HCIA To Miss Q3
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HCIA To Miss Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
HCIA Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HCIA)") else Response.Write("(NASDAQ: HCIA)") end if %> BACKGROUND HCIA is a leading health care information content company that develops and markets clinical and financial decision support systems used by hospitals, integrated delivery systems, managed care organizations, employers, and pharmaceutical manufacturers. The company's databases and products are used to benchmark clinical performance and outcomes, profile best practices, and manage the cost and delivery of healthcare. UNION CITY, Ca., October 1, 1996/FOOLWIRE/ --- HCIA held a conference call with analysts this morning to discuss the company's expectations (outlined in a press release issued last night) that Q3 results will fall short of expectations.
HCIA is estimating, at this time, earnings per share in the range of $0.10-0.15 for Q3 and $0.15-0.20 for Q4. Current consensus estimates stand at $0.29 per share for both Q3 and Q4.
MANAGEMENT REMARKS
The shortfall for the current quarter, which amounts to approximately $2-3 million of revenue was concentrated in their Commercial Markets business unit. The unit licenses the company's databases and data handling technologies to industrial markets such as pharmaceutical companies and medical equipment manufacturers. The sales cycles for these products is typically 3-6 months and annual revenues from these sales have been in the range of $500,000 to $1 million per sale. Many times, a customer might already have HCIA's products installed for testing and debugging purposes, allowing HCIA to recognize revenues upon contract signature. In other cases, they are able to ship databases and data handling software immediately upon contract signature and then recognize revenues.
The company believes the market for commercial services is a large and expanding opportunity. Their sales pipelines in this area are in good shape. They simply did not close enough business in this market to make their numbers for the quarter.
Part of the reason for this is that these larger and more complex commercial sales have historically required the involvment of HCIA's senior management. During the past nine months, HCIA's senior management has been focusing on executing the company's acquisition strategy and raising the equity capital for that strategy.
Also, during these nine months, HCIA has grown from approximately 400 to more than 800 employees. Because of this growth, they have spent the past several months establishing a new organizational structure and have organized HCIA into the discreet business units described in the press release (Commercial Markets, Managed Care Markets, Provider Markets, and HCIA Europe). Each of these units has its own Senior Vice President reporting to the company's CEO.
The Commercial unit is making progress toward building itself into a solid contributor to HCIA's revenue and profit growth. The company believes it is reasonable to expect the unit to be fully staffed and running at appropriate growth rates in 3-6 months. It is for this reason that HCIA has taken their Q4 and 1997 estimates down. They don't want a quick fix, they want to put the unit on track for sustained success. While this is a disappointing quarter for the unit and for the company, they are sticking to their strategy in their marketplace -- to sell large volumes of HCIA's proprietary databases and data handling technologies to a market segment that they believe is just beginning to realize the value and power of information.
The CEO indicated that this revenue shortfall is both a surprise and a terrible disappointment for them. They believe they are putting in place the appropriate operating structure, management controls, and earnings expectations so they can avoid disappointing themselves and the analysts that cover them again.
QUESTIONS AND ANSWERS
The company was asked what the pipeline looks like for the commercial area right now. They responded that they think the current pipeline is a good pipeline and one that will allow the group, they believe at least right now, to hit its numbers for Q4. In terms of Q3, ordinarily they hope to have 5-10 good opportunities and if they can close half of those they are usually in good shape to hit their numbers. In Q3 they didn't, they only closed 1 or 2 deals and they needed between 3-5 depending on the size of each deal.
They were asked why they characterized this as a surprise, didn't they have advance warning that things weren't closing. The company responded that this was something of a surprise because a lot of times these deals take a couple of weeks to finalize and if they are in the final stages of getting them done, they have been able to get them closed by the end of the quarter. As they were moving through their quarter, they didn't feel all that horribly different from other quarters they have been in and in this case they cut it too close and are learning a tough lesson. They were asked if then things have merely slipped from one quarter to the next. The company indicated that they didn't say the deals just slipped, they need to have a bigger pipeline and close more of them. They probably had enough out there where they thought they could get through the quarter, but it probably would have left them with a rather bare pipeline going forward. What they are trying to do is not live "hand-to-mouth" in revising their numbers. They think they are looking at a 6 month fix.
The company was asked if they were seeing any less enthusiasm on the part of potential clients for the products or any hesitancy. The company indicated that this is perhaps the most frustrating part of the last 3-4 days for them in having to make this announcement, because the enthusiasm in the marketplace for what they are doing is as good or better than it's ever been. This was something they feel they just could've done a better job of preventing. The market is very excited about what they are doing and about what a lot of other healthcare information companies are doing. HCIA feels that they are going to continue to participate in that and it is going to continue to be a big driver of their growth. They have said many times that they have been the benefactor of new enthusiasm and new technological prowess on the information side in the markets they sell into. They think that is continuing to be the case, especially in these industrial markets.
They were asked to detail specifics on headcount in the Commercial Markets division. The company said that when they began Q3 the Commercial group was a relatively small group of about 20 people. What they have done during the quarter is consolidate this original Commercial group together with their CHAMP group and syndicated products unit. They put these groups together and directed them at selling into bigger accounts, moving them away from the traditional smaller price-point syndicated product line, but using the syndicated products customer base as a pick list of opportunities to sell their bigger ticket commercial products. That has been their strategy and they are sticking to that strategy. From a headcount perspective, that original 20 people is now a group of more than 100 people. Sales headcount of that 100 people is around 15 people and that number will go up incrementally over the next several months to around 20 people.
The company was asked how they were going to fix the pipeline and management availability issues cited. They responded that the new Senior Vice President resolves and, given the resources at his disposal, they do not expect the pipeline to become a real big issue. Management's involvement in closing the deals, they feel, really becomes a learning experience for their company where the CEO, CFO, General Counsel, etc. have to transfer a lot of the deal-structuring and related knowledge to the new Senior Vice President and his unit so that unit can run autonomously. That is why they are saying that it might take them some time.
The company was asked if they are losing deals to other vendors or what is happening with the deals. The company indicated that rarely are they responding to RFP (request for proposal) driven business, so many times these are not competitive situations. In many cases they are the only source that can supply the type of product and information that they are discussing with the customer. This is simply an issue of numbers they think. They need to have more people working in this area of the company so they have more pipeline and they need to train more people in executing and pulling these deals through. Customers are not ditching HCIA and going elsewhere any more than they used to, which they said has never really been a problem for them as a company. HCIA has always been their own worst potential enemy. That is consistent with what they have said over the past 19 months and in this case, unfortunately, it turned out to be true.
One analyst asked them "as someone with a position in the stock, why going forward should we be buying more of the stock?" The company said that, despite this unfortunate event, they are as confident or more confident now than they have been in the marketplace and in what they are doing. The other big factor that is kind of subtle is that in the last 6 months the management team at the company has expanded enormously. Where 6 months ago there were half a dozen people making almost every critical decision at the company, now they have a much bigger, much more capable management team spread across all these major marketplaces. Each of the units has an excellent strategy and has a good position in each of their markets. They don't feel that this is the end of the world. It is a very unfortunate screw-up, but they are excited about the marketplace. They think it is an unfortunate growing pain and, in retrospect, they should have gotten their organizational structure in place sooner. They think that decentralizing responsibility and authority a little bit and having them focus by market and having the people in place to run those different markets will make a big difference. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |