Toronto Stock Exchange Symbol: SXC

Systems Xcellence announces 2004 first quarter financial results  

MILTON, Ontario, May 5, 2004, Systems Xcellence Inc., (“SXC”) (TSX: SXC) today reported its first quarter financial results for the three-month period ended March 31, 2004 (“Q1 CY’04”). As a result of the change in the company's year-end to December 31 from February 29 (effective December 31, 2003) and in accordance with Canadian GAAP (Generally Accepted Accounting Principles), Q1 CY’04 is compared to the fourth quarter of the prior fiscal year which represented the three-month period ended February 28, 2003. All figures are in U.S. dollars. 

Revenue for the three-month period ended March 31, 2004, was $7.8 million compared to $8.9 million for the three-month period ended February 28, 2003. Revenue of a recurring nature was $4.9 million in Q1 CY’04, or 63% of total revenue, versus $3.9 million, or 43% of total revenue, for the three months ended February 28, 2003. Net income for Q1 CY’04 was $0.3 million, or $0.01 per share, compared to $1.1 million, or $0.03 per share, for the three-month period ended February 28, 2003.  

While revenue from recurring sources increased significantly year-over-year, total revenue fell as two major contracts neared completion in Q1 CY’04 and non-recurring license software and consulting revenue earned from those transactions declined during the current period. In addition, the prior period included a significant amount of consulting revenue from a project that was successfully completed during that period.  Net income declined primarily due to lower revenue earned from the aforementioned contracts, and increased product development and support costs relating primarily to the company’s RxEXPRESS pharmacy workflow application. Also affecting Net income was a non-cash charge of $0.2 million for stock option compensation expense in accordance with CICA Handbook section 3870, which requires the valuation and expensing of stock compensation expense.  

“Over the past several years, we have been focused on establishing transaction processing as our core business in order to expand our base of recurring revenue and achieve more consistent and profitable growth. We believe we have built a reputation as the premier provider of outsourced transaction management solutions to healthcare benefit providers and that we are now beginning to see this transition in our business take hold,” said Gordon S. Glenn, President and CEO of SXC. “While the company’s Q1 CY’04 financial results reflect reduced license and consulting revenue, there were a number of very positive developments in the quarter, particularly that revenue in our core transaction processing business segment increased by 71% during this time. As we continue with our transformation, we remain confident in both our strategic direction and market position and believe that our continued progress will result in increased long term shareholder value.”  

Highlights for Q1 CY’04 included:

·         A 71% increase in revenue from transaction processing and switching sources from $1.8 million to $3.0 million

·         Approval by the U.S. Centers for Medicare and Medicaid Services (CMS) as one of 28 certified Medicare Discount Drug Card Sponsors

·         Implementation of three inaugural contracts for InformedRx, the company’s pharmacy benefit administrative service

·         $1.6M, four-year transaction processing contract with Navitus Health Solutions

·         $1.5M, three-year transaction processing contract with a Pharmacy Benefit Manager (PBM )

·         License sale of SXC’s RxEXPRESS mail-order application to Prime Therapeutics, LLC

·         Backlog remained steady at $49.6 million, of which over 90% was from recurring revenue sources

·         A strong cash position to address working capital and corporate development objectives.

Financial Review

Revenue from recurring sources was $4.9 million in the current period compared to $3.9 million in the prior period, a 26% growth rate. Transactions processing and switching revenue was $3.0 million in the current period compared to $1.8 million in the prior period, a 71% increase.  Maintenance revenue was $1.8 million compared to $2.1 million in the prior period, a 13% decrease. 

Revenue from non-recurring sources was $2.9 million in the current period compared to $5.0 million in the prior period, a 42% decline.  Software license revenue was $1.9 million in the current period, compared to $2.2 million in the prior period, a 15% decline. Integration and consulting revenue was $1.0 million compared to $2.8 million in the prior period, a 63% decline. 

Gross margin was 59% in Q1 CY’04 compared to 54% in the three-month period ended February 28, 2003. Improved gross profit margins resulted from increased transactional processing activity at the company’s data center and the reallocation of certain consulting resources to research and development projects during the quarter.  Projects costs dropped from $4.1 million in the prior period to $3.2 million in the current period. 

Total operational expenses comprised of project costs, product development, and selling, general and administration costs were $6.8 million in the current period, compared to $6.4 million in the prior period, a 5% increase. 

Product development expenses were $2.0 million or 26% of revenue, compared to $0.8 million in the prior period, or 9% of revenue, primarily due to an increase in product development costs resulting from additional hiring and consulting resources deployed for the RxEXPRESS® for Windows product suite, and the redeployment of resources from a large RxCLAIM® integration and consulting project in the prior period. Selling, general and administration costs remained constant during the period at $1.5 million. 

