麥卡遜 (MCK) 2006 Q2 法說會逐字稿

Welcome to the Per-Se Technologies second quarter 2006 results conference call.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Phil Pead, Chairman, President and CEO. Sir, you may begin.

Good morning and thank you for joining us to discuss Per-Se Technologies' second quarter results. Hosting today's call with me is Chris Perkins, Chief Operating Officer, and Steve Scheppmann, Chief Financial Officer.

Before we begin, I would like to read the following Safe Harbor statement. Please be aware that certain statements made during this call will be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. These statements will include expectations with respect to future results and the assumptions upon which such expectations are based. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is found in our press release issued this morning and in our SEC filings, including the Form 10K for the year ended December 31, 2005 and the Form 10Q for the quarter ended March 31st, 2006. Also, in accordance with Regulation G, please refer to this morning's press release and our website for the reconciliation of non-GAAP financial measures discussed in this call to their most directly comparable GAAP financial measures.

Our second quarter financial results significantly exceeded our expectations due to the strong operating performance within each of our business segments. Adjusted diluted earnings per share was $0.24, which is above our guidance of $0.17 to $0.19. We also generated adjusted operating cash flow of $57 million in the first six months of this year, which is more than double our 2005 first half performance. Chris Perkins, Chief Operating Officer, will discuss our operational results in more detail later in the call. Steve Scheppmann will discuss the financial results for the quarter and the outlook for the second half of the year.

I would like to take a brief moment and discuss why we feel our company is in a strong position to take advantage of some of the most significant changes to occur in health care over the last ten years. Firstly, just to remind everyone, in our pharmacy solutions division, we maintain the largest real-time network in the health-care market, processing over 22 million transactions per day. Every day, 24 hours a day, when a prescription is filled in almost 90% of retail pharmacies, our company provides that pharmacy with vital information regarding the financial eligibility of the patient, the prescription cost information, and adverse medication alerts, to name just a few of the transactions, all in real time.

During the first half of this year, we experienced strong growth in our network services business as a result of a higher volume of transactions and our keen focus on developing new valued added transactions that help our pharmacy clients improve their reimbursement and allow them to spend more time with their patient customers. We have seen a higher volume of transactions as a result of the Medicare prescription drug coverage and we're proud to be working closely with CMS to insure that this vital benefit for seniors continues to be a seamless experience.

Another area we see the opportunity for growth in our network services business is from the anticipated increase in electronically transmitted prescriptions. Last year, more than 3.3 billion prescriptions were filled. This number does not include the increase we expect from the Medicare Part D coverage.

According to one estimate, in any given week, four out of every five U.S. adults will use prescription medicines, over-the-counter drugs, or dietary supplements of some sort, and nearly 1/3 of adults will take five or more different medications. While a majority of these prescriptions are paper based, we expect the number of electronic prescriptions to increase exponentially over the next few years.

There are several drivers. Firstly, there is an increasing number of physicians using electronic medical records and e-prescribing tools. Secondly, there is the industry's drive to eliminate medical errors in the prescribing process. I'm sure that many of you are aware that last month the Institute of Medicine issued a report calling for all prescriptions to be written electronically by 2010. The report study was mandated by Congress and sponsored by the Centers for Medicare and Medicaid services. According to the ILM study, it is estimated that more than 1.5 million people annually are injured in the U.S. due to medication errors and the study concluded at least 1/4 of all medication-related injuries are preventable. As a result, we see e-prescribing as a major initiative that the health care provider community will be addressing in the coming years.

How will this benefit Per-Se? Physician EMR and e-prescribing vendors are in the process of connecting to our network. In addition to carrying the script on our network to the pharmacies through our partnership with Sure Scripts, we will offer vital information to the prescribing physician at the point of care that includes formulary, eligibility, medication history, and other information in real time. This enables the physician to more efficiently write an electronic prescription and greatly reduce the potential for medication errors. As these transactions grow with the adoption of e-prescribing, we will generate increased revenues in our network business.

