塞納 (CERN) 2003 Q1 法說會逐字稿

Welcome to Cerner Corporation's first quarter 2003 conference call. Today's date is April 17, 2003 and this call is being recorded. The company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, prospectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Securities and Litigation Reform Act of 1985. Actual results may differ materially from those indicated by forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading "Factors that may affect future results of operations, financial condition, or business," in the MD & A section and Cerner's form 10K and other periodic filings on file with the S.E.C.

At this time, I would like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please go ahead, sir.

Thanks Justin. Good morning, everyone. The structure of our call will be a little bit different this quarter so that we can get to the numbers and guidance early in the call. After my comments I will turn the call over to Trace Devanny, our President, who will provide some detail on the marketplace and what led to our bookings shortfall this quarter. Paul Black, Executive Vice President of our Client Organization will discuss the competitive environment and our leading sales indicators. Glenn Tobin, our Chief Operating Officer will discuss broad operational successes; and Neal Patterson, our Chairman and CEO, will then provide some closing comments.

Let me go through some of the numbers. Our bookings revenue for the quarter was $151.2 million. Bookings revenue includes the contract value of software, hardware and services but doesn't include future support payments. Including the present value of that future support stream our bookings number will be 40 to 50% higher. Our revenues for the quarter before reimbursed travel were $191.5 million, second highest quarterly revenue in our history. This level of revenue reflects growth of 9% over the $175.3 million in the year ago period or 15% if you adjust for last year's higher than normal levels of equipment revenue.

We have added a separate revenue line item to our income statement to report reimbursed travel. Those expenses were previously reclassed against an equal amount of related travel costs netting to zero in the income statement. Including the Q1 travel expense reimbursement of $6.7 million, would bring our total revenue for Q1 to $198.2 million. The cost of sales has increased by a like amount so the margin remains at $149.9 million. Comparable Q1 2002 revenue number is $181.4 million. Looking at the revenue composition, $78.6 million with system sales $64.9 million in services and $48 million in the maintenance and support, and then the $6.7 million in reimbursed travel.

Gross margin on revenue before reimbursed travel and expense was about 78.3%, comparable to the 76.9% in the year ago quarter. Total revenue backlog increased 21% over last year to a little over $1 billion. Contract revenue backlog for the quarter increased 20% from a year ago to $740.4 million. And support revenue backlog was $284.3 million. Margin on the contract backlog was $690.7 million and margin on support backlog was $254.7 million for a total margin $945.4 million.

Operating expenses for the quarter were $138.7 million. Up about $6 million over Q4. And in line with the guidance. Net earnings were $5.6 million in the first quarter compared to $9.6 million a year ago. And EPS was 15 cents per share compared to 28 cents a year ago. Our cash performance was very strong again this quarter. We achieved record cash collections of $224.9 million. Which drove operating cash flow of $21.9 million.

The operating cash flow was a big improvement over the negative $8 million of operating cash flow in the year ago quarter positioning us to achieve strong cash flow improvements for the year. Traditional collections were the primary driver of this improvement with less than $9 million of financing occuring in the quarter. This performance reflects the enhanced focus on our internal collection processes, the impact of database license software payment terms and our effectiveness at delivering solutions to our client. Client are turning solutions on and paying their bills.

Moving down the cash flow statement, capex was $14.3 million including $9.6 million spent on campus expansion. Capitalized software for the quarter was $14.2 million. Free cash flow for the quarter was negative $7 million, including the $9.6 million spent on campus expansion. We continue to expect total capital expenditures in 2003 to be in the 60 to $70 million range. Including 30 to $40 million towards the completion of campus expansion projects. With respect to capitalized software the $14.2 million of capitalized software was 33% of the $43.1 million cash expense on development activities and amortization for the quarter was $8.6 million resulting in a net cap [ph] rate for the quarter of 13%.

The balance sheet remains strong. Cash ended the quarter at $135 million. Accounts receivable were down 22 million to $250.6 million. And contracts receivable for the unbilled portion of receivables ended the quarter at $77.6 million. Down $6.5 million sequentially, and representing about 31% of receivables consistent with last quarter and down from prior quarters. DSOs for the quarter were 119 days, down two days sequentially and six days compared to a year ago. We are very pleased we broke the 120-day DSO milestone particularly in a quarter with lower-than-expected revenue. To be consistent with prior DSO calculations, we have not included revenue from reimbursed travel in this calculation. Doing so would result in a DSO calculation for the quarter of 115 days. Well expect to see DSOs in the current-to-slightly lower range for the balance of the year.

Moving to guidance. Let me provide our updated thoughts on 2003. We now expect 2003 revenue in a range between 840 and $860 million for the year. And that includes about $25 million of revenue from reimbursed expenses. And that drives EPS of about $1.10 to $1.15 for the year. Looking at Q2, we expect revenue in the 200 to $205 million range including about $6 million of revenue from reimbursed travel. And expect EPS between 24 and 26 cents.

For bookings we expect bookings revenue in Q2 of around 175 to $180 million. Our updated guidance reflects the carry-over effect of the lower queue on bookings on the remainder of the year. From previous guidance of $1.80 per share we reflected the 23 cent miss in Q1 and estimated a 20 cent impact of a Q1 miss on the remaining quarters of the year. Much of which hits in Q2. In addition, we are taking a more conservative view of bookings in light of the first quarter shortfall bringing us to our guidance range.

As we move through Q2, we are carefully evaluating all areas of spending growth. Cerner has always planned for the long term and spend our R&D dollars to create organic growth. And since we see a strong level of demand in the market place, we don't expect to make major changes to our strategic R & D spending. This strategy and practice served us well over the 23 years and it is the reason we emerged three years ago as the industry leader. However, as Glenn will discuss, we are looking and plan new associate hires and reviewing other areas where we can moderate our spending growth.

With that I will turn the call over to Trace.

Thanks, Marc. Good morning, everyone.

I will begin today with our thoughts on the marketplace. We believe the market of our technology is substantial. We continue to be positioned to lead this market not only because of our greater depth and breadth of solution offerings but because of our commitment to spending the necessary R & D dollars to support the needs of our clients. Nothing about our results this quarter changes this belief, or this commitment.

Fundamentally nearly all types of health care organizations now view automating their organizations as an essential strategy in eliminating avoidable, life-threatening errors, unexplainable variance in the quality of care delivery and the elimination of waste created by current paper-based and memory-based methods of practicing medicine. These views are expressed in demand for CPOE and other clinical applications. Pressure from consumers, employers, certain state governments and the leapfrog group have accelerated this trend. Improving efficiency is the only way to address the well publicized work force shortage issues we have all read about.

The realities of compliance with HIPPA will help keep the demand for Cerner's integrated solutions, to keep that demand high for Cerner's integrated solutions. As Paul Black will discuss our pipeline which in it is identified all prospective clients and the explicit solutions they are planning to purchase remain substantial. As we discussed two weeks ago, we believe some external factors including a challenging environment for our clients, and a higher level of competition did impact our results in Q1. While these issues are not new to Cerner, or this industry, we believe that they, along with internal factors, collectively impacted our ability to deliver our projected level of bookings in the first quarter.

As you know, healthcare providers have had a good three years where their volumes increased and they received increases in payments. This was a contributing factor to our previous 13 quarters of record performance. Today, we believe many provider organizations are facing an increasingly tough economic environment. As we enter 2003, we see potential for continued challenges in our segment.

Let me offer a couple of examples. Medicaid continues to be a problem because of the state budget crisis that exists in many states. The federal government is considering tightening Medicare as well. Employers continue to closely monitor the rising costs of health care that may -- and many expect to resolve in providers not getting rate increases as easily. The escalating cost of malpractice insurance is also surfacing as a concerning issue with many CEOs and boards. Another development that we are now seeing is increased competition for capital created by the need for many hospitals to consider new facilities to accommodate increased demand for care. All of these factors are compounded by a tough U.S. and global economic climate which may impact the confidence providers have in their future economic conditions.

We felt the impact of some of these factors in Q1. While we do not believe this is a start of a trend, it is something we will monitor closely. Frankly, we are encouraged by the fact that many of the financial challenges our clients face also highlight the need for the benefits that can be generated from investing in information technology.

We continue to see significant demand in the marketplace which reflects the realization by providers of the strategic significance of I.T. investments. The second environmental factor we have discussed with you is our assessment of the environment. We have been indicating on these calls for more than a year that some competitors, who are desperate to protect client base are making financial offers that Cerner has no intention of matching. In this quarter, our unwillingness to compete on price contributed to this near-term impact on our results. Some competitors try to convince clients they can avoid a switching costs related to a strategic decision by accepting a pay-for- it- if-you-like-it deal. We simply believe that this approach to pricing is an unsustainable model and will correct itself over time. It is also very important to note that this -- that this practice is used mainly inside the competitors install base. It is much less effective on new opportunities.

I wanted to make a comment on our view of the opportunities in the United Kingdom. As Neal said in our last call, all indications are the national health service in England will contract for IT systems for all public hospitals, clinics and general practitioner practices in the country. As we indicated, our investment in this area will likely increase over the next three quarters with limited incremental revenues. However, we believe we are in a position to win a good portion of this business, and that the return on these investments has the potential to be significant. To that end we just received encouraging news this week from the head of the NHS procurement process that Cerner has qualified for further consideration as both the local service provider and a national application service provider. This essentially means that we are officially a qualified bidder as both a prime and a subcontractor. This is the first major selection milestone in a very long procurement procession. We will keep you posted as the process progresses.

I would like to note that in the 2003 guidance, Marc provided, we are reflecting the continued spending on this initiative but not including any major contribution of revenue. We believe this is prudent given the pace at which the procurement process has moved and the likelihood that no revenue impact would occur before 2004.

In summary, we believe there continues to be significant demand for our solutions in the U.S. and the global marketplaces. This demand may be tempered in any given quarter by various factors. However, we remain very well positioned to capitalize on this express demand for our comprehensive setup solutions and our leadership position in the industry.

I would like to turn the call over to Paul Black.

Thank you, Trace.

As Marc stated, booking revenues for the quarter came in at $151.2 million, with a bookings margin of $127.9 million. Clearly, we are not pleased with this level of execution by the salesforce. For the first time in 39 months we failed to excelled expectations. As Trace indicated, there are several factors that led to the bookings being lower than expected. I will focus on the mix of the business we signed in the quarter and our view of business opportunity going forward.

We were pleased with the record number of deals signed in the quarter with a total of 143 distinct deals signed with 130 different clients, compared to 110 clients in Q4 and 75 in the year ago period. This number is somewhat skewed by the smaller [indiscernible] deals, but even excluding these deals we signed 96 total deals in Q1. To put that in perspective the number of deals signed in Q1 exceeds the 1999 full-year total. Clearly, this is an indication that the market is buying and that the sales force has the ability to expand the top line through executing more transactions with a larger number of clients. 30% of the contract dollars came from new clients indicating we are still continuing to have success outside our install base. Very few competitors can claim this level of market share gain for Q1.

We did have a lower-than-normal level of large deals this quarter with no deals over $10 million, and a total of six deals for $5 million. This combined with the poor showing from global are the two main reasons we missed our top line in Q1.

Solution categories worth highlighting include a steady performance in the laboratory, ambulatory, clinic, cardiology and knowledge in content businesses in Q1. Additionally, we had better-than-expected enhancement software bookings demonstrating our ability to generate add-on business from our existing clients. We continue to be pleased with the growth of our pipeline. It is now approaching $3 billion and does not include certain large global opportunities. This is particularly impressive considering the large volume of deals we have signed out of that same pipeline during the past three years.

We are still bullish about the long-term prospects for our solutions in both the United States and abroad. RFP volumes continue to be healthy. In fact, the Q1 volume of new RFPs was at the highest level we have seen in over a year. Overall activity defined as RFPs, RF5s and quotes were higher than we have seen it in over two years.

Site visits and vision center visits remain strong. And we will increase our capacity for visits to KC by opening the expanded vision center this summer. We continue to increase the number of millennium reference sites. Which as Glenn will highlight increased substantially over last quarter.

In addition to growing the overall client reference base to continue to expand our reference sites by hospital pipe, geography and the breadth of Cerner systems deployed. This gives us an opportunity to show that Cerner solutions are running in a wide variety environment to a diverse set of potential clients.

In summary, I was very disappointed with the salesforce execution in Q1 and the quarter's bookings results. However, we remain very pleased at the level of demand we are seeing and feel confident about our ability to expand our leadership position in this marketplace. We expect to rebuild your confidence in Cerner one quarter at a time beginning with Q2.

I will turn the call over to Glenn Tobin, our Chief Operating Officer.

Thanks, Paul. Good morning everyone.

Our unmatched success on the operational side of the business continued in Q1 of '03. We continued to have great success in delivering millennium solutions to our clients. During the last three months, we turned on a record 172 millennium major systems. To put this number in context, Q1 typically is a tough quarter to turn on systems, as because large numbers go live in the Q4 of the year depleting the pipeline to turn on in Q1. As a comparison to the 172 from last quarter, we turned on only 76 millennium applications in Q1 of 02. A year-over-year increase of 133%. This brings the count of live millennium applications to nearly 2,000. Q1 was an incredible quarter for turning on millennium at new health care sites.

We started the year with millennium applications running at 415 distinct sites. We ended the quarter at 460. An increase of 45 sites in one quarter. I would bet that we turned on systems at more sites last quarter than the rest of the industry combined. It was a huge record for Cerner. The breadth of applications were tuning on is incredible as well. Our clients turned on 32 different application types. As an example one application type would be pax. [ph] Another would be a pharmacy system. Again, I would challenge our competitors to match any of these numbers on the applications that they are currently marketing.

We are also continuing to have great success with multiapplication go lives. We had 12 different sites do big bang implementations with five or more applications going live at one time. Again, I challenge any of our competition to come close to matching these numbers.

Let me give you an example. One client converted 16 solutions including CPOE, pharmacy, radiology, and document management applications. The Cerner solutions are at the heart of a substantial transformation of this client's business. They are changing the way health care is delivered to their community. As a testament to the success, the hospital's CFO said, The project team and staff here and the Cerner project team have all been outstanding. I can't say enough about the efforts that both organizations have made to get us to this point. As an accelerated solution center client, this example again affirms the success of Cerner's rapid implementation business model. As we have stated in the past we tend to see a much higher number of applications per phase with this implementation approach.

It is worth mentioning another notable transformation success involving the electronic medical records and document imaging solutions. Where we automating the practice of medicine as a federally qualified health center, what makes this an extraordinary implementation, is that it is at the leading edge of driving a whole new business segment for Cerner for small-to-mid-size federally qualified health centers throughout the United States. The Cerner solutions are being hosted at our managed services center and will be used to support over 12 community health centers with 80 clinics spread across 17 counties. The federal government has been closely monitoring this and two other federally funded pilots taking place across the country. This is the first successful pilot implementation. The other two, both nonCerner sites, are struggling and may get canceled. We have already been contacted about the possibility of implementing our solution as a replacement for one of these struggling initiatives.

