塞納 (CERN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerner Corporation's second quarter 2007 conference call. Today's date is July 24, 2007, 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, perspectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Securities and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the 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 "Risk Factors" under Item 1A in Cerner's Form 10-K, together with other reports that are on file with the SEC. At this time, I'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Thank you. Good afternoon, everyone, and welcome to the call. I'll lead off today with a review of the numbers, followed by sales and operational highlights from Mike Valentine, Executive Vice President and General Manager of the U.S. Trace Devanny, our President, will then discuss our global business and some strategic initiatives. And Neal Patterson, our Chairman and CEO, is traveling today.

Now, I will turn to our Q2 results, which included strong bookings, revenue and earnings performance. Starting with bookings. Our total bookings revenue was $486.8 million, including $97.8 million related to the next tranche of our U.K. bookings, as previously discussed. Bookings, excluding the U.K. booking, were $389 million, which is 25% higher than the year-ago bookings and equal to an all-time high for adjusted bookings set in Q4 of '06.

Bookings margin in the quarter was $412.2 million, included in the U.K. bookings and $314.4 million excluding it. One thing I want to note on the U.K. bookings is that to date we have booked about $467 million of approximately $800 million in original contract value for southern England and London. Much of the remaining contract value reflects the value of support, which we don't include in bookings and values we have risked out to reflect minimum expected contract value. Going forward, the risked down items will roll into bookings in smaller increments that we don't expect to be material enough to break out from our other bookings.

Moving to backlog. Our total backlog increased 32% year-over-year and ended the quarter at $3 billion. Contract revenue backlog ended the quarter at $2.5 billion, which is 36% higher than a year ago. Support revenue backlog was $513 million.

From a top line perspective, we delivered strong revenue growth in Q2, with total revenue increasing 17% over Q2 '06 to $386.6 million. The revenue composition was $130.1 million in system sales, $97.7 million in support and maintenance, $148.5 million in services and $10.3 million in reimbursed travel. System sales revenue was up 14% over Q2 '06, with an all-time high level of hardware sales driving much of the strength. Services revenue grew 22% compared to the year-ago quarter, driven by continued strong managed services and professional services growth.

Support and maintenance revenue grew 16%. Our gross margin for Q2 was 79.1%, which is down 150 basis points from a year ago and 110 basis points from Q1. Due primarily to the record hardware sales and lower than normal margins on the hardware.

Our operating expenses before option expense in Q2 were $252.2 million, which is up 14% over a year ago, with professional services and managed services growth being the primary drivers. As indicated in our release, tax expense for the quarter was increased by $2 million due to adjustment of foreign tax NOL's and a decrease of the reserve for uncertain tax acquisitions in accordance with FIN 48. This additional tax expense was offset by lower taxes on certain global income in the quarter, which resulted in an effective tax rate of the projected level of 37%. The geographic mix of global income should normalize going forward and we anticipate the tax rate will be around 37% for the remainder of the year.

Moving to earnings. Our GAAP net earnings in Q2 were $31.1 million or $0.37 per diluted share. GAAP net earnings include stock options expense, which had a net impact on earnings of $2.7 million or $0.04 per share. Adjusted net earnings were $33.8 million, which is 25% higher than Q2 of last year. Our adjusted EPS was $0.41, which is equal to consensus estimates in the high end of our guidance range.

Our operating margin before options expense in Q2 was 13.8%. This quarter, our operating margin was impacted by about 100 basis points due to approximately $26 million of 0 margin revenue from our projects in southern England and London with Fujitsu and BT. Our Q2 operating margin without this revenue was 14.8%, which is up 50 basis points compared to Q2 of last year.

Now, I will move to our balance sheet. We ended Q2 with $282 million of cash and short-term investments. Total debt was $198 million, which is $10 million less than last quarter. Total accounts receivable ended Q2 at $365 million, which is up $7 million compared to last quarter. Contracts receivable, or the unbilled portion of receivables, were $119 million or 33% of total receivables, which is down from 39% last quarter.

Our DSO was 86 days in Q2, which is down five days compared to a year ago and down three days from Q1. The record low level of DSO was driven by record cash collections of $438 million that included strong collections both in the U.S. and worldwide, including collecting cash related to release R1 in England as we previewed last quarter.

Third party financings were $23 million or 5% of total cash collections. Operating cash flow for the quarter was $63 million. Q2 capital expenditures were $51 million, including $19 million of property expenditures related to our new data center and new building. Capitalized software in Q2 was $16 million.

Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was negative $4 million. Free cash flow before property expenditures was $15 million. As indicated last quarter, we expect capital expenditures to slow in the second half of the year, which will lead to stronger free cash flow. And we expect free cash flow momentum we have exiting 2007 to continue in 2008, as we continue growing operating cash flow and moderating capital expenditures.

Moving to capitalized software. The $16.2 million of capitalized software in Q2 represents 25% of the 65.7 million of total spending on development activities. Software amortization for the quarter was $13.3 million, resulting in net capitalization of $2.9 million or 4% of the total. Going forward, we expect the net capitalization rate to remain in the low single digits.