Turning to hospitals, in April of this year, CMS proposed the first significant revision to the inpatient prospective payment system since its implementation in 1983. The changes are designed to more accurately pay hospitals for their services by basing reimbursement on costs rather than charges as well as factoring in patient acuity in the reimbursement calculation. CMS estimates that acute-care hospitals would see an increase in payment of 3.4% in fiscal year 2007 based on the revisions, which would equal approximately $3.3 billion.

Some acute-care hospitals, however, may experience a decline in Medicare reimbursement if they treat a higher proportion of some specialty cases such as cardiac care. The rules are designed to prevent hospitals from cherry picking the more profitable cases. The reason I mention this is that once again the complexity of reimbursement is in the news. Many hospitals are going to have to make changes in not only the types of procedures they perform, but will also need to change their reimbursement practices to comply with the Medicare changes.

One other point I would like to mention is that all providers are facing an exponential growth in self pay. Self-pay does not only describe that category of patients without insurance, it also describes the increased co pays and deductibles that patients are facing as insurance becomes more expensive and consumer driven health care becomes more prevalent. As we have previously mentioned, we are aggressively pursuing our hospital outsourcing strategy. As the largest provider of hospital based physician receivables management services, we believe we are uniquely positioned to leverage not only our expertise in the complexity of reimbursement but also offer hospitals the benefit of our industry leading tools and capabilities to help them collect self pay. I would now like to turn it over to Chris Perkins to review the operating performance of our business segments.

Thank you. In our physicians solutions division we have strong margins for the quarter, driven largely by the contribution margin on the increased revenue and our outsourcing business. In our outsourcing business, our net new business sold for the second quarter was $6 million. Which was lower than our second quarter goal due to the timing of new business closings. However, in July, we closed more than $5 million in net new sales. Including our July performance, we generated net new business sold of approximately $14 million on a year-to-date basis. The timing of new business sold is important because the more business signed and implemented in the first half of the year, the greater the impact on the current year's recognized revenue due to the time frame for starting and ramping up of new contracts.

Despite the delayed timing of new deal closings in the second quarter, the significant new sales closed in July, the robust pipeline, and the momentum of our sales organization together with high customer retention underscores our expectations to achieve our full-year net new business sold target of $25 million to $35 million, which would represent another record year of net new business sold for the division. This high level of new business exiting 2006 will provide strong momentum heading into 2007.In addition, we're seeing interest in the office based physician outsourcing market. You will recall that this year we have begun to focus on providing outsourced receivables services to the office based physician group, leveraging not only our extensive claims management infrastructure and our domain expertise but also combining our ASP based practice management solution, MedAxxis. We also signed an agreement with a 31 physician multi-specialty group in the northwest. Providing outsourced services to office–based physicians is a positive and natural extension of our outsourcing solutions for hospital-based physicians across the U.S., and I am excited about the growth opportunities for this market.

In our Hospital division, both our revenue cycle and resource management operations performed well in the second quarter, with our revenue cycle performance exceeding our expectations. We sold $9 million in new business in Q2, led by strong sales for our revenue cycle management solutions, which continue to gain traction in the market. Our ePREMIS solution continues to perform well with strong market demand and we're building momentum and sales of outsourced services to hospitals. Our Hospital division has one of the most comprehensive suites of Revenue Cycle products and outsourced services in the industry. A great example of the strength of our comprehensive offering was the opportunity we had to convert Central DuPage Hospital, a 360 bed facility outside of Chicago, Illinois, to our ePREMIS claims management platform. Even though Central DuPage has been a PREMIS client since 1997, we still faced a competitive negotiation.

However, as a result of the expanded solutions we can now offer after the integration of our combined Per-Se and NDC Health assets, we signed a four year integrated solutions agreement that includes ePREMIS as well as a number of value-added transaction services, including Medicare direct entry, data extraction and posting, remittance interactive posting and medical necessity dictionaries. Whether a hospital new software tools and integrated claims management to help manage the revenue cycle in house or a national organization to outsource these non-core functions, our market leading solutions help drive greater efficiencies, profitability, and cash flow. With a strong demand in the market for our hospital solutions and given our visibility into the next six months, we've raised our new business sold target for our Hospital division to a range of $25 million to $35 million for 2006, up from our previous expectations of 20 to 30 million. We continue to be excited about the market's response and our opportunity to provide our complementary solutions to new facilities as well as across our extensive hospital customer base.

