Veradigm Inc (MDRX) 2003 Q1 法說會逐字稿

After, ladies and gentlemen. My name is Paul and I will be your conference facilitator today. At this time I'd like to welcome everyone to Allscripts Healthcare Solutions first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star and then the number 2 on your telephone keypad. Thank you.

I would now like to turn the conference over to Mr. Glen Tullman, Chief Executive Officer. Mr. Tullman, you may begin

Thank you. I'm pleased to welcome you to the Allscripts Healthcare Solutions first quarter call. This is Glen Tullman, Allscripts chairman and chief operating officer. Joining me on the call is Bill Davis, our chief financial officer. We will begin by reading a copy of the Safe Harbor statement .

Statements made by Allscripts or its representatives in this conference call will include forward-looking statements that include the current beliefs of Allscripts' management as well as assumption made by and information currently available to Allscripts' management. Wherever practical, Allscripts will identify these forward-looking statements by using words such as may, will, expect, anticipate, believe, intends, estimates, could or similar expressions.

These forward-looking statements are subject to a variety of risks and uncertainties, including those listed in the earnings press release issued by Allscripts today and in Allscripts' filings with the Securities and Exchange Commission which could cause Allscripts' actual results, performance, prospects or opportunities in 2003 and beyond to differ materially from those expressed in or implied by these statements. Except as required by the federal securities laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changed circumstances or any other reasons after the date of this release.

With that, I'd like to turn the call back over to our CEO, Glen Tullman

Thanks, Bill. Following a very strong fourth quarter to close out 2002, we have continued to make solid progress in our three business units, which I'll comment on in a moment. From a company perspective, we accomplished a number of key objectives, which we are pleased with. With the progress we're making, both financially and on the product and sales front, we believe Allscripts is well positioned to address the largest opportunities in health care. The need for better information for physicians who are providing care through an electronic medical record and the need to communicate information to physicians, especially from pharmaceutical companies through our e-detailing solutions and other interactive tools. Having solutions to these challenges and the value of these solutions makes Allscripts a very attractive investment opportunity.

In addition, every major trend in health care is positive for our business and driving demand for our product offering. The need to contain costs, the need for information portability and confidentiality, better known as HIPAA, the need for patient safety, and the legislative and private efforts to encourage safer, higher quality and more cost-effective health care. We have solutions that work today that physicians actually use and that can be deployed very cost effectively.

So I want to first comment on the company. For the first quarter, we reported a loss of five cents. Equal to our lowest loss per share since becoming a public company. From a cash perspective, we ended the quarter with an increase of $1.3m in cash. In contrast to a loss of $930,000 in Q4 of 2002. This represents our first cash flow positive quarter since our last public offering.

Our cash position improved to $66.6m at the end of the quarter. Our backlog increased from $34m to $37.5m. And while I'm pleased with the growth, we continue to focus on how to more aggressively convert backlog into recognizable revenue. Some of this is client scheduling issues and delays, while other relates to regulatory delays in our physicians interactive business. But there's also more that we can do.

While Bill will provide more detail on the financials later in the call, the point I want to emphasize here is that we're making sound progress in moving the company to profitability. Now let me switch focus and provide some detail on the business units that drive our success.

I'll begin with TouchWorks. During the first quarter, Allscripts received some very positive industry recognition solidifying TouchWorks as the leading electronic medical record and clinical information solution for physicians. One of our customers, Dr. Don Caruso from Dartmouth received Microsoft's year award for implementation in driving implementation and use of our TouchWorks modular EMR. He was also very promptly featured in the worldwide launch of Intel's SENTRINO technology which powers our TouchWorks solution making Allscripts one of the three companies in the world the only one in the world highlighted during the SENTRINO launch. As important as the recognition is, the fact that the market is heating up is critical.

MGMA, the largest association of medical groups recently reported that 62% of their members expected to purchase an EMR within the next 24 months. And we're seeing the interest. TouchWorks sales exceeded $6m this quarter, including two deals valued at over $1m each.

This did not include northeast Arkansas or NEA as they're known, which signed in the first week of April and would have taken the total sales to over $7m . By the way, we issued a press release on NEA earlier today that's available on our web site.

