CORPORATE FOCUS
Firm Gives Wrong Directions On Wall Street, Pays the Price
By LAURENCE DARMIENTO
Staff Reporter
First Consulting Group Inc. is an exercise in frustration for Wall Street.
The Long Beach-based information technology consulting firm has slowly recovered from the tech bust by cutting costs and pursuing new growth opportunities.
After two years of successive losses, First Consulting finally eked out a profit in 2002, and seemed on its way to repeat that in the second quarter until yet another earnings warning that irked some analysts and caused its stock to drop.
“They have an extremely strong brand and do quality work for customers,” said Tim Byrne, an analyst with Robert W. Baird & Co., who rates the stock a hold. “But they need to spend a little more time getting their arms around the business and doing what they say they are going to do.”
The 23-year-old company, which went public in 1998, provides consulting and technology services to the pharmaceutical industry, medical care providers and health insurers, among others.
The firm, which had forecast earnings of 3 cents to 7 cents a share for the second quarter ended June 30, revoked its prediction on June 24. It said it now expects to lose 11 cents to 14 cents, blaming the shortfall on a significant downturn in its pharmaceutical business.
Analysts aren’t upset over the losses per se. The technology sector has been spotty for many firms, and from a longer-term perspective it has performed relatively well. It’s the unevenness of its performance when it comes to earnings and projections.
“What has plagued them is managing the Street,” said Sean Jackson, an analyst with Avondale Partners in Nashville. “Whenever you miss numbers, that is obviously a concern.”
The company grew significantly in the late 1990s as clients geared up for Y2K computer transition. In addition, health plans and health-related Web startups spent huge amounts on IT services and hardware.
But then the Internet went bust, and First Consulting lost $13.9 million in 2000 and $6.9 million in 2001. The company responded by cutting personnel and other expenses, and reported net income of $1.9 million in 2002, even though revenues were flat.
Another source of new growth has been outsourcing, which involves taking over the operation of hospital information technology systems. First Consulting’s first contract was for seven years and $228 million with New York Presbyterian Hospital.
But earlier this year First Consulting announced that higher-than-expected outsourcing contract costs, as well as a change in accounting methods and other problems, would cause it to lose money in the first quarter.
The stock, which was trading near $7 a share, fell to about $5 before recovering in May and June to around $6 again recently.
The company blamed much of its second-quarter troubles on a move by pharmaceutical companies away from custom-built software to track drug development to cheaper off-the-shelf products.
In response, First Consulting announced it was laying off 70 employees, or 10 percent of the workforce in its pharmaceutical division, and accelerating investment in an off-the-shelf product already on the market.
Long term plans
Jackson noted that winning or losing one contract could often have an immediate impact on a mid-size firm like First Consulting, with about 2,000 employees. Nevertheless, he downgraded First Consulting to a hold from buy earlier this year.
Now, all three analysts who cover the company rate it a hold. And the second warning prompted Byrne to issue an icy research note that portrayed First Consulting management as taking “one step forward and two steps back.”
Repeated calls to the company were referred to Chairman and Chief Executive Luther Nussbaum, who could not be reached for comment.
The company is betting it can profit from a growing movement in health care aimed at reducing medical errors, partially through the use of technology that digitizes doctors’ prescriptions and patient records.
The systems allow doctors to write prescriptions on hand held or other computers, which can alert them of dangerous drug interactions. There is also less chance that pharmacists can misinterpret a doctor’s order.
However, the push toward such systems has slowed over concerns that the devices’ complexity can cause their own difficulties. Cedars-Sinai Medical Center halted the use of its own new system earlier this year.
