Systems Xcellence announces 2005 third quarter RECORD financial results

Company revises guidance to the high-end of its previously announced financial ranges 

MILTON, Ontario, November 3, 2005, Systems Xcellence Inc., (“SXC” or the “Company”) (TSX: SXC) today reported its financial results for the three- and nine-month periods ended September 30, 2005. All figures are in U.S. dollars. 

Highlights for the quarter included:

• Comparing Q3 FY 2005 to the comparable quarter in CY 2004:

  • 79% increase in total revenue, from $8.2 million to $14.7 million;

  • 83% increase in revenue from recurring sources, from $4.8 million to $8.8 million:

  • 60% increase in transaction processing revenue, from $3.4 million to $5.4 million;

  • 127% increase in earnings before interest, taxes, depreciation and amortization (“EBITDA”), from $1.6 million to $3.7 million;

  • Increase in net income from $0.9 million, or $0.02 per share, to $2.2 million, or $0.04 per share;

  • Cash generated from operations was $3.8 million*, compared to $1.5 million in the prior year period;

• Contract order backlog increased to $103.5 million of which approximately 94% is from recurring revenue sources;

• A $5.0 million four-year contract with a pharmacy benefit manager ("PBM") based in the U.S. midwest that provides national coverage;

• Membership in the Emergis DIS Consortium selected to negotiate with Newfoundland and Labrador for a comprehensive drug information system project; and

• A $10 million five-year subcontract with Client Network Services, Inc. ("CNSI") to provide prescription drug claims applications and systems hosting services for the State of Washington's Medicaid program. If exercised, three one-year renewal options could increase the total contract value to $19 million. 

“Financial results for the quarter were driven by ongoing strength in our core transaction processing business, expansion into the public sector with the State of Washington Medicaid program, and our ability to capitalize on opportunities related to helping healthcare organizations achieve the necessary technological compliance to participate in the Medicare Part D program,” said Gordon S. Glenn, President and CEO of SXC. “Based on our strong performance year-to-date and our outlook going into 2006, we now expect that financial results for 2005 will be at the high-end of the ranges for our previously announced revenue and earnings per share guidance.” 

Financial Review

Consolidated revenue increased $6.5 million to $14.7 million during the three-month period ended September 30, 2005, from $8.2 million for the three-month period ended September 30, 2004. 

Revenue from recurring sources was $8.8 million in the third quarter compared to $4.8 million in the prior year period, a 79% increase. Transaction processing revenue (which includes claims adjudication and switching revenue) was $5.4 million in the current period compared to $3.4 million in the prior period, a 60% increase.  Maintenance revenue (which includes software and hardware maintenance and recurring pharmacy services revenue) was $3.4 million compared to $1.4 million in the prior period, a 136% increase. 

Revenue from non-recurring sources was $6.0 million in the current period compared to $3.5 million in the prior period, a 73% increase.  Systems sales revenue (which includes both software and hardware license revenue) was $2.3 million in the current period, compared to $2.2 million in the prior period, a 5% increase. Professional service revenue was $3.7 million compared to $1.2 million in the prior period, a 206% increase. The increase in professional services was due in part to consulting and implementation services performed for existing customers who will be participating in the upcoming Medicare Part D program. 

Revenue for the nine-month period ended September 30, 2005 was $37.5 million, up 53% compared to $24.5 million in the same period last year. Revenue of a recurring nature was $25.4 million during this period, up 73% compared to $14.6 million in the first nine months of 2004. Transaction processing revenue was $15.5 million in the nine months ended September 30, 2005, up 60% compared to $9.7 million in the same period of 2004. 

Gross margin in the third quarter was 64% compared to 62% in the same period in the prior year. This increase in gross profit margin was primarily a result of the increase in the sale of higher margin transaction processing services in the current period. Gross margin for the nine-month period ended September 30, 2005 was 61%, compared with 60% in the same period last year.  

Product development (“R&D”) expenses were $2.3 million, or 16% of revenue, in the third quarter compared to $1.6 million, or 19% of revenue, in the prior period. R&D expenses declined as a percentage of revenue following the amalgamation of two product lines targeting the provider market.

 Selling, general and administration (“SG&A”) costs were $3.5 million or 23.9% of revenue, in the third quarter compared to $1.9 million, or 23.4% of revenue, in the same period last year. SG&A rose on an absolute dollar basis due to an increase in costs related to the HBS acquisition, certain one-time legal expenses, and an increase in sales and marketing costs to support the Company’s growth initiatives. 

