I spent a number of hours pulling data from OCA earning releases and SEC filings and now I have a pretty good idea of OCA's AR seasonality. My conclusion is OCA's AR typically peaks at Q3, dramatically drops in Q4 and climbs gradually in Q1 and Q2. The seasonality is a result of the following factors:

1) Its new patient starts is seasonal:

"Our affiliated practices have experienced their highest volume of new cases in the summer and other periods when schools are not typically in session. During these periods, children have a greater opportunity to visit an orthodontist or pediatric dentist to commence treatment. Consequently, our affiliated practices have experienced higher revenue during the first and third quarters of the year as a result of increased patient starts. During the Thanksgiving and Christmas seasons, our affiliated practices have experienced reduced volume and fourth quarter revenue for our affiliated practices has been generally lower as compared to other periods." (2002 10-K)

Historically, Q3 is the strongest month in terms of new patient starts. (See table)

2) A typical treatment usually lasts 26 months, or 2 years and 2 months.

This means that most new patients for Q3 (July to September) usually end their respective treatments in late Q3 or early Q4 (September to November), which is also the time the final retainer payment gets billed.

3) OCA's revenue recognition is different from its patient's payment schedule:

OCA's patients usually pay equal monthly payment in the first 25 months, then pay a final retainer fee worth 4 months regular payment. On the other hand, OCA recognizes its revenue equally throughout the 26 months. Therefore, there is an inherent gap between recognized revenue and billed revenue. In recent 10-Qs OCA has listed it separately as unbilled account receivable. As explained in the following table, in every of the first 25 months, each patient will let OCA incur around $16 of unbilled AR.

In summary, the AR seasonality is caused by this cycle:

1) Q3 attracts most new patients
2) Every month OCA incurs around $16 unbilled AR for every patient under treatment
3) After 26 months most Q3 patients get bill for the final big payment in September to November
4) Allow 1-2 months from receiving the bill to actual cash payment, then the final retainer fee for patients who start treatment in a Q3 is usually collected in Q4. Once retainer payment is made, a big part of AR is gone.
5) Therefore, a strong quarter will mean a favorable AR development after 9 quarters, and the seasonality of new patients determines the seasonality of the AR change.

Below is how the seasonality goes in the last several years.

With this study, I'm quite sure that OCA will see a significant decline in AR and strong free cash flow in the next quarter. I believe there is definitely reason to expect AR will drop by at least $20M.