In addition, I would point your attention to the March issue of nursing spectrum magazine. There's an article in that issue that describes the striking benefits that our client, North Broward hospital, received by using Cerner's first net emergency medicine solution. In the article, FirstNet was given credit for improving time management and emergency department turnaround time. For example the use of wireless tablet computers eliminated wait times for medical records and test results. In a similar approach as our health sentry bioterrorism detection system, North Broward, believes the FirstNet system will also be a valuable tool for surveillance of complaints that could be related to biological agents. I would recommend reading the article for a taste of how Cerner continues to transform health care.

Turning to operating margins. Our operating margin decreased to 5.7% from 10.3% in the year ago quarter, due to the previously discussed and unexpected bookings shortfall. While we are obviously disappointed with this performance, we are more focused than ever on improving margins. With revenues growing more slowly in Q1 than expected we're focused on examining every area of our business and reducing low value added activities and expenses. We believe we have found substantial opportunities overall and will continue to act to improve our efficiency. Some of the items we are focused on include reducing unreimbursed travel and other controllable expenses, increasing the profitability of our consulting practice, deploying highly skilled people from staff support roles to frontline consulting and sales assignments, finding ways to streamline our business operations. In all cases, we are preserving the ability of our field staff to work with our clients, and the ability of our intellectual properties organization to develop the next generation of solutions that will fuel our growth going forward.

A 20% operating margin is an achievable goal for Cerner. As we have outlined in the past in some detail, the other key areas of leverage in our business model are gaining economies of scale in our support organizations, leveraging R & D investment and continuing to grow new businesses with high margin potential such as knowledge and content and managed services. All of these areas of leverage remain in tact. And we will be aggressive in taking the appropriate steps to realize the leverage in each part of our business model. We will continue to develop our revised plan to get to 20% margins, and we will be saying more about that in the future.

With that I will turn the call over to Neal.

Thanks, Glen. I will make a few comments and open it up for discussion and questions.

First, we are all terribly disappointed with our results in this quarter. Our guidance always reflects management's best view as to what we believe the business will deliver. This executive team's goal is to -- is to consistently deliver results against this guidance. We have been fairly accurate over the past three years. However, this is not an exact science, and the market conditions are constantly changing. We will continue to share with you our best assessment of internal and external environments and their impact on our business.

Our best view today is that there remains a large demand for health care -- by health care providers for advanced health care information technology solutions. We belief that our results in Q1 reflect the impact of an increasingly challenging economic environment for providers that will -- that may impact their ability to make commitments on their original time frame. While we have indicated some of -- impact on competitive pressures, the majority of the change in Q1 were decisions that were deferred.

In my comments on April 3, I referred to an 18-month window relative to competition. I think there has been some misunderstanding of what I meant with that comment. We believe that three significant things will play out during this 18-month time frame.

First, some of our competitors will struggle to deliver what -- to deliver what they have been selling as their promises of their vision. And we will continue to excel at delivering highly advanced reliable solutions. We are beginning to see the first signs of this struggle as some of our competitors begin to miss delivery dates and clients are disappointed with the real capabilities of what they have purchased. Second, we believe that the survivor behavior of some of our competitors will have changed because of the current approach is -- of retaining clients is not sustainable. And third, and most importantly, Cerner is currently changing the game in this industry by introducing an even more advanced solution platform, integrating medical knowledge and cutting-edge human interfaces into the most comprehensive contemporary applications available. We have a history of leveraging our vision, and ability to innovate to raise the technology standards in the industry and will continue to do so.

In other words, we remain the leader in this industry, and we expect to continue in that role. Leveraging this leadership in the marketplace is the strongest and most successful experience and experienced salesforce in the industry. We have more than tripled our sales force over the past several years. We will continue to expand it as necessary to ensure good coverage of the market and to compete effectively with larger sales forces of some of our competitors. While sales results were below our expectations in Q1, this team has been responsible for 13 previous record quarter bookings.

Even in the current environment, we still believe there is significant opportunities ahead at Cerner to grow our business. Adds Trace and Paul discussed the market fundamentals that created our high growth over the last three years still exist. Our leading indicator, a $3 billion pipeline, support this statement. In the long-term, health care is driven by such a strong set of fundamentals, like demographics and science, and have such large internal issues like medical errors, inefficiencies and quality, that can only be solved with powerful IT solutions. Because of these factors we believe that our long-term future is extremely bright.

Cerner maintains an extremely strong competitive position in this industry. As we indicated in our January 23 call, the market share we gained over the past three years is amazing. We went from about 10% of revenue share of the top six HCIT suppliers in 1999 to 20% share in the -- in 2002. Doubling our market share in these four short years. We expect to be able to continue taking market share from competitors in the future.

