SXC Health Solutions announces 2007 second quarter financial Results

- Company revises annual guidance -

Lisle, Illinois, August 2, 2007, SXC Health Solutions Corp. (“SXC” or the “Company”) (NASDAQ: SXCI, TSX: SXC), announces its financial results for the three- and six-month periods ended June 30, 2007 (“Q2 2007”).  Financial references are in U.S. dollars unless otherwise indicated. 

Second Quarter (Q2) Fiscal 2007 Highlights:

§         Total revenue increased organically 25% to $23.1 million from $18.5 million in Q2 2006

§         Revenue from recurring sources represented 75% of revenue, or $17.2 million

§         Transaction processing revenue, which is the primary driver of recurring revenue, increased 46% to $13.1 million from $9.0 million in Q2 2006

§         Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation and certain one-time charges (adjusted EBITDA¹) increased to $4.9 million, or 21% of revenue, from $4.6 million, or 25% of revenue, in Q2 2006

§         Net income before income taxes was $4.1 million, up from $3.3 million in Q2 2006

§         Net income was $3.0 million, or $0.14 per share (fully-diluted), compared to net income of $2.1 million, or $0.12 per share (fully-diluted) in Q2 2006

§         Book of Business¹ increased to $230 million at June 30, 2007, up from $224 million at March 31, 2007, and up from $160 million at June 30, 2006

§         Selected by AMERIGROUP Corporation to provide PBM services for 226,000 people served by AMERIGROUP Community Care of Georgia. Service delivery began July 2007

§         Selected by Department of Veterans Affairs to provide PBM services for 250,000 government health beneficiaries.  This multi-year agreement which could extend to 60 months and generate $6.9 million in revenues over that term, is expected to launch in early 2008

§         Notified of potential contract award that could result in aggregate revenues of approximately $27 million over a four year period 

“While we continue to post solid year-over-year growth in our core revenue segments, results in the second quarter fell short of our expectations due to lower transaction processing volumes and software license sales, combined with a higher than anticipated expense level,” said Mr. Gordon S. Glenn, Chairman and CEO of SXC. “Transaction processing volumes declined sequentially from 97.3 million transactions in Q1 2007 to 94.7 million in Q2 2007, but based on several new customers who “went live” on July 1, we expect to resume sequential growth in Q3 2007.  Regarding the software license sales that did not close in the quarter, we do not view these as lost opportunities, but rather a situation where the decision to purchase has been deferred to a later date, in some cases into 2008.  Increased expenses included one-time costs associated with recruitment and severance, as well as higher legal costs and consulting expenses associated with our 2007 SOX compliance project.” 

“Our Q2 2007 results, combined with an expected delay in the “go-live” dates of several key transaction processing contracts in the second half of the year has led us to revise our guidance estimates for 2007.  Despite these revisions, we believe that our fundamentals are strong, our strategy is the right one, and our opportunities for significant growth in both our core and emerging markets remain firmly intact. Over the past several years we have built a strong track record for top-line growth and margin expansion that has repeatedly met expectations, and we fully intend to regain this momentum,” added Mr. Glenn.  

Financial Review

Total revenue for Q2 2007 was $23.1 million, an increase of $4.6 million, or 25%, from $18.5 million in Q2 2006.  Year-to-date (“YTD”) revenue was $47.4 million, a 25% increase over the same period in 2006.  Revenue growth for the Q2 and the YTD periods was driven primarily by an increase in transaction processing volume which was offset in part by a reduction in Medicare Part D Program-related consulting and implementation activity during the same periods of the prior year. 

Recurring revenue was $17.2 million in Q2 2007, up 37% compared to $12.6 million for the same period last year.  Recurring revenue consisted of transaction processing revenue of $13.1 million, up 46% from $9.0 million for Q2 2006, and maintenance revenue of $4.1 million, up 14% from $3.6 million in Q2 2006.  Overall, recurring revenue accounted for 75% of total revenue in Q2 2007, compared to 68% in Q2 2006.  

YTD recurring revenue was $35.1 million, up 41% compared to $24.9 million for the same period last year.  For the YTD period, recurring revenue consisted of transaction processing revenue of $26.9 million, up 52% from $17.7 million last year, and maintenance revenue of $8.2 million, up 14% from last year.  Overall, recurring revenue accounted for 74% of total YTD revenue in 2007, compared to 66% in the same period in 2006.  

Non-recurring revenue was $5.9 million for both Q2 2007 and Q2 2006.  Non-recurring revenue consisted of system sales revenue of $2.6 million, up 18% from $2.2 million last year, and professional service revenue of $3.3 million, down 11% from $3.7 million in Q2 2006.    

