WALL STREET CORP REPORTER INTERVIEWS MR. ROBERT YELLOWLEES, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF NATIONAL DATA CORPORATION

I have been in the information business for almost 40 years and have been on the board of directors of National Data Corporation for 15 years. I have been involved directly in the management of the company for seven years.

National Data Corporation

In a phrase, you can call us ndc.com. What others are talking about doing with the Internet and other network capabilities, we have been doing for years. We are one of the world's largest EDI network-based information companies. We handle more health transactions on our network than anyone in the world. The company has a unique data warehouse that allows us to covert that data to information. Our systems combine the ability to move large quantities of transactions with the collection of that data and put it in a useful format. For example, we help pharmaceutical manufacturers determine factors related to the acceptance rates of new drugs that are being launched.

The information that we provide them helps modify their investment in sales and marketing in order to maximize the return on that investment. Information from our database helps pharmacies determine pricing in a competitive environment. We also provide other services that help them ensure they maximize their profitability. In addition to healthcare, in our e-commerce business, we are one of the world's largest processors of consumer payments using credit cards, debit cards and checks. If you buy a meal in a restaurant, charge services at an automobile dealer or pay your cellular phone bill with a credit card, chances are that you are using NDC to do that. Many people don't know our company even though they or their customers are using our products to deliver services. NDC processes transactions and provides information.

When you buy a new pair of shoes at a retail merchant, we provide them with the terminal and when your credit card is read on that terminal, the electrons are passed over the telecommunications network and come to us in Atlanta. We then authorize that merchant to provide the merchandise and send that information to your bank so that you can be billed at the end of the month. We also assure that the merchant's bank account is funded with the money that you spend for that pair of shoes. In healthcare, if you go into a pharmacy with a prescription, the pharmacist will enter that information into a system that we provide. A PC with software. The pharmacist checks to see if that drug is going to have an adverse reaction against other drugs that you are taking.

We then send the transaction to an insurance company and they will confirm that they will reimburse for that prescription and specify the co-payment amount. The pharmacist will give you the prescription and charge you the amount that you owe for it. Whether the transaction that is going on from a pharmacist to the healthcare insurer or from a credit card terminal to the bank, we write the software, but we also own and manage the network and computers that run all of that. In fact, we handled 3.5 billion transactions last year. At Christmas, which is typically our busy season, we handled over 650 transactions per second in our Atlanta center alone. That is a lot of electrons going through our system!

Smooth transactions

A heavy percentage of our revenues are recurring so we do the same business for the same customers, hour in and hour out and day in and day out, 365 days a year and our processes get pretty well ironed out as we do that. In addition, we work very hard to be clear about our strategies and we have good people that know their business. We have an unusual depth of management for a company our size. We have people that have been managing large complex operations for a number of years.

A global company

Most of our business is in North America and only about 2% of our business is outside this continent. That is mainly in the United Kingdom. In the UK, we do electronic payments and cash management for large multinational corporations that transfer funds around the world. We provide banks with the systems and software to do that. We also have a strong presence in the pharmacy market in the UK doing the same type of things that we do in the U.S. to allow pharmacists to handle prescriptions. In healthcare, in North America, we have the number one position in pharmacies and are number one in hospital EDI as well. We have more capabilities than anybody in the physician segment.

In addition, we have a strong presence in the data warehousing information business. We would characterize ourselves as the largest multi-segment health information provider in the world. There are a few companies in health information that are larger than NDC, but they tend to be specialized in a narrower segment of the market. The information flow throughout the entire health network needs to be integrated. For example, people tend to see multiple doctors and occasionally use hospital facilities. They also visit pharmacies that have to deal with insurance companies.

Our pharmaceutical manufacturers' customers need to find out which drugs are the treatment of choice. We are in a unique position to be able to integrate that information flow because we have a presence in more segments of the market than anyone else. Of the $1 trillion a year being spent in the U.S. in healthcare, we are still spending about $180 billion a year on administrative costs. So it is still a very paper intensive business and there is a lot of room for efficiency.

In fact, a recent Senate study showed that approximately $325 billion a year is being spent on treatment that is less than fully effective. Usually that is because information is not available for the provider at the time there is an encounter with the patient. For example, if you see a doctor, the doctor doesn't always have information on your particular disease state readily available. Certainly they don't have information on your medication history. Because, at best, they know what prescriptions they gave you, but do not know what other doctors have written. In fact, it is estimated that 1.5% of all prescriptions cause an adverse drug reaction, often because they have incomplete information.

Revenues

About 60% of our revenues today are generated from healthcare and that has been growing a little faster than e-commerce. Although healthcare is relatively less penetrated, we think there are good opportunities in both areas and intend to continue to invest actively in both. One of the things that helps us is that we have very strong cash flow. In fact, our $750 million a year business generates about $130 million in cash. That cash flow gives us the capacity to invest in growth in both businesses.

Growth strategy

The company will grow in the future through both internal growth as well as acquisitions. That is because the industries that we are in are both relatively young and so there will be consolidation in both. We would expect to periodically make acquisitions. Frequently, it gives you faster time to market to acquire a company in a new area that you are not in than to develop that yourself. That is why we think there is a role for acquisitions that is strictly an alternative to internal development in an area that is a direct extension of what we already do.