These market shares have put -- these market share gains have put us in an enviable position from an install base perspective and we currently have over 1700 clients in nine countries. In the U.S., we have relationships with two-thirds of the major health systems and about 40% of the largest independent hospitals. Within this base, we have an enormous opportunity to increase the number of millennium solutions per client, which currently stands at about four per client. And we are currently offering over 40 different solutions, and we have plans to offer 50 over the next couple of years. This is a breadth of solution that we believe that cannot be matched, particularly on a common architecture. And we have a accomplished this with Millennium. The ability to sell back into our base is an opportunity that has increased significantly in the past three years as we dominate the HCIT market.

A couple other comments about our current capabilities. Our professional service organization is a critical element of our strength in this marketplace. With over 1900 consultants that are now quite experienced with Millennium. We believe we have the largest professional service organization in the world focusing on health care. This organization has performed at a high level during this rapid growth period turning on more than 1200 major applications since the year 2000.

Our commitment to R&D is a hallmark for Cerner. It has driven the organic growth we have enjoyed over the past two decades. Our ability to envision, design and develop technology solutions from the health care industry is unmatched. There is no doubt in my mind that the significant amount of market share we have taken in this market over the past four years is directly correlated to our investment in developing technology solutions.

As I commented above, we believe we will see, in 2004, another R&D-driven improvement in our competitive position. We also understand that we need to maintain our focus on the business fundamentals so we can keep our business model strong and continue generating funds for ongoing investment in technology.

We remain focused on improving operating margins and operating cash flows. Clearly this quarter's lower bookings and revenue impacted our operating margins.

However, as Glenn discussed, we are focused on returning to an upper trajectory aimed toward our long-term goal of 20% operating margins. Another area of focus for us has been to improve cash flow. We are pleased with the progress in this area. We believe the past two quarters, reflect the significant improvement in our cash flow. We believe we can continue to improve our operating and free cash flow going forward.

In summary, we continue to be focused on building a great company, selling to the health care industry and which will, in our opinion, grow tremendously over the next ten years due to the demographic pressures. We had a -- in a great sector, health care computing, which has in our opinion, the most compelling value proposition of any information technology segment in our society. We have a great team that has engineered Cerner into a leadership position. Where we nearly doubled our market share over the last four years.

The results of Q1 represent a reminder letting us all know that the path ahead is seldom straight. It resulted in a broad review of our business, and there is no question in my mind that we will make some relative quick improvements to -- on how to manage our business and we will become an even stronger company with a better plan for the future. We are the leader in the industry with an extremely strong express demand for our solutions. And we have a business model with a significant amount of untapped leverage. With that, Justin, I will turn it over to Q&A

The question-and-answer session will be conducted electrically. If you want to ask a question, press the star key followed by the digit 1 on your phone. Anyone using a speaker phone, please make sure the mute function is turned off so the signal won't reach the equipment. Limit yourself to one question at a time. We will proceed in the way you signal us. Once again, if you would like to ask a question, please press star 1 on your touch-tone telephone. If you find your question has been answered, you may remove yourself by pressing the pound key. We will pause for a moment to assemble the roster.

Our first question comes from James Kumpall [ph] with Raymond James & Associates Inc.

Good morning. Just wanted to see if you could comment on the irrational pricing notation from two weeks ago, and is irrational pricing in the eye of the beholder? In other words, are some deals unprofitable for you but profitable to others? And just in conjunction with that, if you had won the Kaiser half a billion dollar deal would you have recognized a half a million dollars in revenues immediately? That's it.

Trace, do you want to hit the rational pricing question.

Yeah, I think, James, certainly a fair question. What we are seeing in the marketplace, I don't want to overstate it, but it is some pretty desperate pricing measures. Pay-us-if-you-like-it as I mentioned in my comments is not a sustainable model we think has a long-term future. I think the issues around protecting one's install base has become a desperate situation for some of our competitors, and I think they are doing things that are not in the long term in the interests of their company or their clients. So we have seen that behavior now for some time. We do not expect to match that behavior. And we're not sure how much longer it will continue, but it is not something we consider to be a surprise or a long-term strategy that has any chance of success. Relative to Kaiser, I will let Marc make a comment on that.

Obviously, Kaiser would have been a big deal that would have been spread out over a period of time. So, you know, I would have definitely enjoyed the opportunity to figure out how revenue would flow, but at this point, it would have flown over some long period of time.

Okay. Thank you.

And let me -- James, this is Neal. With regards to the irrational for one company and rational for another? The basic answer to that question is what your belief is. Is your belief in what kind of investment you have to make in R & D? So if you think that the technology solutions that have been acquired and rolled -- to roll up strategies that existed in the 60s, 70s, and 80s meet the needs in the next two decades, then -- you could probably price at the level some people are pricing. If you believe there will be a substantial --- IT requires a substantial investment and if that solution has not existed in the past, if you couldn't acquire it through a rollup strategy. If you believe that, then no it is not a sustainable for anybody.

Okay.