Now, we'll go through the guidance. Looking at Q3 revenue, we expect revenue in the $385 million to $395 million range, which is approximately 13% higher than Q3 '06. We expect Q3 EPS, before options expensed, to be $0.44 to $0.45 per share, which reflects growth in the mid-20% range. The Q3 guidance is based on total spending before options expense of around $255 million to $260 million.

Our estimate for options expense for Q3 is approximately $0.04 per share, bringing Q3 to a range of $0.40 to $0.41 after options expense. For bookings, we expect bookings revenue in Q3 of $365 million to $380 million, which reflects about 7% growth over Q3 of last year, which was an all-time record for bookings at that time. Attaining the mid point of this guidance will also put us at year-to-date bookings growth of more than 20%.

For the year 2007, we expect EPS before options expense to grow in the mid-20% range. This expectation is consistent with EPS before options expense in the range of $1.72 to $1.73, with a high end of the range reflecting $0.01 increase from where consensus was the last time we provided guidance. Our estimate for options expense in 2007 is approximately $0.14 to $0.15 for the year.

With respect to 2007 revenue, we expect revenue between $1.55 billion and $1.57 billion, which reflects growth of 14% to 15% over 2006. Our 2007 revenue guidance assumes approximately $100 million of revenue and expense from the contracts in London and southern England, yielding no net margin, as we've discussed. With that, I will turn the call over to Mike.

Thanks, Marc. Good afternoon, all. Today, I will start by discussing some sales highlights and marketplace trends and then cover some operational highlights. From a sales perspective, we had another strong quarter. With good contribution from all major segments, including academic medical centers, Children's Hospitals, integrated delivery networks, community hospitals and physician practices. Our contract volume was very high in Q2 with a record 383 contracts. 12 contracts were over $5 million, six of which were over $10 million. 15% of contract bookings were for new Millenium footprints. This is a slightly lower percent from outside of our base than our historical average, but based on the mix of our pipeline, I expect to see this number at a higher than average level for the second half of the year.

From a leading indicator standpoint, we continue to see strong levels of vision center visits, site visits, RFP activity and our pipeline remains strong. One area of strength I want to highlight is our CareAware MD Bus device connectivity solution, which allows medical devices to be connected to an EMR through a USB-like connection.

Q2 was very active in this space with nine new clients signed, bringing our total to 11. We also had our first client go live earlier this month and they are very happy with the early results. This is a great start for us on this initiative and our pipeline and prospective clients is strong.

We are also making good progress towards rolling out our line of medication-dispensing devices called CareAware RX Stations. Client interest remain strong and we are still targeting the end of the year for shipping and production units.

On the competitive front, the landscape remains active and varies by market segment and region. Overall, we believe we remain well-positioned, given the industrial strength of our architecture and solutions and our experience at delivering real value to clients in a predictable timeframe and at a predictable cost. A trend in the marketplace that we believe is helping further differentiate Cerner in our client base is more emphasis on outcomes-based measurement. One example of this is that independent analysts organizations like KLAS have gone beyond simply counting the number of live CPOE sites and expanded their research to include majors such as CPOE value proposition, which measures physician buy-in, depth of use, patient safety.

Cerner has consistently led in the number of live sites on a modern architecture, as well but we view our dominant position in the value proposition as more important and more strategic. Similarly, HIMSS Analytics has gone beyond counting sites by measuring depth of adoption in stages ranging from 0 to 7 on their EMR adoption model. Currently less than 20% of U.S. hospitals are at Stage 3, which includes clinical documentation, decision support and Pax.

Our analysis indicates that our Cerner Millenium client base has achieved more than double this level, with over 40% of our clients at Stage 3. In my view, there are two key takeaways from this data. First, together with our clients, we are accomplishing great things with our software and services. Our clients take pride in these accomplishments and having this strong community of users positions us well in the current market environment where buyers want to buy from a supplier that has a proven ability to deliver predictable results.

Second, even with these accomplishments, overall adoption is still low and there remains a significant opportunity for Cerner and the HIT industry as hospitals move up this adoption curve. In fact, we believe there are several stages of adoption beyond what HIMSS Analytics has defined that we are well positioned to capitalize on, given the progress we've already made with innovations such as Lighthouse clinical process optimization, CareAware MD Bus device connectivity and our Cerner Millenium Helix genomic information solution.

One other recent study I'd like to briefly touch on is the KLAS Nursing Adoption of IT Report that was released earlier this month. The inaugural report contains detailed analysis of IT adoption in nursing areas and has generated a lot of interest in the industry. The results are very positive for Cerner. Cerner Millenium achieved the highest overall adoption marks in the study, which was calculated by looking at both adoption and satisfaction.

Cerner's depth of solutions, integrated architecture and broad client adoption were also evident in the survey's results, with several clients identifying integration with other applications as a key differentiator. Cerner also had the highest percentage of surveyed clients using [Alaris,] with 86% using them. These results, combined with our number one ranking for value proposition in the KLAS CPOE Digest, highlight our ability to ensure all clinicians derive significant value from the Cerner solutions that they use to provide patient care.