In our pharmacy solutions division, we had a better than expected quarter across the division and are excited about the performance of this new segment for Per-Se. Our network services business continues to perform well with strong volumes. As Phil previously mentioned, with its extensive connectivity and pre and post editing, our network services business can provide significant value to pharmacies and provides an important platform through which to sell additional value-added products. We continue to work with our network services customers to develop new transaction solutions that allow them to be more productive and generate more income. We continue to gain traction in the pharmacy systems markets with good new business sold performances for PharmacyRx, which is targeted at the independent market, MailRx, which is targeted at high volume operations, and EnterpriseRx, which is targeted at larger chains. During the second quarter we closed three EnterpriseRx deals. We now have a total of 11 EnterpriseRx customers. The majority of these contracts have been structured to provide a recurring revenue stream for the division in the future. While we're in the early stages of implementing these contracts, we expect to gain momentum in terms of the number of stores implemented throughout the rest of the year. We had new business sold in the pharmacy division of approximately $12 million in the second quarter.

With our strong first-half new sales performance and the demand we have in the market for both our network services and our end Systems solutions, we have raised our new business sold expectations to a range of $30 million to $40 million, up from our previous target of $25 million to $35 million. The integration of our acquisition of NDC HEALTH, which closed in January, is going well. At the operational level our common focus toward our connective healthcare strategy has facilitated our teams coming together quickly and working well together. Our customer satisfaction is high as they derive value in the unique set of products and services we provide. We believe our new business sold expectations for the year illustrate the value that the wider healthcare market sees in our market leading offerings, as well. We're building strategies for long-term growth in of the respective businesses and are working on leveraging our market leading positions in the physician, pharmacy, and hospital segments to benefit all our customers . I’d like to take this opportunity to thank all our employees for their hard work in bringing together our two organizations. I would now like to turn it over to Steve Scheppmann to discuss our financial performance in more detail.

Good morning. MiMy comments today will include the discussion of our second quarter results on an adjusted basis. Excluded from our adjusted operating income, adjusted income from continuing operations and adjusted EPS in the quarter were as follows. Non-cash stock compensation expense approximately 1.8 million. Transition and integration expenses related to the NDC Health acquisition, approximately 2.6 million. On a consolidated basis, the second quarter revenue increased 64% over last year to 152.7 million, driven by the acquired NDC Health businesses and from organic growth primarily in our physician outsourcing business. Adjusted operating income increased to 25.8 million or 16.9% of revenue, as compared to the second quarter of 2005's operating income of 8.9 million or 9.5% of revenue. Adjusted income from continuing operations was 10.5 million or $0.24 per diluted share on a weighted average, 44.1 million diluted shares. This compares to EPS of $0.23 on a weighted average of 32.4 million diluted shares in the prior period.

To facilitate comparison with analysts' published EPS expectations, and prior year results, using a cash tax paying provision rate of approximately 5%, our adjusted EPS from continuing operations for the three months ended June 30, 2006, was $0.38 per diluted share.

Adjusted cash flow from continuing operations for the six months ended June 30, 2006 was 56.9 million compared to 22.6 million in the same period a year ago. We used 5.5 million in operating cash in the second quarter and a total of 27 million during the first half of this year related to the NDC Health acquisition. We continue to manage our working capital to facilitate achieving our new business and current year guidance.

With respect to our federal net operating cost carry forward, which approximated 375 million as of December 31, 2005, we estimate that we would use approximately 15 million of that – of this NOL during the first six months to offset estimated taxable income for the same period. We expect to utilize the estimated federal NOL carry forwards as a reduction from federal taxable income for the foreseeable future.

