Systems Xcellence announces RECORD 2005 fourth quarter and year-end financial results

- Annual revenue and net income increased 64% and 235%, respectively -

MILTON, Ontario March 9, 2006,  Systems Xcellence Inc., (“SXC” or the “Company”) (TSX: SXC) a leading provider of healthcare information technology solutions throughout the pharmaceutical supply chain, today reported its results for the three- and twelve-month periods ended December 31, 2005. All figures are in U.S. dollars, unless otherwise noted.

Financial Highlights for 2005:

• Revenue increased 64% to $54.1 million

• Revenue from recurring sources increased 70% to $34.8 million

• Transaction processing revenue, which is the primary driver of recurring revenue, increased 58% to $21.5 million

• Earnings before interest, taxes, depreciation and amortization (EBITDA) increased $6.7 million to $12.0 million, or 22% of revenue

• Net income increased to $7.7 million, or $0.13 per share (basic), from $2.3 million, or $0.05 per share (basic), including a $0.7 million, or $0.01 per share, future tax recovery.

• Cash from operations increased 333% to $11.8 million

• Completed an oversubscribed CDN$22.5 million equity private placement

“2005 was a breakout year for SXC in which we delivered record financial performance,” said Gordon S. Glenn, President and CEO of SXC. “We built our base of recurring revenue to more than 60% of total revenue, which drove higher operating margins and profitability. We enhanced our revenue diversification with 63% of revenue coming from our payer division and 37% coming from our provider division, compared to 88% and 12% respectively, last year. With strong cash flow generation throughout the year and an oversubscribed equity private placement completed in the fourth quarter, we have never been better positioned to capitalize on our growth opportunities and seize new market share.” 

Operational Highlights for 2005:

• Integrated acquisition of HBS, Inc., a provider of retail pharmacy systems acquired in December 2004

• Processed 140 million pharmacy transactions through its data center

• Provided Medicare Part D functionality for six software license customers and 11 transaction processing customers

• Won 7 new ASP/InformedRx contracts valued at more than $18.0 million

• Acquired certain pharmaceutical rebate management assets of Ohio-based Pharmaceutical Horizons, Inc. 

• Increased revenue backlog to $108.0 million at December 31, 2005, up from $79.0 million at December 31, 2004

 “2005 was a year of significant growth and strategic development for SXC in both our primary target markets. In our payer division, the growing awareness of InformedRx, and our unique and transparent pricing model, resulted in landmark contracts with the State of Washington, University of Michigan and an internationally recognized medical clinic. In our provider division, we completed the integration of the HBS acquisition, giving us a stronger presence in retail pharmacy markets. Across both divisions, we leveraged our approval as a sponsor for the CMS Medicare Drug Discount Card Program to enable our customers to achieve the necessary compliance to participate in the Medicare Part D program. In 2006, we look to build on our successes in each of these areas and we remain focused on achieving our primary objectives of increasing our base of recurring revenue and the margins associated with that revenue.” 

Financial Review  

Fiscal 2005

Fiscal 2005 consolidated revenue was $54.1 million, an increase of $21.1 million or 64% from $33.0 million in calendar 2004.  

Revenue from recurring sources (consisting of transaction processing and maintenance) was $34.8 million in 2005 compared to $20.4 million in the prior year, a 70% increase. Transaction processing revenue (consisting of claims adjudication and switching revenue) was $21.5 million in 2005 compared to $13.5 million in 2004, a 59% increase. Maintenance revenue (consisting of software and hardware maintenance and recurring pharmacy services revenue) was $13.3 million compared to $6.9 million last year, a 93% increase. 

Revenue from non-recurring sources was $19.3 million in 2005 compared to $12.6 million in 2004, a 53% increase. Systems sales revenue (which includes both software and hardware license revenue) was $8.2 million in the current period, compared to $7.1 million in the prior period, a 15% increase. Professional service revenue was $11.1 million compared to $5.6 million in the prior period, a 100% increase. The increase in professional services was driven primarily by consulting and implementation services performed for customers participating in the Medicare Part D program. 

Gross margin for 2005 was 62% compared to 59% in 2004. This increase in gross profit margin was primarily a result of the increase in the sale of higher margin transaction processing services in 2005.

Product development (“R&D”) expenses were $9.0 million, or 17% of revenue, in 2005 compared to $7.0 million, or 21% of revenue, in 2004. R&D expenses declined as a percentage of revenue due primarily to the amalgamation of two product lines targeting the provider market.  

Selling, general and administration (“SG&A”) costs were $12.4 million or 23% of revenue, in 2005 compared to $7.3 million, or 22% of revenue, in 2004. SG&A rose on an absolute dollar basis and as a percentage of revenue due primarily to an increase in costs related to the HBS acquisition and an increase in sales and marketing costs to support the Company’s growth initiatives. 

EBITDA in 2005 was $12.0 million, or 22% of revenue compared to $5.3 million, or 16% of revenue, in 2004. EBITDA rose largely due to the Company’s 64% increase in revenue, its 59% increase in high margin transaction processing revenue and operating efficiencies realized in product development due to the amalgamation of two product lines. 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. 