Another trend that is favorable for healthcare IT and Cerner, in particular, is the increased presence of paid performance plans that require reporting on safety and quality outcomes as part of the reimbursement process. This trend is positive for healthcare IT because it's difficult for hospitals to gather data and report on it without an electronic reporting system. And it's particularly good for Cerner because Cerner Millenium is better designed to capture all of the required data than less sophisticated systems or systems that consist of multiple disparate databases. Through Cerner Millenium, we're enabling providers to give better quality of care and transparency of data through programs like pay for performance help give consumers more control of their healthcare decisions.

Moving to operational results, we had another quarter of strong execution in our professional services organization. We turned on another 349 Cerner Millenium applications, bringing the cumulative conversions of Cerner Millenium applications to more than 6,700 at over 1,100 facilities. Our progress at CPOE continued in Q2, with four additional acute care CPOE sites going live, bringing our industry-leading total to 135. We also have a large number of CPOE conversions scheduled for the second half of the year. Nobody has close to as many sites on a modern platform as we do now.

And as I mentioned earlier, not only do we have the largest number, the largest count, but our clients are deriving more value than the clients of any other suppliers from our platforms. We remain focused on extending this differentiation in the marketplace by continuing to raise our standards, while lowering our clients' total cost of ownership. Examples of this include Cerner Works hosting capabilities that have led to four 9's of availability; implementation tools and methodologies that significantly reduce the effort while improving the quality of the outcomes; and our Lights On network surveillance system that enables the capability to predict and prevent system and application issues, while providing a platform to actively share good practices with our client base. With that, I will turn the call over to Trace.

Thanks, Mike. Good afternoon, everyone. Today, I'm going to discuss our global progress, our physician practice business and our help the employer services initiatives. On the global front, we had another very strong quarter. Even after excluding the $98 million booking-related to the next tranche of our U.K. projects, our global bookings represented an all-time record with strength from multiple regions. In England, we continue to make progress at bringing solutions live on the national program for IT, as the software provider in two regions representing 40% of Great Britain.

Since our last call, we have brought solutions live at several more sites. We now have a total of 30 sites and 149 solutions live, which is up from 24 sites and 99 solutions last quarter. While some of this progress has been covered by the media, I am sure many of you are aware there continues to be some negative media coverage of the program and in some cases, of Cerner and our partners. We have made several improvements on the usability of the software to address clinical adoption. We will continue to make steady progress across England by working closely with trusts, the NHS and our partners as this program becomes more widely deployed.

Looking ahead, our pipeline of global opportunities remains very strong and we expect continuous strength from this business. I would now like to discuss our PowerWorks physician practice business, where we continue to make steady progress. Our enhanced EMR, based on our Millenium 2007 release, has improved our competitiveness in this market and has led to solid sales growth, both into our existing base, as well as new physician practice relationships. We are also continuing to receive traction with many of our acute care clients as they look to use their Millenium PowerWorks solution as their strategic platform to link to community-based physicians.

Another positive development is that we are seeing instances where a footprint established with our powerworks solution has helped us in non-Cerner acute care opportunities. This activity reinforces our belief that a common architecture and platform, supporting both the inpatient and outpatient environments, is strategic to our clients.

In Q2, we continued to make progress across several of our employer-focused initiatives that we have branded, healthy employer services. We have been selected by a second employer to provide a fully-automated clinic, based on our own successful on-campus clinic. This initiative has proven to provide real productivity and cost savings to Cerner, while improving the health status of our associates.

In addition, we are very pleased to have been selected by another employer to provide our healthy exchange third party administrative services or TPA. As we have said in previous calls, we terminated our TPA in 2006 and became the first employer to utilize the healthy exchange platform. We look forward to extending this important initiative to other employers, as we help them reduce the administrative friction in their own healthcare environment. Overall, we are very happy with our progress on these exciting new initiatives and look forward to providing you more detail in coming months.

In closing, we are pleased with our results this quarter and with our progress around various strategic initiatives. Consistently delivering strong results, while steadily increasing momentum around future growth opportunities is a hallmark of our Company and this quarter was no exception.

Before turning the call over for questions, I would like to make a brief comment about our good friend and colleague, Paul Black. Paul announced on July 13, he would be retiring from Cerner at the end of August. As many of you know, Paul has been a significant contributor to the near tenfold increase in Cerner's topline growth that has occurred during his tenure. We are fortunate that Paul's responsibilities have been assumed by very capable leaders and we expect no business disruption related to his departure. Paul will be missed and we wish him that best in the future. With that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Steve Halper with Thomas Weisel. Please proceed, sir.

Yes, hi. My question was on cash flow. The free cash flow numbers, I was expecting positive free cash flow in the quarter. Was the number below your expectations? If so, why? And what is the outlook for the second half Year? I was wondering if you could give us a firmer estimate on free cash flow for the full year?