Turning to our segments. In the physician solutions division, revenue was 80.2 million in the quarter compared to 69 million a year ago. Revenue growth was due to organic growth in our physician outsourcing business, as well as the acquisition of NDC Health. Adjusted operating income for the division was 12.4 million, or 15.5% of revenue, compared to 7.5 million or 10.8% of revenue in the prior year second quarter. Margin expansion during the quarter was due to performance within the division's existing operations and as well as the acquired NDC Health business. Revenue growth in our physician outsourcing business was approximately 6% and was primarily driven by the net new business sold in prior periods. As Chris mentioned earlier, operating margin for the outsourcing business expanded when compared to the first quarter due to the strong contribution margin on the incremental revenue that business generates and ongoing cost improvement initiatives.

In our hospital solutions division, revenue for the second quarter increased 60% over last year to 44.6 million due primarily to the NDC Health acquisition as well as penetration of both existing customers and new customers with our expanded set of revenue cycle management products. Adjusted operating income was 12.3 million or 27.7% of revenue compared to operating income of 5.3 million or 18.9% of revenue. The margin expansion can primarily be attributed to the synergies of the restructuring of the overhead structures associated with the combined businesses and the acquired NDC Health business.

Pharmacy solutions division's revenue was 32.1 million and adjusted operating income was 6.9 million or 21.5% of revenue, which exceeded our expectations. Our pharmacy business benefited from a higher margin revenue mix than we had forecasted. Additionally, the timing of certain expenses in the division was different than what we had anticipated. The pharmacy business is new to Per-Se and we had forecasted a higher level of expense in the second quarter than we now anticipate incurring in the second half of the year. From a balance sheet perspective, our cash position as of June 30th, 2006, was approximately 27 million versus 61 million at December 31, 2005. As we discussed in the last quarter, we paid down $10 million of debt in April and have retired 50 million of our term Loan debt on a year-to-date basis.

Our financial guidance for 2006 excludes expected transition and integration costs related to the NDC Health acquisition, non-cash stock based compensation expense, as well as the first quarter in process research and development write off and the tax benefit related to the release of our deferred tax asset tvaluation allowance. As a result of the timing of the net new business in our physician outsourcing business and the revision or termination of certain unprofitable contracts in the hospital solutions Division, we've lowered our consolidated 2006 revenue guidance to range of 615 million to 620 million.

Our adjusted EBITDA guidance for 2006 remains unchanged in the range of 142 million to 147 million. We are also maintaining our full-year consolidated operating income guidance in the range of 90 million to 96 million or 14.5% to 15.5% of revenue. We're reiterating our diluted EPS guidance for 2006 in the range of $0.81 to $0.87. On a quarterly basis, our adjusted diluted EPS guidance for the third quarter is a range of $0.18 to $0.21 and the fourth quarter is $0.25 to $0.28. Our third quarter guidance has been negatively impacted by a two to $0.03 per share due to the government’s action to withhold all Medicare reimbursement payments that would be funded during the last nine days of September as mandated by the Deficit Reduction Act of 2005. These suspended Medicare claims will be paid in October and therefore has no impact on our full-year EPS guidance. In addition, as previously discussed, the timing of certain expenses in our pharmacy business was different than we had forecasted, which we now expect to incur in the second half of 2006. Our guidance for the full year of 2006 adjusted cash flow from continuing operations remains in the range of $100 million to $110 million, excluding acquisition related costs. The adjusted diluted cash flow per share remains in the range of $2.27 to $2.50 based on 44 million diluted shares outstanding.

Thank you, Steve and Chris. As I mentioned in our press release this morning, there is strong momentum in each of our divisions. We have raised new business sold expectations in both pharmacy and hospital solution divisions, and are on track to achieve another record year for net new business in our physician outsourcing division. With the significant margin improvement and strong cash flow in our businesses, together with our low cash tax paying rate, we're well positioned for the second half of 2006 and to carry this strong momentum into 2007.

At this time, I would like to open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from Sean Jackson.

This is Sean Jackson from Avondale. Can you talk about the lower revenue guidance for 2006 real quick? You mentioned lower-margin business. Can you go into more detail about that, please?