It's where you come down on the -- what the solution of health care is, and I will tell you as a matter of fact, healthcare is the most complex industry. Because we are dealing with biology in the world. So it is easier to make machines work than it is to make healthcare organizations work. Now, it is a perspective you have with regards to R&D.

Thank you.

Moving on to Glen Santiangelo [ph] with Smith Barney.

Just a follow up to that first question. Can you give us a better sense of how much pricing is down in the current year versus maybe it was a year or two or three ago?

Glenn, this is Marc. I think that -- on the deals that we are talking about, on the irrational pricing, we're the not doing those deals. We won't go to that level of pricing.

But the problem is you have to capitulate on price. Your margins go down. If you don't capitulate, revenues go down. I'm just trying to get a sense of how irrational is it? I mean is pricing significantly off from a year ago?

It is not significantly off. That was going to be my point, Glen. The deals we are signing we are not seeing significantly different discounts than we have in the past on the software side of the business. And on the services side of the business actually I think we are seeing some price increases coming through. So, you know, that takes out the segment of things that we are not going to go basically give software away for free because of the value we provide.

Thank for the comments, Marc.

Our next question comes from Sandy Draper of Robinson Humphrey.

Thank you. My primary question is on the software development size on the spending there. It definitely was -- you indicated was up. You expect to continue to spend. I guess it was up higher than I expected. Do you sort of think this 20 plus percent year over year growth is where you expect to be? At what point would that moderate? And a follow up is just a quick question, Marc, what do you expect the tax rate to be? It bumped up a little bit higher this quarter? I don't know what that was related to.

The tax rate basically reflects the impact of permanent differences. There are things that flow through the income taxes that permanently affect that rate. The smaller your earnings are, it has an impact on the tax rate. It was lower earnings -- that permanent difference raises your tax rate. It is a function of the level of earnings and not a function of anything special on the the tax side.

And Sandy, Neal, with regards to the R&D spend, the -- we have a very aggressive plan laid out for this year to get us into this -- the '04 stuff that I have been talking about. I do not see it growing -- it will not -- I will put it this way -- it will not grow at the same rate from '04 out.

And, Sandy, I would also just make the point that we did acquire zincs memory devices last year which grew through acquisition some of that spending. Q1 of this year you will see the impact of the amortization of the capitalized software kicks in. That accrues during the year and kicks in in the following year, so some of that increase you will see Q4 Q1 is related to increases in the amortization expense.

Thank you.

And we will take our next question from Darren Malhoona [ph] with Piper Jaffrey.

I want to get more detail on your revenue guidance. You have traditionally guided such that 85% of revenue comes out of backlog and 15% out of current quarter bookings. Is your '03 guidance if you back out the reimbursed travel expense at that same ratio? Or have you become more conservative?

Yeah, Darren, as we go through and look at the revenue, I think we thought it was appropriate to be somewhat conservative in the guidance we provided. Clearly we want to make sure that we see the bookings come through that we get our visibility back on the booking side, and so we -- I think you can assume that we will be slightly less with our guidance pulling out of current quarter bookings.

Okay, so is it fair to think that may be more like 90-10 rather than 85-15?

It would probably be somewhere between the 85 to 90% range, closer to the 90.

Okay. So modestly more conservative on that ratio?

Correct.

Great, thanks, guys.

And next question is from Ray Balchi [ph] with Bear, Sterns.

Good morning. A two part question on the environment. One, I think Paul mentioned 30% of your bookings in the March quarter came from new clients which obviously is a great rate. But it's down from where you previously had been. My question is excluding anything from the UK, that could come in this year in bookings, what is your assumption of bookings for new clients for the balance of the year?

This is Paul. The -- my assumption for the balance of the rest of the year is that we did back up to the range where we were in the 40% range. We were teetering around the 40s. The high 30s, low 40s all of last year. In the prior year. My expectation of the salesforce is we will get back up to that range.

Okay. Is it safe to assume you are assuming that implicitly in the June quarter booking guidance or is it sort of a little bit of a ramp?

I would say -- this is Marc, that when we look at the pipeline there is enough new clients sitting in there, Ray, spread throughout kind of the next four quarters that we think is -- is likely that we can be closer to the 40% range on new bookings. It obviously can vary quarter to quarter just between the deals that come in.

Sure, sure. And then just my final part of that question is, have you given thought to sort of contingency elements to your financial plan to the extent some of the economic issues that pushed up sales in Q1 persist. What other sort of leverage do you have and what have you consciously thought about doing to sort of run your plan in and run your business to the extent that some of these issues continue?

Well, I think, Ray, as Glenn talked about we are doing a very comprehensive review of all of the spending we do, just to make -- you know to measure the value that it adds to the company. We have grown so much over the last few years that, you know, looking at the level of growth and spending moderating that growth probably makes a lot of sense at this point in time. So that being said, R&D is still a major component of our strategy, we will continue to invest in R&D. I think the guidance we provided indicates some rationalization of the spending, but does not include anything -- any major differences, and I think you kind of see that as a -- relative to your models I assume as you start building them. We are going to continue to be look at spending, and if for some reason, the trends change, we will run this company at the appropriate levels. But, right now, the marketplace is strong, the -- we think it is prudent to wait and see kind of what the next couple quarters deliver from a booking standpoint.