Yes, Steve, this is Marc. We were expecting basically expecting somewhere around break-even free cash flow for the quarter, so, being $4 million negative was probably within our range of expectations. One of the things in the quarter, the high hardware sales did have an impact on us a little bit, in that while we had good strong cash collections, we also had to go pay for that hardware that we sold in the quarter. So, it was a little bit of inflow, outflow relative to those items.

Going forward, I'm not sure we're in the mode of giving specific cash flow guidance, but I think we would expect to see growth on the operating cash flow line and we should -- we definitely will see a moderation of capital spending, So we will be free cash flow positive in Q3 and that will improve more to go relative to Q4. With our expectation certainly that we finish the year with positive free cash flow and with a goal of at least getting in range of '06 amount, which I think was around $40 million. But I think basically from our vantage point, improving operating cash flow, reducing CapEx, will turn us positive and that will drive us forward toward getting to the '06 levels.

So, it sounds like the goal is to be even with the '06 level at this point?

That would be the goal. I think that's -- we're going to be at least striving for that and I think that's not unreasonable. We may be within $10 million of it, I don't know today relative to the exact numbers. But I think that's a range that certainly we're looking at relative to cash.

Great. And relative to the --?

And, Steve, I'd make the point that relative to going forward to 2008, clearly our CapEx will continue to remain at the lower levels we expect to see relative to the end of this year and see strong operating cash flow increases in '08. So, that should be a significant increase of free cash flow once we move into the '08 year.

So, you're not expecting any major, you know, buildings, data centers in 2008 that you haven't told us about yet?

We are not expecting anything that we haven't told you about. That is correct.

Thanks.

Your next question comes from the line of Ross Muken with Deutsche Bank. Please proceed, sir.

Hi, guys, it's Mike in for Ross. Congrats on another strong quarter. I just want to talk a little bit about the RFP activity you're seeing. As you look both domestically versus internationally, can you talk about where the RFP's are coming from and what you expect to see for that trend over the next 12 months?

This is Mike. I will answer for the U.S. and let Trace tackle global. In the U.S., what we're seeing is a representative sampling relative to the market. So, the market size, the composition between academic medical centers, community hospitals, IDN's, we're seeing a balanced level of activity across there.

So, it's not coming from one particular segment. And I think there's also a flavor within each one of those segments of some what we would describe as rebounds. Where people have attempted a strategy and it's not worked for them and now they're coming back to the marketplace. And we're having sort of a second shot on goal opportunities. And that's a flavor that exists within each of those segments, as well. Trace?

Yes, Mike, regarding the global marketplace, we continue to see strong interest across all major markets around the world. We had a very balanced performance in our global business. We see activity in most of the major western countries around healthcare reform. And we're beginning to see a great deal of activity in countries that we haven't necessarily had on our radar in the past and that's Eastern Europe, India, Russia, specifically, in Eastern Europe and then the Far East. So, we are bullish on our opportunities to continue to exploit the Millenium advantage in these other markets.

Great. And then just one other thing, you touched on this briefly, in terms of being able to go back to your existing installed base and selling some of the new product offerings, can you go into a little more detail in terms of whether it's the Pax-type products or some of the other stuff that you're finding success with in your existing installed base?

Yes, again, this is Mike. What -- we measure, what we describe as white space. So, the opportunities to expand on Millenium footprint across the 57 solutions in each one of our client. And you've heard us talk about the relationship model that we've put in place, where we essentially have a single accountable executive for each one of our clients. And one of the main objectives of that individual is build a road map together with that client so that they have full visibility -- we have full visibility to their expectations and their strategies going forward and vice versa. We have the opportunity to position our solutions in that white space.

So, I think that's giving us a higher degree of confidence. I think that's only going to improve over time as we cover more and more of our installed base with these accountable executives. And then, I would just say that there's the trends that we see around critical care, the ambulatory environment, imaging solutions, that being markets that are still very active, I think we would say that within our installed base, those are still very real opportunities. But, again, our objective is to create a balanced radar across our entire installed base, our client base of this white space and be building road maps with our clients around those solutions.

Great, thanks, guys. Congratulations again.

Your next question comes from the line of Atif Rahim with JPMorgan. Please proceed.

Hi, thanks. Could you elaborate a little bit more on the hardware sales during the quarter? You said they reached a record but what percentage of the system sales do they constitute at this point? And what are the trends you see for the balance of the year?

Yes, this is Marc. We don't give out necessarily componentry on the system sales line. What I can tell you is, kind of the $30 million over-attainment in bookings related to the top end of our range relative to guidance, probably about $10 million of that was hardware. So, it was a good, strong contribution. The VAR's were a little less than we have historically seen because there were a couple of singularly large transactions there. But it was overall strength in that marketplace for us. So in a quarter where software was probably a little bit low expectations, we ended up with hardware above expectations and drove out our gross margin dollar number, which is kind of what we focus and run the Company on. So, don't really have the breakout, but I can say, relative to kind of the bookings number that gives you a sense of where that over-attainment came from.