This is Chris. We did lower the guidance to 615 to 620. About two-thirds of that related to our physician solutions Division and the rest was related to the hospitals division. In the physician solutions Division, again, we have a very positive -- about the outlook for the new business sold in 2006 at the 25 million to 35 million leveland the fact that through July we are at 14 million on a year-to-date basis. But the timing of signing those contracts as it relates to the ramp up and implementation and the timing of those ramp ups does affect our revenue in the physician's division this year. We are positive on the outlook for our new business findings that will benefit our recurring revenue that will give us momentum for 2007.

On the hospital side, we did approach some of our lower margin contracts and we terminated and revised some of those contracts to better suit the company's profitable growth objectives. Those were primarily related to our print and mail operations. The reduction and restructuring of some of those contracts has affected our revenue outlook.

Also on the expense side, I think this is two straight quarters where you expected some expense to come in in the quarter and it’s gotten delayed. It looks like it is in the pharmacy unit more than most. Can you go into detail of what those costs are?

This is Steve Scheppmann. Those costs are some project related costs that due to the integration and to ensure the integration went smoothly and not disrupt the combination of these businesses and the integration into Per-Se, we had delayed some of the project costs, the onetime project costs, we were anticipating incurring in the pharmacy area with respect to product development and other items and then we have moved those in to the latter half or the second half of the year. It is primarily more of a onetime expenses relating to those project costs.

Are those costs anticipated to be two quarters long, three quarters long?

We’ve, right now, positioned them through the second six months of the year.

Just wanted to make sure as far as the tax rate, you still anticipate it being a 5% cash paying tax rate through 2006, correct?

That is correct.

Thank you.

Your next question comes from Steve Halper.

This is Julia Thies in for Steve from Thomas Weisel Partners. I think some of the questions about revenue are fully answered. But I wanted to see maybe if you could give a breakdown to segment revenue. We ha some guidance ranges originally. Maybe you could provide that?

The segment revenue for the year?

In terms of, yes, breaking down kind of – I think, at one point, we had 325 to 330 for physician revenue. I may be mistaken. Or was it as a percentage of revenue? We have not heard on that. If you could break that down. Or maybe just give us a percentage of total revenue?

That is what I was just looking at. On the physician side being approximately, I would say, within the 315 to 320.

And the other segments?

If I could -- let's see. I will verify the numbers at the end. About 175 to 180 on the hospital. I am doing this without the eliminations in it. Then on the pharmacy side, roughly 130 to 135. Let me just verify those totals.

OK.

I will come back to at the end of the call.

Thanks.

Your next question is from Chris Sassouni with Eagle Asset Management.

On the CapEx side, can you just tell us what you anticipate the CapEx being for the full year this year?

We are still anticipating that within the 40 million to 42 million range. With the integration expenditures.

OK. I know you have not given guidance for next year, but would you anticipate that to be flat or down for next year?

Under the assumption that it has the integration expenses and the investments in the integration, I would expect it to be down.

Significantly?

I would expect it to be down at this point.

OK. The second thing is, after falling you for quite a few years, I almost get the impression in listening to the balance of how the revenues are starting to come through for the Company now that you have this integration largely completed that there is a subtle shift occurring for more individual physician or group sales more to an institutional sale as you move into both hospitals and pharmacy solutions. I just want to verify that I am looking at this correctly because it somewhat changes the complexion of the company, I would think favorably, because I would think that the size of the contracts that you could sign are pretty large relative to what you could sign for just an individual hospital group. Am I incorrect?

Chris, let me take that. This is Phil Pead. I will have Chris add a little bit more to it. We are still targeting organic growth in our physicians outsourcing business. As you know, from experience, the opportunities there range from large academic practices such as the contract that we signed with the University of Texas, which included over 500 physicians, down to anywhere in the eight to 10 physician range when we're looking at, for example, radiology as a specialty. The average sales price, I can tell you, in our physicians outsourcing business is increasing. It has been our desire to go up market to the larger groups. We're actually experiencing that. If our numbers bear out this year, we will find a higher average sales price in our physicians outsourcing business, certainly as it relates to the last three years. So that’s very positive..