YTD non-recurring revenue was $12.3 million, compared to $12.9 million in the same period last year.  For the YTD period, non-recurring revenue consisted of system sales revenue of $5.7 million, up 19% from $4.8 million last year, and professional service revenue of $6.6 million, down 19% from $8.1 million last year.    

Gross profit margin in Q2 2007 was 60% compared to 59% for the same period last year.  YTD gross profit margin was 61%, compared to 60% in the same period of the prior year.  Q2 2007 and YTD gross profit margins rose slightly due to the increase in higher margin transaction processing revenue. 

Q2 2007 product development expenses were $2.6 million, or 11% of revenue, compared to $2.1 million, or 11% of revenue, in Q2 2006.  YTD product development expenses were $5.5 million, or 12% of revenue, compared to $4.2 million, or 11% of revenue, in the same period last year. Year-over-year, product development expenses rose primarily due to the redeployment of resources from certain integration and consulting projects to product development in Q1 2007, and the Company’s continued investment in the expansion of its suite of PBM services. 

Q2 2007 selling, general and administrative (SG&A) expenses were $6.4 million, or 28% of revenue, compared with $4.3 million, or 23% of revenue, in Q2 2006.  Increased costs in the quarter related to one-time charges for recruiting and severance, as well as higher legal consulting costs related to the preparation for Sarbanes-Oxley compliance.  Going forward, the Company is committed to continuing to manage its costs aggressively. YTD SG&A expenses were $12.3 million, or 26% of revenue, compared to $8.2 million, or 22% of revenue, in the same period last year.  Year-over-year, SG&A expenses rose primarily due to the ongoing investment in personnel and infrastructure costs to support the Company’s current and future growth, and a significant increase in public reporting costs resulting from the listing of SXC’s shares in the U.S.  

Adjusted EBITDA¹ for Q2 2007 was $4.9 million, or 21% of revenue, compared to $4.6 million, or 25% of revenue, for the same period of 2006.  YTD, Adjusted EBITDA was $11.2 million, or 24% of revenue, compared to $10.4 million, or 27% of revenue, in the same period last year.  Year-over-year, higher adjusted EBITDA primarily reflects the increase in revenue and in particular, transaction processing revenue, partially offset by expense increases in product development and SG&A.  

Income before income taxes was $4.1 million in Q2 2007, compared to $3.3 million in Q2 2006.  YTD income before income taxes was $9.6 million, compared to $7.0 million in the same period last year.  In fiscal 2006, SXC incurred a blended tax rate of approximately 17%, while in fiscal 2007, the Company expects to be taxable at a rate between 30-33%. 

SXC reported net income of $3.0 million, or $0.14 per share (fully-diluted), in Q2 2007 compared to net income of $2.1 million, or $0.12 per share (fully-diluted), for the same period last year.  YTD SXC reported net income of $6.7 million, or $0.31 per share, compared to net income of $7.7 million, or $0.43 per share, in the same period last year. 

Although YTD gross profit and net interest income increased by $6.2 million and $1.9 million, respectively, net income decreased $1.0 million primarily due to increases in income taxes ($3.6 million), SG&A costs ($4.1 million), product development costs ($1.3 million), and depreciation and amortization ($0.7 million).  Net income for the first six months of 2006 included a one-time lease termination charge of $0.8 million, and a tax recovery of $0.7 million. 

Liquidity and Resources

SXC has a strong balance sheet from which to pursue its growth initiatives.  At June 30, 2007, the Company had cash and cash-equivalents of $74.7 million, compared with $70.9 million of cash and cash-equivalents at December 31, 2006.     

2007 Financial Guidance

SXC is revising its guidance for fiscal 2007:

§         Consolidated revenue of $95 to 97 million

§         Adjusted EBITDA of $22.5 to 24 million

§         Pre-tax income of $19 to 20.5 million

§         For 2007, the Company expects to be taxable at a rate of approximately 28%, resulting in forecasted earnings per share (fully-diluted) of $0.63 to $0.68  

Notice of Conference Call

SXC will host a conference call on August 2, 2007 at 8:30AM (ET) to discuss its second quarter 2007 financial results.  Mr. Gordon S. Glenn, Chairman and CEO, will host the call. To participate on the call, please dial 416-644-3426 or 1-800-814-4861.  A replay of the call can be heard by dialling 416-640-1917 or 1-877-289-8525 and entering the reference code 21241240.  The taped call will be available until August 9, 2007. 

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.