The remainder of it was fairly balanced on the services side. With, as I indicated, software being probably slightly lower than the number in our guidance. And that's primarily due to lower percent of new business from new clients. At 15%, a lot of those deals bring with it more software. Mike indicated, toward the end of the year, we expect to see that pick up relative to the percent of bookings from new clients. And that will bring with it software that will put us back on plan.

Okay, thanks. And then secondly, on the tax issue, I think you said your tax increase increased by $2 million this quarter. And still if you strip out the options-related tax, it comes out to less than 37%, which is what your guidance was for the year. So, are we going to see the tax rate lower for the back half of the year or should we assume it's 37% as well?

Yes, as in my comments, we indicated that we expect the balance between the certain geographies in global that might have a lower tax rate to kind of normalize and we think 37% is the number that we'd recommend people use in modeling out the finances for the rest of the year.

Okay. And then finally, do you have a timeline for Millenium '08, the launch date for that?

Yes, this is Mike. What -- literally we're projecting it in 2008 and when we land on the exact content to be in that release, we will give more specific guidance. But at this stage, we're naming it Millenium '08 because that's exactly when we think we're going to get it.

Okay. All right, thanks.

Your next question comes from the line of George Hill with Leerink Swann. Please proceed.

Yes, good afternoon, guys. Marc, I just wanted to be sure I heard you right. Did you say that R1 was accepted and that you guys did receive a cash payment for that?

That is correct.

Can you tell -- did that happen during the quarter or after the quarter close?

As is our norm, our call always includes things that occurred during the quarter if we don't specifically say it. So, it came in during the quarter. We kind of previewed that on the call last time and it went as expected.

Okay. With regards to the FIN 48 adjustment, could you maybe just give us a little more color around what the changes to the evaluation allowance, what new information you guys realize about the NOL's and where they're coming from?

The best place for that, George, is probably going to be in our Q. I don't think there's anything that's going to change anybody's analysis relative to that but we will have an opportunity to lay it out more clearly on an item by item basis there.

Any chance you would give us a little more color with respect to the bookings in the quarter, managed services and international?

The key is relative to the over-attainment in Q1, management services drove a lot of the on over-attainment, as I kind of indicated earlier this quarter, it was hardware, probably $10 million of it. And the rest of it, strong contributions from professional services and some from managed services. But managed services was definitely more normalized this quarter, which we were pleased with, given the very strong Q1 we had.

And I'll say, Mike, maybe you can speak to this, Neal is not on the call. But interestingly highlighted in the press release, you talk about the achieving of strategic initiatives during the quarter. Could you provide a little more color on what you guys feel like you're accomplishing that doesn't show up in the financial statements?

Yes, I would say that the progress that we're making with the innovations that we've launched in the last 18 months, were solid in Q2. So, CareAware, really as a platform that not only leverages Millenium, but can exist on its own outside of the Millenium footprint. The takeup rate and the market interest and the fact that we've had go-lives and we've got a solid pipeline, that's very encouraging to us. The progress that we've had with employers that Trace mentioned is encouraging and the activity we see in front of us is solid. The bread and butter, the core that we've been focused on in reducing our total cost of ownership, all of those initiatives continue to contribute for us and help differentiate us in the marketplace. So yes, I would comment that the things that we've launched over the last 12 months, 18 months, are becoming very real and having a difference in terms of how we approach the marketplace and where we see it going.

All right. I'll hop back in. Thanks.

Your next question comes from the line of Glenn Garmont with First Albany Capital. Please proceed.

Thanks, good afternoon. Marc, I'm sorry if you addressed this and I missed it, but when is your best guess as to when you'll be able to generate some positive margin from your U.K. initiative?

Yes, Glenn, I haven't talked about it on this call. It's remained consistent. The ability to start recognizing margin is dependant upon completion of all the undelivered elements and those are still expected to occur in 2008. So, that's the same guidance we've had for some period now and that hasn't changed.

Okay. And then just a quick follow-up. Mike, with regards to the percent of bookings coming from new customers, 15%, I believe, in early '06, it was hovering closer to 30%. Is there anything else going on there? And do you think you can ultimately get back to that 25% to 30% of bookings in the back half of the year from customers? Thanks.

Yes, Glenn. My answer is absolutely. The expectation that I have is that the back half of the year will see a higher mix than average, from our net new Millenium opportunities. So, it fluctuates, as you know from our meetings here, but our expectation and what we're seeing in front of us in terms of the next 18 to 24 months pipeline, combined with the things that we've done to continue to improve our win rate and our competitiveness, has me feeling that that rate will trigger up, at least in the back half of this year.

Okay, great. Thanks for the comments.

Your next question comes from the line of James Kumpel with Friedman, Billings and Ramsey. Please proceed.

Thanks. It's actually James Kumpel. And Trace, can you talk a little bit about the global bookings as a percentage of the total and where you see that maybe trending? If you can quantify that, that would be great.