Of our sales, 60% were new and 40% represented repeat business from our existing base. We added modules for additional physicians. Over one-third of our customers purchased additional modules during the quarter alone. A good indication that we are successful in driving results for our clients.

And our sales to IDX into the IDX space continue to grow. We are recognized as the safe choice for the 138,000 physicians who use IDX practice management systems. Because of the growing number of IDX customers buying TouchWorks, because of the free interfaces we provide, because of our integration through the web framework and because it works.

I'm also pleased to report that our service team continues their track record of successful version 9.0 upgrades and implementations, with approximately one quarter of our clients already live on our latest version of software, which was released at the end of 2002. Now let me switch gears and talk a little bit about Physician's Interactive. Our PI group launched 18 new products during the first quarter, a new record. And of those, 13 were e-detailing and the other five were for new products that we now sell, a clear sign of our continuing innovation and products.

Our contract size in PI remains significant. In excess of $225,000 per contract. And you should note that this average includes our new survey and convention programs, which are typically smaller in size due to their limited focus and because they're brand new.

PI sales are $3.3m, which was one of the largest sales quarters ever, followed by record sales efforts in Q4 of '02. While we did experience some delays in client approvals to move forward, we continue to be highly confident in this part of our business and our ability to grow. With pharmaceutical companies spending over $12b each year marketing their product to physicians, PI is starting to capture a meaningful percentage of the total that Pharma spends on interactive education of physicians.

Programs in PI have moved from the experimental stage to where we were last year to become an integral part of Pharma strategy to reach physicians, more coast effectively and with a greater level of impact, supplementing traditional methods. One of the top Pharma companies in the world has now contracted with us for e-detailing for over ten brands, with over 16 different programs. The most recent renewal approaching $1m. Another major Pharma selected us this past quarter as one of only two approved choices for their brand managers to use for e-detailing. Both of these examples are good indicators of what is likely to come.

Our Allscripts direct business, which includes both our medication sales and our touch script business, continues to be a cash contributor. And sales this quarter increased to more of what we would expect going forward.

Now, for a more detailed look at our financials, I'm going to turn it over to Bill Davis, our chief financial officer. Bill ?

Thanks, Glen. Hello, everyone. As Glen indicated, I will review our first quarter results in a little more detail. Turning first to our financial position, we ended the quarter with $66.6m in cash and marketable securities. This $1.3m increase over the prior quarter is a significant milestone for Allscripts, given that it represents the first positive cash flow quarter for the company in over three years. At the same time, our accounts receivables decreased $2.6m or 14%, while our deferred revenue increased $300,000. In addition, the company continued to have no debt.

Turning now to sales. The sales or bookings for TouchWorks business, the largest part of our software segment, continued to be strong. We closed $6.2m of TouchWorks business during the quarter, excluding ongoing support. This is coming off very strong sales effort in Q4 of $7.3m compared to the $4m in the first quarter of '02.

The year-over-year comparisons represents a 53% increase. Further, 60% of our sales are with existing customers. What is equally if not more encouraging is that our pipeline continues to build, driven by both existing and new customers. We also are encouraged by the fact that our average deal size for the quarter remained strong at $310,000.

It is important to note that our average deal size consists of add on sales to existing customers as well as sales to new customers. Average deal size with new customers remained consistent quarter over quarter at approximately $400,000 per deal. The average number of modules purchased in the quarter was four.

Our Physician's Interactive unit, the largest part of our information services segment had sales during the quarter of $3.3m. This represents one of our best sales quarters ever and is on the heels of our record sales effort last quarter. The average deal size remained relatively consistent quarter over quarter at $225,000, and a large percentage of our sales continue to come from existing accounts.

Customers ask for more when you deliver results and this is a good indication that our offerings really can drive market share for pharmaceutical companies. With regard to our backlog, we ended the quarter at $37.5m. The backlog breakdown is as follows. One time fees of $23.3m, subscriptions of $9.5m, and our service maintenance agreements of $4.7m.