Earnings before interest taxes depreciation and amortization (EBITDA) for Q1 CY’04 were $1.0 million, or 13% of revenue compared to $2.5 million, or 28% of revenue for the three-month period ended February 28, 2003.  This decline is primarily attributed to the revenue associated with the integration and consulting projects that were largely completed in the prior period. EBITDA is calculated by adding-back interest, taxes depreciation and amortization and stock compensation expense to net income. EBITDA does not have any standardized meaning prescribed by generally accepted accounting principles and therefore may not be comparable to similar measures presented by other issuers. 

SXC continues to operate with a strong balance sheet from which to pursue its growth initiatives. At March 31, 2004, the company had a working capital position of $14.1 million, with cash and cash-equivalents of $13.0 million, compared with $14.2 million of working capital and $13.5 million of cash and cash-equivalents at December 31, 2003.  

At March 31, 2004, the company’s contract order backlog was $49.6 million, of which over 90% was from recurring revenue sources, compared with $49.4 million at December 31, 2003.  Management anticipates this contracted order backlog to be realized over a three-year period. Outlook

Outsourced transaction management for healthcare benefit providers is a expanding business and still is in an early, but rapid growth stage. Driven by the increased utilization of prescription drugs, managed care organizations (MCOs) are being forced to examine how they can better control the costs and features related to the delivery of prescription drug benefits. SXC’s suite of transaction processing applications directly addresses this need by providing a full complement of solutions that allow MCOs to save money and enhance functionality in the prescription drug plans offered to their members. 

SXC’s strategy to build its business is focused in four areas:

·         Expand revenue per claim and addressable payer markets with new pharmacy benefit services offerings;

·         Aggressively target new technology upgrades in retail, mail and out-patient pharmacy markets with RxEXPRESS;

·         Introduce new applications such as RxPORTALä and RxVIEWä, - offered both on a software license and ASP basis – to expand relationships with the company’s existing customer base; and

·         Leverage SXC’s approval as a sponsor for the CMS-Endorsed Medicare Drug Discount Card Program to drive transaction revenue resulting from newly introduced prescription drug coverage for over 20 million Medicare members. 

“We believe that we are ideally situated to capture significant market share in the area of managing transaction processing for MCOs,” said Mr. Glenn. “Increasingly, small and mid-sized MCO’s in our target market seek to upgrade their claims processing systems with industry-leading technology that can be implemented quickly, enhance health plan functionality and doesn’t require a substantial upfront expense. We are at the forefront for meeting those requirements.” 

In connection with the company’s transition from a dependency on license software sales to a more transactions-based recurring revenue model, the company has recently taken steps to adjust its cost structure and will continue to closely monitor its cost base. 

Financial Guidance

The company has established the following financial goals for calendar 2004: it is projecting consolidated revenue to be in a range of $32-35 million, and earnings per share (basic) to be in a range of $0.04-0.07. Included in this EPS guidance is approximately $0.02 of stock option compensation expense for the year.   

The company also expects its core transaction processing revenue to grow by over 30% in Calendar 2004, while license revenue and service revenue decline in the aggregate by approximately this same percentage.

Notice of Conference Call

SXC will host a conference call on May 6, 2004 at 8:30AM (ET) to discuss its Q1 CY’04 financial results. Mr. Gordon S. Glenn, President and CEO, will host the call.  

A live audio webcast of the call will be available at www.financialdisclosure.ca and www.sxc.com. Webcast attendees are welcome to listen to the conference in real-time or on-demand at your convenience. A taped replay of the call will be archived at those sites for 90 days. A replay of the call can also be heard by dialling 1-800-408-3053 or 416-695-5800 and entering the reference code 3043747. The taped call is available until May 13, 2004. 

About Systems Xcellence Inc.

Systems Xcellence (SXC) is headquartered in Milton, Ontario with offices and processing centres in Lombard, Illinois, Scottsdale, Arizona and Victoria, British Columbia. SXC is a leading provider of healthcare information technology solutions and services to the healthcare benefits management industry. The company’s product offerings and solutions combine a wide range of software applications, application service provider (ASP) processing services and professional services, designed for many of the largest organizations in the pharmaceutical supply chain, such as pharmacy benefit managers, managed care organizations, retail pharmacy chains and other healthcare intermediaries.  SXC can be found on the Internet at www.sxc.com. 

This press release contains forward-looking statements based on current expectations. These forward-looking statements entail various risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Risks and uncertainties about the Company's business are more fully discussed in the Management Discussion and Analysis published in the Company's annual report.

LINK TO FIRST QUARTERLY STATEMENTS - PDF FORMAT

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