When we're looking at the new opportunities and the new markets that we're addressing, such as hospital outsourcing, you are right -- they tend to be larger revenue stream because we're dealing obviously with a larger outsourced receivables number. In the physicians office space market, again, that is a new market for us. We're pleased to say that having just signed a group recently that also has the potential to drive up our average sales price in those markets also.

How do -- if your average sale price is increasing in the physicians outsourcing business, can we still read into that the profit margins would increase commensurately or not necessarily?

I think we would look at it that we can still have a good degree of confidence that we will achieve that strong margin on incremental revenue that we have historically experienced and will continue to.

With the combined companies the way they are today, what would you say three to five years out from now after all the integration is completed and after you have optimized the three legs of the stool, so to speak, how high can those operating margins get in your opinion?

This is Chris. I would say in all three of our business segments, we feel we have a good leverage model, that incremental revenue does contribute a very positive operating margin. I would say our objective would be to increase margins combined with sales revenue growth and operating efficiencies to increase over 100 basis points a year in margin points.

Thank you.

Your next question comes from Sandy Draper.

Sandy Draper, JMP. Maybe this is a question for Chris or Phil from a big picture perspective. Obviously, a few things moved around here in the quarter. I don’t know if you guys know it, but the stock is taking a little bit of a hit here. But as I listened to your preliminary comments, it sounds like you guys are pretty positive about the business. Can you give a sense, comparing your six months, which, admittedly, is a short period of time, with the NDC acquisition. Where do you feel a higher degree of comfort or lower degree of comfort relative to when you bought the business? If I just sort of do some back-of-the-envelop numbers, with the revenue coming down but cash flow and expenses and EPS staying the same, it sounds like to me you’re tracking at least in line if not a little bit better on the integration side. Is that a fair statement?

This is Phil Pead. I am very excited about the progress we have made in our businesses. Each of the segments as we indicated in the call this morning and our press release -- pharmacies and hospitals, we're seeing really good demand for the combined assets that we have from a product perspective. Obviously, Pharmacy is new to us. But on the hospital side, we have the combined solutions. So we’ve actually raised our expectations for new business sold this year. Clearly, including the physicians outsourcing business, a lot of the new business we are signing and we expect to sign this year is not going to have an impact on our revenue in the second half of the year, which is why timing, as Chris mentioned, is very important for physicians. Even though it is very important from a revenue perspective, a lot of the new business we sign and bring in in the second half of the year impacts our margins negatively as that business ramps up. We are able to keep our margins the same, but all this business we are signing will obviously go into our backlog and become recurring revenue with significant incremental margins going into 2007.

OK. It sounds like while you have not given 2007 guidance, there is nothing you are seeing happening right now that would cause you to be more conservative or more pessimistic about 2007. If anything, you are as optimistic if not more because of the new business signings?

We are very excited about the fundamentals of our business. If you look at our pharmacy business, our network volume increased in the first half of the year. That is at a higher margin rate. We have got really good sales going on in EnterpriseRx, which, as you know, we are in the process of implementing. We should see, again, a good number of those stores going live tothroughout the second half of this year. On the hospital side, we are aggressively pursuing not only the conversions of PREMIS to ePREMIS but adding a lot of our other solutions we had on the Per-Se side to hospitals.

In addition to which, we have now ramped up our sales organization to aggressively go after hospital outsourcing and we hope to be able to announce in the next quarter or so some of the signings that we have in that area. Even though the timing of the new business on the physician side, clearly we really want that business -- for it to show revenue growth in physicians outsourcing, that business needs to assign as much new business as possible in the first half of the year. Even though it moved into July, and that obviously impacted our revenue for the balance of the year for that division, the fact that we're going to close –- we expect to close between 25 million to 35 million is a record for us. And that just shows the momentum that we’ve got in that business.

