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Executives Talk Tech Trends

June 1, 1998
by Jeffrey Elliott
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HBOCJay Gilbertson
President,
Co-COO & CFO
HBOC

REVENUES
’97: $1.2 billion
’96: $950.9 million
Percent change: 27

NET INCOME
’97: $200.7 million
’96: $124.5 million
Percent change: 61

BASIC EARNINGS PER SHARE
’97: .96¢
’96: .61¢
Percent change: 57

Note: Figures restated to reflect the 1997 acquisitions of AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and National Health Enhancement Systems, Inc., accounted for as a pooling of interests.

What is HBOC’s business plan for 1998 and beyond?
We expect to grow internally 20 percent per year, and we would like to grow revenue another 10 percent through acquisitions this year alone. From a revenue standpoint, I think you’ll see a continuation of what we did in 1997, but it will have a different flavor. If you look at where we are today, in terms of the number of products we offer, we really don’t need to add additional products. Our concentration will be to grow our services revenue.

What does HBOC’s size do for the provider community?
Our size has helped us drive the standardization of systems. We probably have the most complete data model for integrating different systems from different areas of healthcare. Last year 50 percent of our R & D budget, or $60 million, went into integrating our applications. We’re spending a lot of money that our customers don’t have to spend on the integration of systems.

How have your competitors reacted to your aggressive growth strategy?
I don’t think they have reacted to HBOC as much as they have reacted to all of our customers’ needs. As healthcare goes through structural changes, providers are looking for applications that give them a return on investment. If you’re going to spend $10 million to $20 million, you need to make sure you’re going to have some return.

What’s HBOC’s position on the international marketplace?
Today we do about $100 million in revenue from 700 customers in the United Kingdom. Our feeling is that healthcare IT in the United States is five to eight years behind other industries. Foreign markets seem to be that far behind our healthcare market. Unless we can make an acquisition of a large customer base, it probably doesn’t make sense for HBOC to go in and take over a market when we’ve got a lot of growth opportunity in the United States. Right now were taking a ’wait-and-see’ approach--going for distributor relationships that provide us with sales people around the globe.

What will the healthcare IT industry look like early into the next century?
There is a good chance companies like Cerner or SMS will both be acquired by someone more sizable. As far as dominant players, HBOC will be a standalone three years from now. Hopefully we will be a $3 billion company at that point. However, I think you will continue to see plenty of good niche companies in the industry.


SMS
Marvin S. Cadwell
President
& CEO
SMS

REVENUES
’97: $896.2 million
’96: $779.1 million
Percent change: 15

NET INCOME
’97: $60.4 million
’96: $49 million
Percent change: 23

BASIC EARNINGS PER SHARE
’97: $2.42
’96: $1.98
Percent change: 22

Note: Figures restated to reflect the 1997 acquisition of American Healthware Systems, Inc., accounted for as a pooling of interests.

What was 1997 like for SMS?
Nineteen-ninety seven was a record year with revenues just short of $900 million and sales in excess of 1.2 billion dollars on a consolidated basis. Our performance from domestic operations was strong, which can be attributed to our positioning in the market. Our European unit has experienced growth the past several years, with the exception of last year. However, we remain bullish on Europe because of our strong position there, which we will continue to maintain.

What segment of your business do you see growing the most over the next five years?
We will see a higher rate of growth in the emerging ambulatory market in which we have made investments internally and externally through partnerships. Network and network support will also be an area that will provide us opportunities for growth that is, perhaps, outside the average growth of our organization.

Why did SMS switch from the Nasdaq to New York Stock Exchange for trading of its stock?
We were seeing great volatility in the early part of 1997 with SMS share value, and therefore our market capitalization. The inflection in the value of our shares does not properly reflect the actual performance of the company. The NYSE will provide a more stable environment in which our stock is transacted. Also, the NYSE offers us a much broader market internationally. SMS was excluded from a lot of international money purely because we traded on the Nasdaq.

What is the largest barrier your
customers face building their IT departments?

I think one of the greatest barriers IT organizations face is the integration of disparate systems. As providers consolidate, executives must articulate the benefits they are pursuing through consolidation. They are assuming efficiencies through consolidation, yet efficiencies can only be achieved through integration of those disparate systems.