¹Non-GAAP Financial Measures

SXC reports its financial results in accordance with Canadian generally accepted accounting principles (“GAAP”).  SXC’s management also evaluates and makes operating decisions using various other measures.  Two such measures are book of business and adjusted EBITDA, which are non-GAAP financial measures.  SXC’s management believes that these measures provide useful supplemental information regarding the performance of SXC’s business operations.   

Book of business is management’s estimate of the total revenue expected to be recognized over future periods generally not exceeding three years based on the existing portfolio of in-place contracts at a point in time.  It is composed of two components: (1) revenue expected to be recognized over such period from in-place renewable contracts related to transaction processing, and maintenance contracts described as recurring revenues in the above discussion; and (2) revenue expected to be recognized from in-place professional services and systems sales contracts, described as non-recurring revenues in the above discussion.  SXC’s book of business at any time does not indicate demand for the Company’s products and services and may not reflect actual revenue for any period in the future. 

Adjusted EBITDA is a non-GAAP measure that management believes is a useful supplemental measure of operating performance prior to net interest income (expense), income taxes, depreciation, amortization, stock-based compensation, debt service, and certain other one-time charges.  Management believes it is useful to exclude depreciation, amortization and net interest income (expense) as these are essentially fixed amounts that cannot be influenced by management in the short term.  In addition, management believes it is useful to exclude stock-based compensation as this is not a cash expense.  Lastly, debt service and certain other one-time charges (including lease termination charges and losses on disposals of capital assets) are excluded as these are not recurring items.  

Management believes that adjusted EBITDA provides useful supplemental information to management and investors regarding the performance of the Company’s business operations and facilitates comparisons to its historical operating results. Management also uses this information internally for forecasting and budgeting as it believes that the measure is indicative of the Company’s core operating results. Note however, that adjusted EBITDA is a performance measure only, and it does not provide any measure of the Company’s cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliation of adjusted EBITDA.  

Adjusted EBITDA does not have a standardized meaning prescribed by GAAP.  The Company's method of calculating adjusted 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 adjusted EBITDA to net income is shown below:  

About SXC Health Solutions

SXC Health Solutions, Inc. (SXC) is a leading provider of pharmacy benefits management (PBM) services and healthcare IT solutions to the 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 Federal, provincial, and, state and local governments, pharmacy benefit managers, managed care organizations, retail pharmacy chains and other healthcare intermediaries. SXC is based in Lisle, Illinois with locations in; Scottsdale, Arizona; Warminster, Pennsylvania; Alpharetta, Georgia; Milton, Ontario and Victoria, British Columbia. For more information please visit www.sxc.com.

Forward-Looking Statements

Certain statements included herein, including those that express management's expectations or estimates of our future performance, constitute "forward-looking statements" within the meaning of applicable securities laws.   Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies.   We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements to be materially different from our estimated future results, performance or achievements expressed or implied by those forward-looking statements.   Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, our ability to achieve increased market acceptance for our product offerings and penetrate new markets; consolidation in the healthcare industry; the existence of undetected errors or similar problems in our software products; our ability to identify and complete acquisitions, manage our growth and integrate acquisitions; our ability to compete successfully; potential liability for the use of incorrect or incomplete data; the length of the sales cycle for our healthcare software solutions; interruption of our operations due to outside sources; our dependence on key customers; maintaining our intellectual property rights and litigation involving intellectual property rights; our ability to obtain, use or successfully integrate third-party licensed technology; compliance with existing laws, regulations and industry initiatives and future change in laws or regulations in the healthcare industry; breach of our security by third parties; our dependence on the expertise of our key personnel; our access to sufficient capital to fund our future requirements; and potential write-offs of goodwill or other intangible assets.  This list is not exhaustive of the factors that may affect any of our forward-looking statements.  Investors are cautioned not to put undue reliance on forward-looking statements.  All subsequent written and oral forward-looking statements attributable to SXC or persons acting on our behalf are expressly qualified in their entirety by this notice.  We disclaim any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.   Risks and uncertainties about our business are more fully discussed in our Annual Information Form. 

Certain of the assumptions made in preparing forward-looking information and management’s expectations include: maintenance of our existing customers and contracts, our ability to market our products successfully to anticipated customers, the impact of increasing competition, the growth of prescription drug utilization rates at predicted levels, the retention of our key personnel, our customers continuing to process transactions at historical levels, that our systems will not be interrupted for any significant period of time, that our products will perform free of major errors, our ability to obtain financing on acceptable terms and that there will be no significant changes in the regulation of our business.

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Jeff Park	Dave Mason	Susan Noonan	Judith Sylk-Siegel
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