It's important to note that in our backlog reporting, we contemplate only one year of SMA. Given that most of our customers signed a ten-year license agreement, it is reasonable to assume that we have an additional $42m of SMA related fees not reflected in our reported backlog. With regard to revenue, we reported revenue for the quarter of $20m . That represents a 7% increase over the first quarter of last year.

It is important to note that software and related services revenue increased $1.4m or 31% year-over-year. It's also important to note that our TouchWorks business delivered another record number of milestones in the quarter. Q1 revenue of $20m compares to $19.9m in the fourth quarter. The $100,000 increase quarter over quarter was due to a $500,000 increase in our medications revenue and a $200,000 increase in our software and related services revenue.

Both increases were offset by $600,000 decrease in our information services or Physician's Interactive revenue. The PI revenue decline was primarily due to delays of certain project launches. The good news is that these projects have since launched and we expect these projects to benefit us in the future quarters of this year. 16 clients came live on one or more TouchWorks modules in the first quarter and six for the first time.

IDX customers continue to represent a significant portion of our sales as our ten-year strategic relationship with IDX continues to pay off. We had 77 IDX customers as of March 31st. In terms of revenue mix, our software and information services segments were 39% of total revenue for the quarter. Compared with 33% a year ago and 42% in the prior quarter.

The increase year-over-year is due to the overall increases in the revenue from our TouchWorks and physician interactive businesses and the slight decline in med distribution business. The slight decrease in revenue from TouchWorks and PI quarter over quarter is due to the previously mentioned decline in Physician's Interactive revenue. We expect this to improve in future quarters.

First quarter revenue by segment is as follows. Medications contributed $12.1m. Software and related services contributed $5.8m and information services contributed $2.1m. With regard to margins, this is an area where we also saw improvement. Overall our gross margin was 30.9% in the first quarter, versus 29.3% in the fourth quarter of 2002 and 20.4% a year ago.

This represents a 50% increase year-over-year. Margins by segment is as follows. Medications moved from 18% in the fourth quarter up to 22%. Software and related services delivered 39% gross margins, and information services s delivered 59% gross margins, once again for a total of 30.9.

As just indicated, margins increased slightly in our meds distribution segment quarter over quarter. Due to a change in the mix of products sold. While our software segment decreased by approximately two percentage points due to the increased amortization of capitalized software by approximately $200,000.

Turning now to expenses. We continue to maintain tight control over our expenses. Operating expenses for the quarter were $8.7m versus $8.2m in the fourth quarter. As I mentioned on our last call, this increase is due to the fact that the first quarter included approximately $200,000 of software capitalization versus approximately $900,000 in the fourth quarter of last year. As I indicated before, this amount will fluctuate from quarter to quarter, depending on where we are in product development cycle.

Consistent with prior quarters, the first quarter also included approximately $130,000 in amortization expense related to intangible assets. R&D expenditures as a percentage of software revenue were approximately 30% in the first quarter. Once again, demonstrating our continued commitment to the future development of our product. With regard to head count, we ended the quarter with approximately 305 employees.

Our loss for the quarter was $2.1m, or five cents per share, versus a five cent loss per share in the fourth quarter. Please note that two cents of our current quarter loss could be attributed to the $700,000 reduction in capitalized software quarter over quarter. Basic shares outstanding for the quarter were $38.4m, and fully diluted shares was $38.8m. We’ve been profitable.

Finally, as we look forward to the balance of the year, we continue to execute against a plan we laid out to the street last quarter. As it relates to the second quarter of '03 we expect revenues to be in the range of $21m to $22m with a net loss of two to three cents per share. Please note that we expect $200,000 to $300,000 decrease in operating expenses for next quarter due to a higher amount of software development costs being capitalized.

In summary, we are pleased with the progress we made in the first quarter and are particularly encouraged by the positive cash flow we generated in the quarter. Couple this with our increasing backlog and we believe we're well positioned to have a strong 2003.

With that I would like to turn it back over to Glen for some closing remarks

Thanks, Bill. So let me also summarize with a few comments. We believe 2003 is on track for a year of growth and profitability. Our progress on the financial front in adding to our cash position is a good early indicator. Our TouchWorks sales progress and overall growth in our backlog are also good signs. As is the increase in the combined margin that Bill just referred to to over 30%, with less capitalization this past quarter.