For example, in healthcare, we decided to make our initial presence in the physician area through acquisitions because we felt that we could acquire people that knew that market and already had products or services. Even though those services were network based and we could bring some synergy to that, they knew some things about the market that we did not. It is easy to let your ego get in the way of reality and assume that you can do things better than anyone. The reality is that often there is somebody that knows it better than you and it is better to simply acquire them.

Sales and marketing

The company has a very sophisticated distribution system. In some cases, we will sell directly. In others, we sell our products and services through other companies. For example, in the pharmacy business we sell systems directly to the pharmacies, but we also provide network services to other companies that sell in that area. In the credit card business, we provide services to banks, but there are a large number of independent sales organizations that are emerging and we provide services to them as well. The issue is what is the lowest cost and most efficient means of distribution. In that sense we are not any different from a manufacturer.

Ongoing contracts

We have contracts with our customers that have varying characteristics because we do so many related things. The contracts are tailored to the particular services that the customer needs. A customer may contract with us for transaction processing healthcare claims, which would have different characteristics from one that is putting a system in a pharmacy. That, in turn, would be different from credit card processing for a bank. However, in all cases, we have contracts with our customers.

Up and running

Particularly in the information business, the time it takes to get a system up and running depends on what the customer wants. It can take from a matter of days to in some cases weeks or even months to implement a system. For most of our services, we can have a customer up and running in a matter of weeks.

Inventory

Relative to our asset base, we are not inventory intensive. NDC carries a minimal amount of inventory of the systems that we install in pharmacies as well as dental and physician's offices. Since we sell a total system, of course, we carry a small amount of inventory there. The same is true with some credit card reading devices. The inventory turns over rapidly so we don't have much of a worry about obsolescence even though we are dealing with advanced technologies. Most of our assets are in our networks and our database management techniques as opposed to inventory.

In that sense, it is a very nice business model because it allows us to leverage a fixed investment with incremental transaction volume. In addition, it is a business where there are barriers to entry because while we try to keep it simple in terms of what we do the actual performance of it is fairly sophisticated. We also find that there are continuing opportunities in the market. For example, the Internet offers a significant opportunity to us over time because it is extends purchasing capabilities to new users and new environments and as transaction volume grows that is good for our business.

Today less than 30% of all consumer purchases in the United States are done with a credit or debit card. If you can extend that to more people utilizing the Internet, that increased mix of non-cash payments will be good for our business. Similarly, we see the Internet as providing new distribution alternatives for us. We are using a lot of the Internet technologies internally to link together and communicate amongst the systems that we have. That is just one example of change that we think is quite positive for us. Another is the growing awareness of the cost and quality issues in healthcare that demand more information in a more timely way and that as well creates demand for our services.

Potential customers

In healthcare, we tell potential customers that we can give them the ability to reduce the cost of paper handling in their office, improve cash flow for them, and provide them with more time for decision support and clinical applications. In the future, we hope to provide information that allows them to have information such as the medication history at the time they are seeing the patient, which will improve the quality of care.

On the other hand, we help the pharmacist handle the filling of prescriptions in an accurate way and ensure that their customers will be satisfied by not keeping them waiting or giving them a drug that is going to cause an adverse reaction. We also help them with cash flow by ensuring that the claims are processed in a timely manner. And we help them manage the inventory in their store and automatically reordering to replenish their inventory.

Shared information

A major area of opportunity for NDC is the sharing of common information. Right now, a lot of information is entered multiple times so that information may be sitting someplace in the healthcare system, but somebody that needs it does not know that it is there. Such as the medication history of patient. We do that today in pharmacies. In fact, most prescriptions that are filled check for adverse reactions if they are using our system. Unfortunately, most physicians don't have that information available before they write the prescription.

Taking all of that into consideration, you can imagine how important it is to move this information and have the ability to store and repackage it in a way that is useful. That is the business that we have been in for 22 years in healthcare. As a company, we are uniquely positioned because of the need to network information since we have been doing it for a long time. And we have a broad reach in our ability to collect information and disseminate it to people who need it. In addition, we have a strong business model with a high growth rate, high recurring revenues that provide a safety net for investors. We have strong cash flow to fuel the continued growth of the company.

Updating systems

We are able to upgrade our customers' systems as new technology becomes available, although in some applications it may not necessarily improve the timeliness of information. For example, if we are providing reports to people on a monthly basis and they analyze them over a couple of weeks, to use new technology that is going to get them the reports an hour earlier really is irrelevant. However, a pharmacist with a patient at their counter needs to have information on drug interactions, have the claim approved, check drug enforcement numbers and check for the appropriate pricing in the geographic area they are in very quickly so as not to keep the customer waiting. Retail pharmacists are under a lot of competitive pressure these days and so customer service is very important to them.

Research and development

The company spends a substantial amount of time and money every year on research and development. In fact, in a typical year we spend in the range of $15 to 20 million on research and development.