
$21.9 million, or 87.3%, from net revenue of $25.1 million for the three months
ended March 31, 2008.
• Acquisition related revenue. The operating results of Accuro were included
in our three months ended March 31, 2009 and were not included in the
comparable prior period. $18.7 million of the net revenue increase resulted
from revenue attributable to Accuro, which we acquired on June 2, 2008.
Given the significant impact of the Accuro acquisition on our Revenue Cycle
Management segment, we believe acquisition-affected measures are useful for
the comparison of our year over year net revenue growth. Revenue Cycle
Management net revenue for the three months ended March 31, 2009 was
$47.0 million, an increase of $5.4 million, or 13.0%, from Revenue Cycle
Management non-GAAP acquisition-affected net revenue of $41.6 million for
the three months ended March 31, 2008. The following table sets forth the
reconciliation of Revenue Cycle Management non-GAAP acquisition-affected net
revenue to GAAP net revenue:
Three Months Ended March 31,
2009 2008 Change
Amount Amount Amount %
(Unaudited, in thousands)
RCM non-GAAP acquisition-affected
net revenue(1):
Revenue Cycle Management net revenue $ 47,020 $ 25,106 $ 21,914 87.3 %
Non-GAAP acquisition related RCM
adjustments(1):
Accuro - 16,505 (16,505 ) (100.0 )
Total RCM non-GAAP
acquisition-affected net revenue(1) $ 47,020 $ 41,611 $ 5,409 13.0 %
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(1) See "Use of Non-GAAP Financial Measures section" for additional information regarding 2008 RCM adjustments.
• Non-acquisition related revenue. The increase in net revenue from non-acquisition related products and services was $3.2 million, or 12.7%. The increase was attributable to a $1.3 million increase in revenue from our revenue cycle services; $1.2 million increase in revenue from our claims management reimbursement technologies; and a $0.7 million increase in revenue from our decision support software.
Spend Management net revenue. Spend Management net revenue for the three months ended March 31, 2009 was $32.0 million, a decrease of $1.7 million, or 5.0%, from net revenue of $33.7 million for the three months ended March 31, 2008. The decrease was primarily the result of a $1.1 million, or 8.9% increase in revenue share obligations, a decrease in other service fees of $1.6 million, or 26.7% partially offset by an increase in administrative fees of $1.0 million, or 2.6%, as described below:
• Administrative fees. Administrative fee revenue increased by $1.0 million, or 2.6%, as compared to the prior period, primarily due to higher purchasing volumes by existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors. The net increase in administrative fee revenue was comprised of a $3.1 million, or 8.3% increase, in administrative fee revenue not associated with performance targets. This increase was partially offset by a $2.1 million decrease in contingent revenue recognized upon confirmation from certain customers that respective performance targets had been achieved during the three months ended March 31, 2009 compared to the three months ended March 31, 2008. We may have fluctuations in our administrative fee revenue in future quarters as the timing of vendor reporting and customer acknowledgement of achieved performance targets vary in their timing and may not result in discernable trends.
• Revenue share obligation. Revenue share obligation increased $1.1 million, or 8.9%, as compared to the prior period. We analyze the impact that our revenue share obligation has on our results of operations by analyzing the ratio of revenue share obligation to administrative fees (or the "revenue share ratio"). The revenue share ratio for the three months ended March 31, 2009 was 32.8% as compared to 30.9% for the three months ended March 31, 2008. The increase in our revenue share ratio was primarily the result of changes in revenue mix to larger customers during the period. Larger customers who commit to higher levels of purchasing volume through our group purchasing organization contracts typically receive higher revenue share obligation percentages. We may also experience fluctuations in our revenue share ratio because of changes in revenue mix, the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.
• Other service fees. The $1.6 million or 26.7% decrease in other service fees primarily related to revenue from our annual customer and vendor meeting that will be recognized during the second quarter of 2009 as compared to related revenue of $2.9 million included in the three months ended March 31, 2008. Partially offsetting this decrease was approximately $0.9 million in higher revenues from our supply chain consulting. The consulting growth was mainly due to an increased number of consulting engagements from new and existing customers.
Total Operating Expenses
Three Months Ended March 31,
2009 2008 Change
% of % of
Amount Revenue Amount Revenue Amount %
(Unaudited, in thousands)
Operating expenses:
Cost of revenue $ 16,745 21.2 % $ 8,462 14.4 % $ 8,283 97.9 %
Product development
expenses 6,018 7.6 2,697 4.6 3,321 123.1
Selling and marketing
expenses 10,896 13.8 12,911 22.0 (2,015 ) (15.6 )
General and
administrative
expenses 27,451 34.8 21,060 35.8 6,391 30.3
Depreciation 2,910 3.7 2,121 3.6 789 37.2
Amortization of
intangibles 7,011 8.9 3,778 6.4 3,233 85.6
Total operating
expenses 71,031 89.9 51,029 86.8 20,002 39.2
Operating expenses by
segment:
. . .
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