Toronto Stock Exchange Symbol: SXC

Systems Xcellence announces 2005 first quarter financial results

Revenue rises 36% on higher recurring revenue and integration of HBS business 

MILTON, Ontario, May 5, 2005, Systems Xcellence Inc., (“SXC” or the “Company”) (TSX: SXC) today reported its first quarter financial results for the three-month period ended March 31, 2005. All figures are in U.S. dollars. 

Revenue for the three-month period ended March 31, 2005, was $10.6 million compared to $7.8 million for the three-month period ended March 31, 2004. Revenue of a recurring nature was $8.2 million in the first quarter, or 77% of total revenue, versus $4.9 million, or 63% of total revenue, for the three months ended March 31, 2004. Although first quarter net income was $15,606, or $0.00 per share, compared to $274,262, or $0.01 per share, in the same period of the prior year, cash flow from operations was $715,820 compared to $18,976 in the prior period.  

Operating earnings per share (“Operating EPS”), defined as earnings before interest, taxes, depreciation and amortization (“EBITDA”) divided by weighted-average basic shares outstanding, was $0.02 per share in the first quarter, compared to $0.02 per share in the same period last year. A complete reconciliation of EBITDA to net income appears further down in this press release. 

“Higher revenue in the first quarter was driven by activity in both our payer and provider markets, resulting in a 69% increase in revenue from recurring sources,” said Gordon S. Glenn, President and CEO. “Revenue on the provider side was driven by the inclusion of results from HBS – acquired in December 2004. The addition of HBS has led to broader revenue diversification between SXC’s two primary markets with the payer/provider revenue split evolving from 85/15% at December 31, 2004 to approximately 60/40% at March 31, 2005. Revenue in our transaction processing business rose 63% as outsourced transaction management for healthcare benefit providers remains a high growth opportunity and a key factor for our future growth.”  

Mr. Glenn continued: “Over the course of the year, we expect revenue and net income to increase on a quarterly basis driven primarily by new opportunities in our transaction processing business and with our newly expanded suite of provider solutions targeting retail pharmacies. We also expect this activity to be supported by greater strength in our system sales and professional service business in the latter half of the year, primarily in connection with our Medicare Part D initiatives. Medicare Part D is the government funded pharmacy benefit program in the U.S. commencing January 1, 2006 that is expected to add prescription drug coverage for 10-20 million seniors. While first quarter results fell just short of our expectations, we believe that with our strengthened sales pipeline, solid revenue backlog and growing transaction processing business, we are on track to meet our previously stated financial guidance for the year and to further position SXC for future growth.” 

Highlights for Q1 2005 included:

• 36% increase in total revenue, from $7.8 million to $10.6 million

• 69% increase in revenue from recurring sources, from $4.9 million to $8.2 million

• 63% increase in transaction processing revenue, from $3.0 million to $5.0 million

• Revenue backlog of $86 million, of which over 95% is from recurring revenue sources

• Cash from operations of $715,820, compared to $18,976 in the prior year period,

• and The addition of two new InformedRx clients for SXC’s pharmacy administration services  

Financial Review

Revenue from recurring sources was $8.2 million in the first quarter compared to $4.9 million in the prior year period, a 69% increase. Transaction processing revenue (which includes claims adjudication and switching revenue) was $5.0 million in the current period compared to $3.0 million in the prior period, a 63% increase.  Maintenance revenue (which includes software and hardware maintenance and recurring pharmacy services revenue) was $3.2 million compared to $1.8 million in the prior period, a 78% increase. 

Revenue from non-recurring sources was $2.4 million in the current period compared to $2.9 million in the prior period, an 18% decline.  Systems sales revenue (which includes both software and hardware license revenue) was $1.1 million in the current period, compared to $1.9 million in the prior period, a 72% decline. Professional service revenue was $1.3 million compared to $1.0 million in the prior period, a 33% increase. 

Gross margin in the first quarter was 57% compared to 59% in the same period in the prior year.  The drop-off in gross margin is due primarily to the decline in system sales revenue, but was offset by the leverage available in the transaction processing business. 

Product development (“R&D”) expenses were $2.2 million or 20% of revenue, compared to $2.0 million, or 26% of revenue, in the prior period. R&D expenses declined as a percentage of revenue following the integration of the HBS pharmacy applications with SXC’s core RxEXPRESS for Windows pharmacy offerings and the subsequent reduction in resources allocated to thedevelopment of RxEXPRESS.  

Selling, general and administration (“SG&A”) costs rose to $2.6 million, or 24% of revenue, compared to $1.5 million, or 20% of revenue, in the same period last year. SG&A rose primarily due to expenses associated with a higher headcount following the acquisition of HBS, an accelerated investment in sales support and higher marketing expenses.

EBITDA in the first quarter was $1.3 million, or 12% of revenue compared to $1.0 million, or 13% of revenue for the three-month period ended March 31, 2004. EBITDA is expected to increase during 2005 led by higher expected revenue and diligent expense management. 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. 

The variance in net income in the current period compared to the prior period is largely a result of increased amortization expense of $0.4 million resulting primarily from the acquisition of Health Business Systems, Inc. in late 2004. 

SXC continues to operate with a strong balance sheet from which to pursue its growth initiatives. At March 31, 2005, the company had a working capital position of $15.3 million, with cash and cash-equivalents of $12.1 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 $715,820, compared to cash from operations of $18,976, generated in the same period of the prior year. 

At March 31, 2005, the company’s contract order backlog increased to $86 million from $79 million at December 31, 2004. Of this total, more than 95% is from recurring revenue sources and management anticipates this contracted order backlog to be realized over a three-year period.

Subsequent Events

Subsequent to March 31, 2005, the Company announced the award of two contracts for its InformedRx Pharmacy Benefit Administration services to a mid-sized pharmacy benefit manager and a managed care organization, together valued at $2.7 million over the term of the contracts. Both contracts are multi-year agreements with variable terms and are expected to be implemented during the second and third quarters of 2005, respectively.  

2005 Financial Guidance

The company has previously established the following financial goals for calendar 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 May 5, 2005 at 8:30AM (ET) to discuss its first 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 21123354. The taped call is available until May 12, 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.

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