But with that, I want to begin by thanking our employees for another great effort that led to a strong quarter for the company. Our clients tell us consistently that our people and their commitments separate us from the pack. And that's a competitive advantage not easy to replicate. I also want to thank our clients for the confidence in us and thank our investors for your continued support as we build the Allscripts' success story together.

At this point I'd like to close the official comments of the call and we'd be happy to entertain some questions. Thank you for joining us.

If you would like to ask a question press star and then the number 1 on your telephone keypad. Again that's star one if you would like to ask a question. One moment, please, for your first response.

Your first question is from Seth Frank, with AG Edwards.

Good afternoon, guys. How are you doing? . Quick question on the, just the sales force, Glen. Are you satisfied with sort of productivity levels there in terms of signings? Has there been any changes in the sales force at all? Can you elaborate at all on people you're looking for or open slots that could help continue your charge sales effort?

Well, there's a few questions there, Seth. Asking me if I'm identified with our sales is a little bit of a set up. I'm never quite satisfied with our sales. I think we've got a great sales group. And that sales group on the TouchWorks side of the business is a pretty stable group right now. On the PI side of the business, we've actually added two additional positions this past quarter. And we'll likely add one more. So that's actually a pretty substantial increase in overall sales force for PI.

In terms of productivity, it's nothing we continue to focus on. The group is very focused on the IDX space and a number of specific smaller markets that we've targeted. But overall I think we're comfortable that we've got the right group of people working. And we'll continue to focus on drilling more wells and we can strike oil. So we're continuing to look at their productivity. But overall I think we're happy with the group we have and the products that we have.

I apologize. I didn't ask the question exactly the way I wanted to. I'll take one more crack. More specifically, in terms of the IDX thing which you bring up and the interactions there, how optimized are you right now in terms of leveraging off of their feet on the street and being all over potential leads and that's a little different question than a sales execution. But sort of more of a pipeline thing with respect to that IDX

I think more than ever we're absolutely focused on the IDX accounts. We have the database of the top five people at every IDX account in the country. We're in touch with all those people. We measure the percentage of presentations, the number of contacts we do. So we're managing that very tightly in association with IDX. In addition, we have these executive summits that we conduct every two to three months where we bring in 50 to 75 clients. That's another effort. And we're just about to launch a joint campaign with IDX that will hit every IDX, the top five people every IDX account in the country. So again very strong focus on understanding that client base.

Thanks, Glen.

Your next question is from Shawn Wayland with WR Hambrecht.

Hi guys. How are you doing? I'd like to know if you can comment on the implementation of TouchWorks? I'm pretty happy with the level of sales in TouchWorks this quarter, and wanted to know how the bookings of TouchWorks revenue is being converted over to recognized revenue. What kind of implementation cycles are you looking at? And also related to that what percentage of the deals done in the quarter were licensed deals versus subscription deals?

Let me take a part of that and then we'll ask Bill to cover the percentages. In terms of the process, the good news is that we can normally get the first modules on a TouchWorks deal in within 30 to 90 days. Something like that. So within three months of signing we can get the first modules in and up with a client. I will asterisks that by saying that there are cases where the clients are not ready.

For example, in the case where to net new clients through IDX and Allscripts, they may sign with both of us but they want and they have to first get their IDX system installed before we can install. That's a great deal. It's booked. Goes into our backlog but we can't take advantage of it right away. Second, what we're finding is sometimes in our success, getting one module up, clients come back to us and say, “hey, that's great, we're actually up and operating. We need a little time to digest it.”

So they actually again slow us down in the implementation process because they didn't expect it to go that quickly or that easily. So there is some client delay that we're experiencing in those two categories. But we're very focused on compressing the cycle. We've got a lot of attention focused on how we make that process easier, more standardized and frankly how we turn more of it over to clients to actually implement and having our own people do it. That's the answer to the first part. You also asked about percentage licensed versus subscription. Bill?

Shawn, licenses tend to constitute about 70% of our sales, subscriptions being about 30%. We saw that being the case in the first quarter as well.