This is Marc. We don't -- just a precursor to Trace, we don't break out kind of the componentry of the bookings between international and global. But I'm sure Trace can give us a sense of kind of just the global marketplace.

Yes, James, thanks for the question. As I mentioned a moment ago, we continue to be very bullish on the global healthcare IT marketplace. As you know, historically, the U.S. market has typically four to five years in front of what we see coming out of the these various countries. We like the fact that these governments -- much of medicine around the world is socialized and when they make decisions, they're very large decisions. And our proven Millenium architecture that scales so very nicely and then the key to our success in Great Britain will serve us and has served us well in other countries around the world. So, we are seeing increased activity levels. They all have aging populations. They all have huge investments in healthcare. And I think we're well-positioned to take advantage of that.

Can you maybe give us some way of benchmarking you guys in terms of the next new opportunities and maybe over the next two to four quarters, where we might be seeing meaningful contributions?

Specific to the global business, James?

Yes.

I think countries -- and we're -- as you know, historically, we've never left the country when we have made a commitment to enter a country. And that's an important statement because it's a big decision. We have a process whereby we evaluate emerging opportunities and I think that has served us well to date. Evidenced by our success in France.

You will see more activity coming out of Spain, clearly more out of France, as well, but Germany, Italy, Turkey, Poland, Russia, all have very active environments. The Netherlands, the Scandinavian countries are a bit more mature. And of course, the Far East offers great opportunity. We will be very cautious as we consider our next move. I would offer up that India is a very attractive market in so far as it is English and we have a significant presence there today. So, I would say in 2008, you should look for all of our existing countries to continue to contribute. And then perhaps India, maybe one other country by the end of '08 would be of interest to us. And that other country might be Taiwan or Hong Kong.

Again, this is Marc. The issue with kind of putting out milestones relative to global business is that a lot of it is government-related. A lot of those procurements, once they have an initiative to go by, can take -- can go quickly or it can take a very long time. So, you can understand why we can kind of talk a high level that we see the demand out there but really today it's a little early for us to start putting kind of benchmarks or yardsticks in different countries. There is also a little bit of a competitiveness issue. When these countries go, it will be one supplier wins and we just assume, other than covering most of the globe as Trace and his Company (Laughter) be a lot more specific than that for the near-term.

My final question, this is all international now, is -- Trace, can you comment about the McKesson contract in it the southern region, with Fujitsu on the pediatric side and whether or not it might be appropriate to assume that certain vendors might take off isolated opportunities in some of the existing markets in the U.K.?

Yes, James, it's not unusual for pieces outside our scope to be put in play. Various -- relationships are very important in every market in which you do business and sometimes those relationships lead to pieces of business that weren't otherwise on our radar. So, we are -- well, we have a very strong pediatric offering. McKesson was well-placed there. It wasn't in our scope and they won that piece of business.

Thank you.

Jim, this is Marc, you will see in the U.K., that the good news for us is that while we have a very large contract in two of the regions, we have not sold nearly all of our available solutions. So, there will be opportunities to go back into those. With respect to those specific ones, that was an area that we did not sign up to do in our original contract. And our expectation, really, for a localized version of that, it wasn't a high priority for us. So, all in all, given the small impact it has primarily kind of the schools and other nonacute areas, we're fine with any supplier that comes in and furthers the goal of that program.

Okay. Fair enough. I appreciate it. Thank you.

Your next question comes from the line of Richard Close with Jefferies and Company. Please proceed.

Yes, thank you. Congratulations. I was curious, maybe, Marc, I know you don't break out international bookings and domestic bookings. But could you give us maybe some details with respect -- did the growth rate in the U.S. bookings accelerate sequentially, that is as compared to the first quarter's growth rate in domestic?

Richard, without providing -- breaking out the two and actually I couldn't even necessarily tell you the answer to that right off the top of my head. We're a global business and we are focused on the overall growth of the Company and we manage the business very much as if it's a global business. So, there was strong contributions in the U.S. strong contributions globally. We over-attained our number by $30 million over the top end, so, you really kind of have to hit on all cylinders for that to happen.

Okay. And then you mentioned something in your commentaries with respect to not breaking out the U.K. bookings on a go-forward basis. If you could just go over that again and maybe provide some additional details on why that is?

Yes, the primary method that we kind of use -- the original book -- contract for the south cluster and for London, which totaled about $800 million in total, was to bring it into bookings kind of on a milestone basis until we get to the minimum contract commitments. On that basis, we've recognized and broken out and kind of segregated $467 million worth of bookings. Of the $800 million, probably $250 million of that will be support-related, which isn't an item that we put in our bookings.

So, you end up with a number that's less than $100 million and it will come into bookings, basically, as we continue to make progress on the project in very small increments. So, at this point, the follow-on bookings and selling outside those contracts in the U.K. is going to be a more material impact than the recognition of those small milestones.

If at any particular quarter it would have a significant impact, we'll certainly tell you about it. But there's no other big milestone that, at least in our mind, investors would have on their radar relative to tracking the progress there.