Thank you.

And moving on, this question will come from Seth Rank [ph] with AG Edwards.

Good morning. Thanks for moving the call around. I appreciate it. In terms of just strategically, the sales cycle, I was wondering, I don't know, Neal or Trace or Paul, who wants to address this, but I mean some of what we have heard is a little bit more pushback from doc's on some of this. Obviously the sale in the past has been, you know, geared to the hospital, to the CIO, the board, the CEO. But at the end of the day, in order to get that ROI, the doc's have to use it and be on board and with, you know, reimbursement pressures, HIPPA hassles and all that kind of stuff, I am wondering about the extent to which you are seeing and hearing that that's an issue. You haven't mentioned it. Maybe it is at a low level. Maybe the right question is, do you see that as any sort of concern at a slightly higher level going forward?

Seth, this is Neal. I will take the first shot at that. I think it is a great question. It has a great deal of insight into it.

It frankly is something we talk about internally that -- that the -- kind of the enthusiasm that grew relatively quickly in the marketplace. Particularly around the connecting physicians connecting to the information technology. That -- will that top and/or will that decline? Particularly decline as people actually use the technology?

Here is the basic assessment, straightforward. It is not the factors that is affecting -- that affected the first quarter. I personally did not see it, and I'm -- what Paul and Trace, they can comment on it, and Glenn, if they saw it out there. The -- I think it is a, you know, a factor that might affect the future, but it is a transition, and I think that Cedar Sanai, you know, well publicized, I have the site right now, well publicized doctors, the doctor meeting, you know, kind of puts this on the radar.

So it is a risk out there. I don't think -- I think there may be a bit of that out there, but I don't think it will be major. For these reasons -- the rest of the environment, particularly nursing, is absolutely committed to going paperless. And I'm talking about going paperless. Because nursing is the heart of the health care system, that if you have the -- if you have part of the information in the electronic record and part of it on the paper record, they are the ones that have to go find it and put it all together to make the right decision. And to my surprise, that has become a very vocal group with regards to complete automation of the care process, and are driving -- and frankly the shortage in nursing increases their power. So the doctors, even though I think there might be other bit of a backlash out there, will be surrounded by pressures to go do it. And then the younger doc's just expect it.

In the worst case you are dealing with you're segmentation in the medical group and you are dealing in -- and age will be part of the segmentation, and those doctors, even the old doctors, their mothers are on the Internet. So they -- it is -- it is a good question. I don't think it is a significant risk but it is a potential risk out there.

Do you guys want to comment? It is probably more than you wanted to hear.

No, no. That was good. I think you bring up the right point, which is you get these things any way you can. The nurses do work for the hospitals. You have a lot of nurses working for you, so I guess maybe the only follow-up, if I would be allowed to ask that is to Paul, Is there any tinkering with the approach it there? Are you comfortable with where you are so that, you know, you can adjust the pitch and sort of the leverage you are pushing with the most senior nursing staff in these hospitals, especially the bigger ones, because at the end of the day, the doctors grind to a halt if the nurses are unhappy? That's a truism, so is there any adjustment you need to make there, or you feel like you are optimal?

No, I will start this, and Trace, you weren't down with us at the nurses -- there was a major nursing meeting last week, or the week before, I believe. That the nurses are -- we are making adjustments, there's no question we are making a bunch of adjustments. But, the good news here, we have been doing incredibly well in the nursing phase. Frankly, we have a large number of our client nurses who love this automation. So I am just tickled to death that -- how well nursing has kind of got on board the complete automation of the health care practice. And that is significant pressure on the voluntary medical staff. As you well pointed out. They don't want the nurses unhappy. So -- that's -- Anybody else got a --

I would just point out, Seth, we had a strong performance by our office [indiscernible] segment in the quarter, and a we feel very good about the future going forward. As Neal said, the nursing products are -- we consider to be best in class anywhere in the world. The bigger challenge I think we face is physician acceptance. It is a culture issue. As more and more physicians, as Neal indicated, come out of these medical schools, the expectation is technology will be on their desk and available in a mobile fashion. In a wireless fashion. So changing the culture and how people perceive technology to use in -- as part of their daily work is as big a challenge as the technology.

Thanks very much, guys.

This question comes from David Francis with Jefferies and Company.

Good morning. I wanted to circle back to the 20% operating margin target that you guys talked about a couple times on the call. I'm trying to understand a little bit better where the buttons are to be pushed to drive additional margin leverage in the business given we are on a revenue level today that is about twice that of year 2000. But we are looking at an operating margin picture that is kind of back to where we started back in 2000. So if there's a way you could elaborate on that a little bit more, it would be helpful. Thank you.