EBITDA in the third quarter was $3.7 million, or 25% of revenue compared to $1.6 million, or 20% of revenue for the three-month period ended September 30, 2004. EBITDA rose largely due to a substantial increase in revenue, an increase in sales of higher margin transaction processing revenue and efficiencies realized in product development resulting from the amalgamation of the two product lines targeting the provider market. EBITDA does not have any standardized meaning prescribed by generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similar measures presented by other issuers. However, management believes is a useful supplemental measure of cash available prior to amortization, debt service and income tax. 

Third quarter net income rose substantially to $2.2 million, or $0.04 per share, compared to $0.9 million or $0.02 per share in the same period of the prior year. Higher net income was driven primarily by the 79% increase in revenue, higher margin revenue and efficiencies realized in product development, partially offset by a $0.5 million increase in amortization expense resulting primarily from the acquisition of HBS in late 2004. 

Net income for the nine month period ended September 30, 2005 was $3.8 million, or $0.06 per share (basic), compared with $1.6 million, or $0.04 per share (basic), in the same period of the prior year. 

Liquidity and Resources *

SXC continues to operate with a strong balance sheet from which to pursue its growth initiatives. At September 30, 2005, the company had a working capital position of $16.0 million, with cash and cash-equivalents of $16.3 million, compared with $14.8 million of working capital and $29.6 million of cash and cash-equivalents at December 31, 2004. Approximately $2.7 million of the cash balance at September 30, 2005 resulted from an advanced payment from a customer relating to the Company’s pharmacy benefit administrative (or “InformedRx”) program.  

Typically, such receipts and payments occur within the quarter and do not impact quarter-ending cash balances.  The proceeds of this advanced payment were used to pay the pharmacies in connection with amounts then due after quarter-end. In part, this accounted for the unusually high quarter-end cash balance at quarter-end relative to the prior sequential quarter, with the remainder of the increase in the cash balance due to operations. The unusually high year-end cash balance was a result of SXC assuming an $18.0 million note payable with the HBS shareholders at the closing date of December 17, 2004 and repaying the note subsequent to year-end.  

During the quarter, SXC generated cash from operations of $6.5 million compared to $1.5 million generated in the same period of the prior year. Excluding the $2.7 million advanced payment discussed in the prior paragraph, SXC generated $3.8 million in cash from operations during the third quarter, a significant increase over the prior year period. 

2005 Financial Guidance

The Company had previously established the following financial goals for fiscal 2005: consolidated revenue of $49-52 million, and earnings per share (basic) of $0.09-0.11. SXC now expects that for 2005, the Company will generate revenue and EPS at the high-end of the respective ranges.

EBITDA Reconciliation to Net Income

EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP measure that management believes is a useful supplemental measure of operating performance prior to amortization, debt service and income tax. Investors are cautioned that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of the Company's performance or to cash flows from operations as a measure of liquidity and cash flows. EBITDA does not have a standardized meaning prescribed by GAAP. The Company's method of calculating EBITDA may differ from the methods used by other companies and, accordingly, it may not be comparable to similarly titled measures used by other companies. Reconciliation of EBITDA to net income is shown below: 

					For the three months ended				For the nine months ended
					30-Sept-05		30-Sept-04		30-Sept-05		30-Sept-04
EBITDA					3,650,641		$1,606,859		$7,491,283		$3,907,994
Amortization					(856,946)		(390,592)		(2,607,009)		(1,157,710)
Stock-based Compensation					(226,791)		(114,096)		($594,995)		(452,127)
Interest expense, net					(326,416)		(191,298)		(1,051,602)		(581,339)
Other Income					-		-		626,342		-
Income Taxes					(30,507)		(29,910)		(92,017)		(69,910)
Income (loss) after taxes					$2,209,981		$880,963		$3,772,002		$1,646,908

Subsequent Events

Subsequent to September 30, 2005, the Company announced it had enhanced its InformedRx offering by completing the acquisition of certain pharmaceutical rebate management assets of Worthington, Ohio-based Pharmaceutical Horizons, Inc.  The acquisition was completed as a cash transaction effective September 30, 2005 and other terms of the transaction were not disclosed.

Notice of Conference Call

SXC will host a conference call on November 3, 2005 at 8:30AM (ET) to discuss its third quarter 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.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 1-877-289-8525 or 416-640-1917 and entering the reference code 21159627. The taped call is available until November 10, 2005.

About Systems Xcellence Inc.

Systems Xcellence (SXC) is headquartered in Milton, Ontario with offices and processing centres in Lombard, Illinois, Warminster, Pennsylvania, Scottsdale, Arizona and Victoria, British Columbia.  Through its SXC Health Solutions, Inc subsidiary, SXC is a leading provider of healthcare information technology solutions and services to the U.S. 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, independent, chain and mail-order pharmacies 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 Company's Annual Information Form.