And then what's the timeframe on those remaining bookings flowing in?

The contract extends to 2014, probably most of those would flow in between now and probably 2010.

Okay. And then just one final question. With respect to the physician practices, you talked a little bit about that. Originally when you acquired that operation at around 30,000 physicians, if I'm not mistaken, how many of those have converted over to the subscription model and are, in fact, on a percentage basis using the EMR product?

Yes, this is Trace. Without being specific and giving perhaps some interesting competitive information, we have had had hundreds of our clients that were acquired through the VitalWorks acquisition that have moved to our subscription model and even beyond that. So, to the full scope of our capabilities, which greatly exceed many of our competitors in that we have the ability to support lab results, images and enforce the pharmaceutical data.

And as they move, all of those have the EMR available.

Okay. But you still have growth within that existing base to upsell those doctors that you acquired essentially -- relationships?

Yes, the same points that Mike made earlier about what we described as white space clearly is represented by this acquisition and the many, many client/physician relationships that come with that acquisition of VitalWorks.

Okay, great, thanks. Congratulations.

Your next question comes from the line of Sean Wieland with Piper Jaffray. Please proceed.

Hi, thank you. Of the 12 big deals larger than $5 million, can you assign any kind of commonalities to the win reasons for those deals in terms of maybe vendor displacements or did the majority of them use managed services? Or give us some kind of idea as to what your win reasons are for these big deals.

Yes, this is Mike. About 1/2 of those had some component of managed services with them. And I would say that they would probably have, in the neighborhood of five to seven applications bundled with them. So, it's a combination of larger managed services, expansions or new footprints. And Millenium Solutions.

And was there any particular vendor out there that was -- that you're winning most often against?

Well, again, it's -- part of what you see is there is white space, so, that means we probably competed with multiple vendors for that white space. And then, some would be new footprints and we talked about what the competitive landscape looks like earlier in the call. So, it's a mixture.

Okay. Second question is on the U.K. Marc, can you give us -- I know your guidance stands or what you said stands for how U.K. flows into the model but I think you said earlier, the second half of '08 is when you expect some operating margin contribution from the U.K. Can you give us, in terms of the top line contribution, is it going to be kind of in line with what you're seeing in '07? And any idea on contribution margins from that U.K. business in '08?

Yes, I think from a revenue standpoint, we think it would be consistent with what we're seeing today, when you look at '08. We have not been really specific necessarily in '08 when that occurs. In fact, for most people we're recommending that to the extent that you start putting margin in '08, that it's toward the last half or further back in the year just to minimize the impact that ha because . that's a little bit of a wildcard relative to it occurring. We have to tie down the date that that's going to happen. And when that happens, as we've indicated, the overall margins of that business are higher than our 20% operating margin target that we discussed with investors. And given that we will have deferred recognizing margin on some of the early elements of the revenue, the contribution margin from that will be in excess of that

Okay. And the mix between system sales and services? Will that remain the same?

Yes, it's varied between 10% to 20% system sales and the remainder being services. So, that's probably a reasonable range.

Okay. Last question, any success with the Vital partnership, have you had any traction with that yet?

VitalWorks?

Vital Imaging, I'm sorry.

Vital imaging.

It's still pretty early. So, we haven't -- I would't say it's anything that's -- we're still getting that -- how we're going to work together figured out. So, there's nothing to report from our side, anyway, on that front.

Okay. Thank you very much.

Your next question comes from the line of Charles Rhyee with CIBC World Markets. Please proceed.

Yes, thanks. Just in case -- I apologize if you've already touched on this but I was looking -- you guys had some pretty strong bookings here the last, call it, three quarters or so, even excluding the U.K. portions. But however, when we're looking at the guidance that you guys have been putting out there and clearly you guys have been meeting and doing -- raising the guidance a little bit here and there. But relative to the strength in bookings, can you just give me a sense on what it is about the bookings here and sort of how you expect them to flow into revenues and into earnings, why we might not see sort of a faster increase on the earnings side? Thanks.

Yes, the -- keep in mind that relative to bookings it's all about the mix, if it comes in. And even in recent quarters we have a big mix of services and managed services. And those have a longer profile relative to when they come into the income statement.

So, what you're seeing is our backlog going up significantly during that period of time because a lot of managed services bookings will flow into the income statement over five to seven years. So, the -- a little bit of it is the impact with the managed services business being so popular and growing as a part of our -- helping to grow our bookings. That being said, we are seeing our bookings as they grow, it kind of grows from every segment. We see managed services, sometimes contribute over but most of the time, it's all of the businesses growing pretty much across the board.

So, our guidance relative to the income statement is going to reflect that we may -- our bookings number isn't all going to flow to the income statement. The good news about that is that we are much less dependent on current quarter bookings than we have been in the past. And that's been a goal for the Company to increase visibility and decrease volatility. And I think given all of the service offerings that we now present and that we're selling, I think that's worked as we planned.

