Toronto Stock Exchange Symbol: SXC

Systems Xcellence announces 2005 second quarter RECORD financial results

Revenue rises 43% on higher recurring revenuE

MILTON, Ontario, August 4, 2005, Systems Xcellence Inc., (“SXC” or the “Company”) (TSX: SXC) today reported its second quarter financial results for the three-month period ended June 30, 2005. All figures are in U.S. dollars. 

Highlights for the quarter included: 

• Comparing Q2 FY 2005 to the comparable quarter in CY 2004:

  • 43% increase in total revenue, from $8.5 million to $12.2 million;

  • 69% increase in revenue from recurring sources, from $5.0 million to $8.4 million;

  • 57% increase in transaction processing revenue, from $3.3 million to $5.1 million;

  • 96% increase in earnings before interest, taxes, depreciation and amortization (“EBITDA”), from $1.3 million to $2.5 million;

  • Substantial increase in net income from $0.5 million, or $0.01 per share, to $1.5 million, or $0.03 per share

  • Cash generated from operations of $2.1 million, compared to cash used in operations of $0.5 million in the second quarter of 2004;

• Contract order  backlog increased to a record $95 million of which approximately 95% is from recurring revenue sources;

• The addition of three new InformedRx clients, including a three-year $2.8 million agreement with a U.S. based regional health plan; and

• The signing of eleven agreements with existing customers and eight ASP customers – under which the company expects to begin generating revenue beginning in the fourth quarter of this year.

“In the second quarter we made important progress in expanding our transaction processing business, growing our InformedRx base of customers and generating sales activity related to the Medicare Part D program which comes into effect in January of 2006,” said Gordon S. Glenn, President and CEO of SXC. “The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Part D”) initially provided Medicare beneficiaries with discounts on their prescription drugs and effective January 1, 2006, will provide a federally funded Medicare prescription drug plan for millions of high utilizing seniors that are without drug coverage today.” 

”Year-to-date we have signed up 11 existing license and claims processing customers to provide enhanced functionality related to the Medicare Part D program and we expect to add additional Part D customers during the remainder of the year,” added Mr. Glenn. “In addition, our substantial agreement announced subsequent to quarter-end to provide prescription drug claims applications and services related to the State of Washington’s Medicaid program, reinforces the broad application of the company’s products and services and a new opportunity for SXC in the public sector.” 

Financial Review

Consolidated revenue increased $3.7 million, or 43% to $12.2 million during the three-month period ended June 30, 2005, from $8.5 million for the three-month period ended June 30, 2004. 

Revenue from recurring sources was $8.4 million in the second quarter compared to $5.0 million in the prior year period, a 69% increase. Transaction processing revenue (which includes claims adjudication and switching revenue) was $5.1 million in the current period compared to $3.3 million in the prior period, a 57% increase.  Maintenance revenue (which includes software and hardware maintenance and recurring pharmacy services revenue) was $3.3 million compared to $1.7 million in the prior period, a 92% increase. 

Revenue from non-recurring sources was $3.8 million in the current period compared to $3.5 million in the prior period, a 7% increase.  Systems sales revenue (which includes both software and hardware license revenue) was $1.2 million in the current period, compared to $2.0 million in the prior period, a 41% decline. Professional service revenue was $2.6 million compared to $1.6 million in the prior period, a 68% increase. 

Revenue for the six-month period ended June 30, 2005 was $22.8 million, compared to $16.3 million in the same period last year. Revenue of a recurring nature was $16.6 million during this period, compared to $9.9 in the first six months of 2004. Transaction processing revenue was $10.1 million in the six months ended June 30, 2005, compared to $6.3 million in the same period of 2004. 

Gross margin in the second quarter remained steady at 61% compared to 60% in the same period in the prior year. Gross margin for the six-month period ended June 30, 2005 was relatively flat at 59%, compared with gross margin of 60% in the same period last year, due to slightly lower historical margins at the Company’s Health Business Systems, Inc. subsidiary (“HBS”). 

Product development (“R&D”) expenses were $2.3 million or 19% of revenue, compared to $2.0 million, or 23% of revenue, in the prior period. R&D expenses declined as a percentage of revenue following the amalgamation of two product lines targeting the payer market and certain provider market synergies arising from the acquisition of HBS.  

Selling, general and administration (“SG&A”) costs were $2.6 million, or 21% of revenue, compared to $1.8 million, or 21% of revenue, in the same period last year. On an absolute dollar basis, SG&A rose primarily due to expenses associated with a higher headcount following the acquisition of HBS and associated integration costs, and an accelerated investment in sales support and higher marketing expenses. 

EBITDA in the second quarter was $2.5 million, or 21% of revenue compared to $1.3 million, or 15% of revenue for the three-month period ended June 30, 2004. 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. 

Net income rose substantially to $1.5 million, or $0.03 per share, compared to $0.5 million, or $0.01 per share in the same period of the prior year. Higher net income was driven primarily by the 43% increase in revenue, a $0.6 million recorded gain on the sale and leaseback of the Company’s head office in Milton, Ontario, and efficiencies realized in product development, offset by a $0.6 million increase in amortization expense resulting primarily from the acquisition of HBS in late 2004. 

Net income for the six month period ended June 30, 2005 was $1.6 million, or $0.03 per share, compared with $0.8 million, or $0.02 per share, in the same period of the prior year. 

SXC continues to operate with a strong balance sheet from which to pursue its growth initiatives. At June 30, 2005, the company had a working capital position of $13.2 million, with cash and cash-equivalents of $10.3 million, compared with $14.8 million of working capital and $29.6 million of cash and cash-equivalents at December 31, 2004. SXC assumed an $18.0 million notes payable with the HBS shareholders at the closing date of December 17, 2004 and repaid the note subsequent to year-end. This accounted for the unusually high year-end cash balance.  

During the quarter, SXC generated cash from operations of $2.1 million compared to cash used in operations of $0.5 million, generated in the same period of the prior year. During the second quarter SXC made a $4.5 million payment in connection with the acquisition agreement entered into with the HBS shareholders. Of the total payment, $2.4 million was due to the HBS shareholders upon HBS achieving certain working capital and year-end revenue and profitability targets which were met, with the balance to be held in escrow until December 2006.

At June 30, 2005, the company’s contract order backlog increased to $95 million from $79 million at December 31, 2004. Of this total, approximately 95% is from recurring revenue sources and management expects this contracted order backlog to be realized over a three-year period. Primarily contributing to the growth in backlog during the quarter were the three aforementioned InformedRx customers and the subcontract with Client Network Services, Inc. referenced below.

Subsequent Events

Subsequent to June 30, 2005, the Company announced a five-year subcontract with Client Network Services, Inc. to provide prescription drug claims applications and systems hosting services for the State of Washington’s Medicaid program. The initial five-year term of the agreement is valued at approximately $10 million. The contract has options for three additional years, and if all options are exercised, the contract would have a value of more than $19 million.

2005 Financial Guidance

The company has previously established the following financial goals for fiscal 2005: it is projecting consolidated revenue to be in a range of $49-52 million, and earnings per share (basic) to be in a range of $0.09-0.11.

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 cash available 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:

 Notice of Conference Call

SXC will host a conference call on August 4, 2005 at 8:30AM (ET) to discuss its second 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 21132227. The taped call is available until August 11, 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.

Q2 Financial Results in Excel Format

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