I think the -- as we go through -- clearly, one of the elements of our 20% operating margin is we are a software company and we need to sell software. That's one element of it which we fell short in Q1. I think as you go look at the model, there are clearly elements of leverage, our services organization, which has grown significantly over the past couple of years, it is still operating at, you know, mid-teen type operating margins just on that part of the business. And that is -- those services element of our business grows and we can grow that into the mid-20% contribution margin, which we think is a doable event, that's going to provide a significant amount of leverage. I mean that alone is worth 3 or 4 points over -- over a period of time.

I think engineering and R&D as we do have some big increases in those expenses in the last couple of years, but I think we can moderate that as we roll forward. We have technology rolling out. I think that will be another leverage point. So I will be honest, at this point in time I have not reviewed my math to 20% margins. I will do that, though, and we will have it out as we go and begin doing presentations. Kind of in the next analyst meeting season, forward-looking you will.

David, this is Neal. I will also just say that there is not a lot of costs around here that go away when you don't have a top line. So for us to hit our margins, we have to basically know our top spot. We have to be able to be on plan on our top line. Now, there are plenty of buttons here to push, and we will push them. It is not that hard. To get this to 20% operating margin. So -- our -- large amount, our quick growth caused some of the delay of getting there.

I guess if I could follow up, is it a function of the complexity of the systems that you are installing that you have to continue on the aggressive head count ramp that you have for the last several years, and to that end is there a point at which the software becomes less complex, that is such you can drive more revenue over the same number of bodies?

It is the latter. It is not the complexity. It is of -- we -- healthcare is complex. We match -- we create solutions to solve their problems. It is the repeatable processes, getting the variants out and getting the cost down and getting the appropriate teams built with the appropriate level of management, appropriate skills and getting the productivity in that work force. This is very doable.

Great, thank you.

There is other lot harder things we have to go work on. Solving -- getting completely -- automating health care is harder than running these projects on a repeatable basis.

Thank you.

And moving on, this question comes from Corey Tobin [ph] with William Blair and Company.

Good morning. Two quick things. First, you mentioned in this and in previous quarters, there is, you know, strong RFP activity and general strong demand in the marketplace. Given the opportunities are out there can you give additional comments as to whether the disappointing bookings this quarter are due to more competitive type issues or more to general delays in customer decision making?

Corey, this is Paul Black. If I look at the deals that we didn't get done that would have made the quarter, one of those would have been a competitive issue and then you could pick from three or four others that didn't happen that could happen, if it would have, we would have made it. Those are all internal client process issues that we used -- did not anticipate, account for or there was a last-minute snafu that caused us to not get through their process. Again, these are all very large transactions that go through a, if you will, a different process than what a normal purchasing agent has the authority to approve.

And so have these -- the three or four you mentioned have they -- are they gone at this point, or could they be possibly be picked up in this quarter? How do you view those now?

As we look at our bookings guidance, Corey, this is Marc, deals that are -- that didn't occur in this quarter, we have cracked to sign during the rest of the year. We do not expect, based on bookings guidance to see a blip, if you will, in Q2 of a bunch of new deals. Even when deals push it takes time to go get those deals signed. So we are not building into our guidance at this point any blips. We basically laid out our 175, $180 million booking guidance for Q2 and we will kind of wait to see the results relative to that at this point.

Okay, great. And then one quick housekeeping question. The last quarter you mentioned a competitive displacements figure, did you give that this quarter?

We did not at this time.

Okay, thank you.

We have a question from Herb Bookbinder [ph] with Wachovia Securities.

Just two quick questions, can you quantify the expenses this year in the UK? And then also have there been some delays in implementing your new financial system? And has that had an impact on getting orders?

Herb, this is Marc on the -- from the UK standpoint, we have always had operations in the UK. We've operated there for over 15 years. We are -- have expanded the sales organization there and obviously our global team is spending more time on that but it is not a hugely, today, significant additional investment as we continue to pursue these NHS activities, there will be a little bit higher level of spending going forward.

And Herb, it's Glenn, on the patient accounting solution, it is continuing to roll out, and we are pleased with the progress we are making in that regard. We feel good about it as a product as a solution, as a way that our clients are going to be able to drive substantial value as they link the operational financial, and clinical data all together in one system.

Okay, have you been able to leverage the benefits of that yet or is it too soon? I don't know how many orders you have actually taken, but I was hoping that would be a big source of giving you a competitive edge again.

Herb, this is Marc. It clearly is a driver as we have attacked successfully over the past year and a half, the community stand alone hospital markets. So it is clearly given us the foothold having that solution available, it allows us to go sell the complete package to these institutions. So, even though it is very early in its life cycle and we are not today really selling at stand alone, it is absolutely an important component of the larger 3 to $5 million community hospital deals we have signed over the last year and a half.

Going back to the UK, can you give me an idea of how many people you will have working there at the end of the year versus maybe the start of the year?

We don't have that available at this time, Herb.

Okay. Thanks a lot.

I think given the timing we will go ahead and close the call off at this time. Neal, any final comments?

With that, I thank you all for attending. Hope everyone had a good passover. And we will talk to you soon.

That does conclude today's conference call. Thank you for your participation. You may disconnect from the conference.