So, you will see bookings growth in Q3, year-to-date will be to 20% up. The increase over Q3 of year ago is probably 7% but it's -- Q3, keep in mind, last two years has had astronomical growth in that quarter. Higher than what our traditional expectation on a seasonal basis would have been for Q3. So, I think the -- our guidance is good and strong, it reflects our strong pipeline. But that's why you're not seeing over-attainment of bookings necessarily flowing into an over-attainment on the income statement.

And just a clarification on the managed service agreements. Let's say you sign that contract today, obviously I understand that you kind of recognize it over a five to seven year period and I would imagine sort of ratably over that time. But typically, when is that first increment recognized?

Relative to the earnings?

Yes, you sign it today, that first --?

Normally those agreements will start very quickly. They will want us to buy the hardware and start the project to bring them inside the data center because keep in mind this is healthcare automation. Unless it's a brand-new client who is going to start a brand-new project on the hardware that's in the data center, if it's a flip, they've got to basically transfer their existing project. And even if it's a new project, they're going to want to kick that project off very quickly. We have to get the infrastructure ready. So, those agreements usually kick off almost immediately, relative to starting the hosting stream.

Okay, thanks a lot.

Your next question comes from the line of Frank Sparacino with First Analysis. Please proceed.

Marc, I just had one question as it relates to the Healthy business. Can you remind me of what the business model there looks like? What the revenue stream looks like, as it hits the P&L and what type of margins you have in that business?

On the Healthy business?

Yes.

The business model there is basically per member per month type of a subscription-based business. You sign up people and your fees for whatever services you're providing from TPA services to health record for the employer, all of those are normally based on a per member per month basis. And so, they will flow into income as subscriptions do, kind of on a monthly basis. Almost every business that we target -- obviously that's in a start-up phase but we strive not to get into a business that's not going to deliver 20% contribution margins. Since ultimately, to get the 20% operating margins you have to have every business contributing at or above that level. Next question?

Your next question comes from the line of Gene Manheimer with Caris and Company Please proceed.

Thanks, nice quarter. Can you talk about your international revenues as a percent of total today and where you expect -- where you kind of ballpark that, say three years out?

Yes, I can speak to that. This is Trace. We've had, as you tracked our progress over the last few years, substantial growth in our revenues from the global markets, those being described as outside the U.S. Last year the number was over $200 million, which represented roughly, if you do the math, 15% of our revenues. We expect substantial growth over that number, again here in 2007. And like most companies that are doing business on a global stage, it will become an increasingly large percentage of your revenues going forward, if you're executing. And we certainly expect that to be the case. So, it would not surprise me to see, if the next three years, that we're approaching 20%, 25%, maybe of our total revenues coming from outside the U.S.

Okay. Thanks, Trace. And with respect to the Company's goal of 20% operating margin, how would you kind of rate yourself today? Are you satisfied with your position? Are you on track or do you want to accelerate that a little bit? Thank you.

Well, we'll never be satisfied even when we get to the 20%, but I think if you look at the numbers, clearly, a little bit higher hardware in this quarter, good for earnings growth, which is our prime focus. But it puts you a little bit behind on the margin but we're within 50 basis points of where we expected to be in the quarter. So, I think that rates us maybe a "B" in our opinion. We don't give ourselves very high grades on most things unless we really knock it out of the park. But we're continuing to make good progress. And as we do on an annual basis, we will update people on exactly where we stand relative to getting to 20% in 2009. Why don't we take one more call, and then we'll have some closing comments.

Thank you. Your final question comes from the line of Todd Weller with Stifel Nicolaus. Please proceed.

Yes, thanks. Two questions, guys. One on the U.S. market, I wondered if you could just talk about activity levels at the high end of the market and it may be down in the community segment? And last question on head count growth plans going forward, what are you thinking about there? Thanks.

Okay, this is Mike. On the activity in the marketplace, I mentioned earlier, it's pretty balanced. I would say that there is -- we are seeing activity with the IDN's and academic medical centers. So, the upper end of market in terms of size, we're seeing -- we do have activity there. The for-profits are active, as well. So there is plenty of activity and it's pretty balanced. We mentioned before, I think Sean asked about competitors, there are no free shots on goals, so, I think you can expect almost every competitor to be involved in the major transactions. And that's what we're seeing. The second part of your question was --?

On the head count growth, this is Marc, we basically have seen kind of the last 12 months, about 5% growth in head count. Keep in mind that our global business has had some share of that as we wrap up for the two clusters and got them staffed. But I think kind of a 5% growth is not, net people, is not too bad. So, with that, I will go ahead and throw it to Trace for closing comments.

Yes, thanks, Marc. Well, a final thought. Broadly, we're very pleased with our Q2 performance. We see very good momentum in the U.S. We see great momentum in our global markets. And perhaps most importantly, solid traction with our numerous new initiatives that represent our growth engines for the future. So, we continue to be very bullish on HIT around the world. Specifically, the U.S. and around the world. And to that end, we expect to continue to have continued success. So, thank you for joining today's call and have a nice evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.