Has your business strategy changed in light of your competitors’?
Nothing our competitors have done really impacts the focus of our strategy. We’re cognizant of the many changes--clearly the acquisitions, but our strategy continues to be one of a very strong focus on the health provider marketplace. The area of greatest differentiation between us and our competitors is the way we’re focusing on the importance of what we call solutions--offering a number of services along with our technologies and applications.


IDXRichard Tarrant
President
& CEO
IDX

REVENUES
’97: $251.4 million
’96: $206.9 million
Percent change: 22

NET INCOME*
’97: $8 million
’96: $16.7 million
Percent change: (52)

BASIC EARNINGS PER SHARE*
’97: .31¢
’96: .66¢
Percent change: (53)

*Reflects $20 million in charges related to the acquisition of Phamis.

Note: Figures restated to reflect the 1997 acquisition of Phamis, accounted for as a pooling of interests.

What factors influenced IDX’s performance in 1997?
We are having a lot of success selling to the very high end of the market--places with as many as 10,000 users. In general, the healthcare IS market is just a great market to be in. Spending is increasing dramatically, larger portions of operating budgets are being spent on information systems and capital budgets are increasing for healthcare providers in terms of recognizing the value of acquiring financial and other information systems.

What are your plans for growing the business?
We’re just going to keep on growing internally at a pretty high rate and continue to look for acquisitions like Phamis, which we completed last year. We have some possibilities in the pipeline right now that we’re looking at. A combination of internal growth and growth by acquisition should have a substantial impact on our size over the next several years.

What segment of your business do you see providing the most return in five years?
Clinical systems, particularly ambulatory clinical systems, will start kicking in for us. Also, large integrated delivery networks looking to combine financial and clinical systems under one vendor will be a good source of return, and organizations that want to use fewer vendors and are willing to replace their older systems.

How is IDX approaching the international market?
We acquired an initial customer in London with the Phamis acquisition. We are continuing to install at this site; however, we are not going to continue selling in the U.K. until we get this particular hospital up and running successfully. Our international strategy is one of cautiousness--making sure we get this one done right, making sure our customer is happy, then deciding how aggressively we want to market there.

1997 healthcare IT stocks, in general, have recovered from a turbulent run on Wall Street in 1996. Are investors warming up to the industry as a solid place for their money?
I think the industry is once again starting to be well received on Wall Street. The number of analysts covering IDX has gone from six a year ago to about 20 now. That tells me there is a lot of interest, certainly in IDX, but also in the industry. I don’t think anyone blew up last year, as opposed to ’96 when a number of companies were hit hard.


CernerNeal Patterson
Chairman
& CEO
Cerner

REVENUES
’97: $245.1 million
’96 $189.1 million
Percent change: 29

NET INCOME
’97 $15.1 million
’96 $8.3 million
Percent change: 82

BASIC EARNINGS PER SHARE
’97 .46¢
’96 .25¢
Percent change: 84

What factors influenced Cerner’s performance in 1997?
In 1996, we basically reinvented ourselves by completely automating the clinical process. We went to the drawing board and redesigned our architecture around the continuum of care. That caused 1996 operations to slow down. However, in 1997 we made HNA Millennium available and finished the year with more than 40 major HNA Millennium applications converted at alpha sites. Our 1997 report clearly showed that we had a very good year--profits were up 84 percent.

Is there an advantage to building a multi-faceted system, as Cerner has done, as opposed to acquiring technologies and integrating them?
The advantage is huge. We have a data model that defines the relationship between a patient and a provider which represents all of the entities, objects and events that are going to take place inside the scope of our applications. We basically positioned it to be a platform from which to manage health, from your home all the way to the ICU. All of our applications contain this singular data model. As a result there are no interfaces in our system--it’s all one. If I had bought all of the applications I would have to move the data from each application to a common data model or pass the data back and forth through an interface. Any systems person will tell you that interfaces are the most difficult and complex part of what they manage.

What do your customers say they are looking for that hasn’t been delivered by IS?
Return. Until providers have the courage to eliminate all paper, specifically the medical record, they will never get a return on investment. Granted, there are all kinds of legal issues to be resolved, but there are a few provider organizations that have already had the courage to go paperless.

What is the key for healthcare IT companies to be competitive into the next century?
We continue to see pressures put on by health expenditures. People are pressuring us to help them manage their health and all the related care. I think a key for any technology company is to have the fortitude and courage to reinvent yourself. You have to basically think change both from the market standpoint and the technology.



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