Luther Nussbaum, FCG’s chairman and chief executive officer, said, Our markets continue to recover, but erratically, and reflect the uncertainty in the overall economy. While this uncertainty continues to color our near term outlook, we have created an organization that is nimble enough to weather this environment and, with the proactive steps we have taken to protect our margins, we are positioned for success as the business climate improves. We are seeing more large deal activity in outsourcing, implementation and integration services than we have seen in the recent past. As our clients gain a better understanding of how to operate in this economy, we believe that many project initiatives will start to move forward again.
Consistent with the overall market for IT consulting firms and as previously reported, FCG has experienced a slowdown in certain business units, which it anticipates will result in revenues at the lower end of its $69M to $71M projected range for the second quarter 2001. Consequently, excluding the one-time charges, the company expects to report breakeven or below results for the second quarter 2001.
Performance Outlook
After experiencing more than 100% growth from the first quarter of 2000 to the first quarter of 2001, FCG’s Healthcare Group experienced an unanticipated, longer-term slowdown of services to its health plan clients during the second quarter 2001. This slowdown is due to a combination of activities specific to one of our large clients who has slowed new project starts while evaluating its outsourcing options, but also reflects a more general trend in Health Plans.
Health Plans are facing rising costs for both provider services and drugs. Also, employers are shifting only gradually to defined contribution arrangements for their employees, which has led to a slower than previously anticipated conversion by health plans to digital business models to serve employees directly. This slower conversion pace by health plans has reduced demand in this sector and cut the number of projects in FCG’s pipeline. Consequently, the company expects its second quarter 2001 health plan business to be down by more than 25% compared to the first quarter of 2001.
However, FCG continues to see its Healthcare Delivery business rebounding with larger engagements again emerging in the areas of patient safety, cost reduction, clinical systems, ERP and compliance, all of which are driving business in this sector. While this improvement does not offset the Health Plan decline, FCG believes the gains in Health Delivery are sustainable and will continue to grow.
With the commencement of the University of Pennsylvania Health System (UPHS) outsourcing engagement, revenue gains in the company’s FCG Management Services business unit have largely offset FCG’s decline in revenue from the Health Plans during the quarter. However, similar to the company’s Health Plan business, the Doghouse Technology Services business unit has been impacted by the decline in Health Plan revenue. Nussbaum stated, As discussed in April, the downturn in Health Plans was thought to be a sales issue and not a weaker demand shift. But as we currently view the market, we see that industry demand has softened, causing lower utilization in Health Plans and Doghouse Technology Services. As a result, we have taken steps to reduce our excess resource capacity to better match market demand.
FCG’s Life Sciences business unit continues to have solid potential. The company is currently working to further improve profitability in this unit, aided significantly by the reductions in staff and by the April 2001 leadership change in the unit. FCG expects to see the improvement from these initiatives in the third quarter 2001.
In response to the business slowdown in certain of the sectors FCG addresses and in order to improve future profitability, FCG recently reduced its staff by approximately 100 people, which is expected to result in a one-time charge during the second quarter 2001 of greater than $3 million. Because these staff reductions occurred in the second half of the quarter, FCG was not able to achieve enough benefit from the reduced staff to offset the revenue decline.
Beyond the Second Quarter
FCG provided the following statements while noting that readers should reference the section at the end of the release regarding the company’s forward-looking statements in this section and elsewhere in this release:
Nussbaum said, We currently have in our pipeline a number of very large potential outsourcing and implementation engagements that could significantly improve our outlook for the remainder of the year. While our visibility is limited — as is true with all others in our space — we are focused on improving our profitability as our growth outlook improves.
FCG expects to be profitable in the third quarter 2001. Nussbaum continued, We have sized the organization to be profitable. We believe that the deterioration in our business has stopped and that recovery, though slow in some sectors, is underway. As our clients get more clarity on their own business, they will then have more confidence in their budgets, which in turn will begin to open up project opportunities. Even in this slowdown our clients continue to seriously consider potential projects. We expect to be profitable in the second half, and we believe that the second half will yield opportunities to well position us going into 2002.