2005 net income rose substantially to $7.7 million, or $0.13 per share (basic), compared to $2.3 million or $0.05 per share (basic) in 2004. Higher net income was driven primarily by increased revenue, higher margin revenue and efficiencies realized in product development, and a $0.7 million, or $0.01 per share future tax recovery, partially offset by a $1.7 million increase in amortization expense resulting primarily from the acquisition of HBS in late 2004. 

Fourth Quarter Fiscal 2005

Revenue for the three-month period ended December 31, 2005 was $16.6 million, up 95% compared to $8.5 million in the same period last year. Revenue of a recurring nature was $9.4 million during this period, up 62% compared to $5.8 million in the fourth quarter of 2004. Transaction processing revenue was $6.0 million in the fourth quarter, up 54% compared to $3.9 million in the same period of 2004. Quarter-over-quarter growth in revenue was driven primarily by an increase in transaction processing revenue and higher professional services revenue related to the Medicare Part D program. 

Gross margin for the fourth quarter was 62%, compared with 56% in the same period last year. Quarter-over-quarter growth in gross margin is primarily due to a greater portion of revenue being generated from the Company’s higher margin transaction processing business. 

R&D expenses were $2.2 million, or 13% of revenue, compared with $1.4 million, or 16% in the same period last year. SG&A expenses were $3.7 million, or 22% of revenue, compared with $2.0 million, or 23% of revenue in the same period last year. Expenses rose on an absolute dollar basis as the Company invested in its sales capabilities and in bringing new products to market. Total expenses decreased on a percentage-of-revenue-basis driven by the Company’s ongoing cost control efforts and the amalgamation of two product lines targeting the provider market. 

Fourth quarter EBITDA was $4.5 million, or 27% of revenue, compared to $1.4 million, or 17% of revenue. The increase in EBITDA reflects the significant increase in revenue, an increase in higher margin transaction processing revenue and SXC’s ongoing efforts at cost control.  

Net income for the fourth quarter was $3.9 million, or $0.06 per share (basic) including a future tax recovery of $0.7 million or $0.01 per share (basic), compared with $0.6 million or $0.01 per share (basic) in the fourth quarter last year. 

Liquidity and Resources

SXC continues to operate with a strong balance sheet from which to pursue its growth initiatives. At December 31, 2005, the company had a working capital position of $37.0 million, with cash and cash-equivalents of $36.0 million, compared with $14.8 million of working capital and $29.6 million of cash and cash-equivalents at December 31, 2004. The cash balance at December 31, 2004 included $18.0 million that was offset by an $18.0 million note payable made-out to HBS’ shareholders. Payment in full was made subsequent to year-end. 

To further strengthen its balance sheet and to procure capital to support its growth initiatives, in the fourth quarter, SXC issued nine million common shares at a price of CDN$2.50 per share for total gross proceeds of CDN$22.5 million ($19.4 million). The equity offering was oversubscribed and was a strong endorsement from the investment community of the company’s progress and outlook. 

In 2005, SXC generated cash from operations of $11.8 million, an increase of 333% compared to $2.7 million generated in 2004. SXC generated $2.7 million in cash from operations during the fourth quarter, up from cash generated from operations of $1.7 million in the fourth quarter last year. 

2006 Financial Guidance

The Company is establishing the following financial goals for fiscal 2006: consolidated revenue of $65-68 million, EBITDA of $16-18 million, net income before income taxes of $12.5-14.5 million and earnings per share (fully-diluted) of $0.14-0.16. The midpoint of our guidance equates to growth rates in revenue of approximately 23%, EBITDA of 35% and net income before income taxes of 85%.  

In addition, for 2006, the Company expects to increase overall transaction processing levels by at least 65% to more than 230 million adjudicated and switched transactions. Approximately 33% of this growth, or 30 million transactions, is expected to result from the Medicare Part D program with the balance originating from the Company’s commercial and State Medicaid initiatives. 

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 twelve months ended
					31-Dec-05		31-Dec-04		31-Dec-05		31-Dec-04
EBITDA					$4,531,388		$1,411,917		$12,035,006		$5,319,909
Amortization					(699,158)		(341,392)		(3,306,167)		(1,499,103)
Stock-based Compensation					(248,985)		(127,202)		(843,979)		(579,329)
Interest expense, net					(283,111)		(265,883)		(1,347,049)		(848,891)
Other Income					-		-		626,342		1,669
Income Taxes					650,000		(30,050)		557,983		(99,960)
Income (loss) after taxes					$3,950,134		$647,390		$7,722,136		$2,294,295

Notice of Conference Call

SXC will host a conference call on March 9, 2006 at 8:30AM (ET) to discuss its fourth quarter and year-end 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 and www.newswire.ca. 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 21179468. The taped call is available until March 16, 2006.

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 subsidiary, SXC Health Solutions, Inc., 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.