It did not look like you paid down any debt since the update from the first quarter. You paid down a little early in the second quarter. Maybe talk a little bit about philosophically what your targets are. Is it based on absolute debt levels? Ratio levels? What is the longer-term outlook for where you expect to be putting the cash to work?

This is Steve Scheppmann. This year, we are really focused on, as we indicated earlier, too, was the focus on working capital, making sure we have the right working capital within the new business to drive the new business and our objectives for 2006. As we continue to have free cash flow available to us, yes, it is our intent to repay down debt and to get down to a lower leverage ratio than we are right now with respect to our senior debt. We will continue to look at the alternatives but primarily focus on repaying debt as we look past 2006 and the latter part of 2006 into 2007.

Thanks.

Our next question comes from Gene Mannheimer.

Thank you. Gene Mannheimer, Caris and Company. Could you provide a brief update of the EnterpriseRx product specifically? When is the release date slated? I think it is later in the year. Maybe price points on that? Maybe if you could guide even to potential new customers for the balance of the year, that would be helpful. Thanks.

This is Chris. We have had good success, as I mentioned earlier, on signing of new customers. To date we have 11 EnterpriseRx customers that have signed with the solution. We are in the early stages of implementing those customers, and we do expect to gain momentum on those as we go throughout the rest of this year. I will also say that we have a number of opportunities for new customers. Total customers – we put out a release early in the second quarter that out of those 11 customers, that covers approximately 3000 stores that have signed up for utilization of the solution.

So we're very excited about the positive acceptance and the return that it provides to our customers and the momentum we have as far as implementing. We do continue to expect the product will reach general availability in the second half of this year, but we will continue through our opt– implementation process. I do not think we have talked about specific price points for the solutions, but it is basically targeted generally on a per store rate. We proposed most of our contracts to provide a continuing revenue stream in going forward periods.

Thanks, Chris.

Our next question comes from Chris Sassouni

I was wondering if you could elaborate a little more on the sales force. If I recall correctly, the physician solutions Sales Force by the time you had expanded it was somewhere around 30 representatives. At this point, what is the total size of the physician solutions sales force? In aggregate, what is the size of the entire sales force for the entire company at this point?

In physicians, we are at the 30 sales reps, quota carrying sales reps, level today. They are operating effectively. Again, we're very positive on the momentum they have and the pipeline they are working going through the second half of 2007. -- 2006. We have approximately 30 sales staff in both the hospital and pharmacy divisions all –contributing to the sales of their solutions.Chris Sassouni: When you say 30 in hospital and pharmacy, each?

That’s 30 each, yes.

Are there any thoughts in terms of your desire to maximize the revenues and the opportunities you have vis-a-vis any other competitors in these markets that are seemingly growing quite rapidly? Is there any interest in adding to the sales force?

Yes, we're looking at some opportunities in all our divisions as we target new business opportunities, for example in the physician solutions division, we're planning to add some additional sales staff to cover the office space market outsourcing market potential. So we're looking to do that. We're very positive about what they can achieve.

OK, thank you.

Your next question comes from Sean Jackson.

This is Sean with a follow- up. I think in the past you have given backlog numbers for each division. I was wondering if you can communicate those here as well.

We have historically given backlog primarily in the physicians solutions division.

It’s 12 million at the end of the six months compared to 10 million the prior year.

OK. Appreciate it. Also, have you changed -- within each division, have you changed metric that was not included in this press release.

I think we're still very comfortable with the operating margin guidance that we had given initially in the year.

So that is unchanged. Thank you.

[OPERATOR INSTRUCTIONS]

OK, Operator. This is Steve Scheppmann. I want to follow-up on the one comment with respect to the ranges for sales for revenue in 2006. If you follow the percentages in the reg table supplied in this morning's press release with respect to physicians, hospitals, and pharmacies, that percentage is representative of the percentage that we are anticipating at the end of the year.

I would like to thank you all for taking the time to participate in our earnings call this morning. We're excited about the opportunities ahead of us and look forward to sharing our results with you next quarter. Thank you, everybody.

This concludes today's conference. You may disconnect at this time. Thank you.