Okay. Can you, Bill, just run through again, because I missed it, the margin breakdowns?

With regards to the medications segment, margins were 22%. Software and related services 39%. And information services 59%, for a total of $30.9m and that compares to $29.3m in the fourth quarter.

One more question, if I may. Glen, can you talk from a sales perspective, you gave some good comments earlier in the call about reasons why there's demand for TouchWorks. But can you cite specifically why either the CEOs or administrators of these groups are pulling the trigger and buying EMRs? What is it that's causing their pain today that's making them want to spend money for these solutions?

I think there's a number of reasons. But HIPAA has caused a tremendous amount of interest in the CEO suites about information systems generally, whether they're existing systems will provide the kind of information that they need, the kind of confidentiality and auditing that they need. That's one big one. Patient safety is a very large issue and that also has driven some of these sales. And I think there's also a realization that for the first time the systems that you can actually implement in your lifetime that physicians will use. And that's something that frankly we take a lot of credit for, because we're actually being able to demonstrate very rapid return on investment on our systems and very rapid implementation. And that's new.

For the traditional monolithic EMRs it took years and it cost tens of millions of dollars to implement them and you still couldn't get physicians to use them. Our system is very targeted. It allows them to start at the biggest points of pain and then move from there. And let me give you one specific example. In the transcription area, we'll go in and they'll do a very fast return on investment that says using our note product, using our automated dictation product and the like, they can actually cut transcription cost on the order of 15% to 20%. And they do the math on that and it pays for itself within 12 months. So those are the kinds of ROIs that make them move.

Are you seeing capital constraint situation in the group practice market staying the same, getting better, getting easier, getting harder?

We really haven't seen capital as being a major issue. I know some people in the market have talked about that. I think that really relates to the hospital market. And I've heard some of the companies that have said they seem some constraints there. Then on the physician markets that we focus on, there's a lot of vibrancy and there's a willingness to spend money. What they want to see is systems that work, systems that physicians can use and reference sites. All of which we have.

Great. Thank you very much

Thank you.

Your next question is from David Francis, Jeffries and Company.

Following up on Shawn's questions and your answers, I was hoping you could reconcile a few issues trying to get a better sense of growth metrics. We're down sequentially from a bookings perspective from Q4 to Q1 on both TouchWorks and physicians interactive. Physician's Interactive is down below the Q2 number from last year. I'm just trying to get a better sense of, A) physician's ability to pay, B) the value proposition that you are selling, and closing on and getting a better sense of the company's balance to ramp new business going forward so that we can get a better sense on revenue growth and potential profitability going forward. Thanks

There are a number of questions embedded in what you've asked. So I'm going to try to pull different pieces. First, let me talk about from a sales perspective, from a sales perspective we continue to see in these businesses very solid growth. The end of the year for the TouchWorks business tends to be a time where we, and this goes across the software business as you know, Dave, fourth quarter tends to be a nice high blip and we've seen that in prior businesses as well. That's what we saw, very solid record fourth quarter.

You mentioned that this quarter was down from fourth quarter in TouchWorks. But as I mentioned in my comments, we had a deal that signed two or three days into -- we expected NEA to close this quarter. Had it done that our numbers would have been almost equivalent to fourth quarter and that deal did sign within the first week following the quarter. So we saw that as very, very good sign, very solid sign. From a physicians interactive standpoint. I think there we saw a little bit more drop off. Once again, some of that swing relates to one or two deals from a sales standpoint.

The numbers in PI add a little bit of seasonality in them because of when the Pharma years end, they don't do a calendar year. It's a little different. So we saw a little bit of that in the PI business, but overall from a sales standpoint we're very happy with it. Again I mentioned in my comments that from a revenue recognition standpoint we saw some delays in PI, which caused us to recognize a little less revenue than we expected there. We talked about the ability to pay. I think one of the reasons that our cash this quarter was up was because in fact we had been able to get customers to pay frankly at a more rapid rate than we had in the past. And that's why cash collections were up and that drives part of the cash number. And that refers to the TouchWorks business.

On the PI business, as you know, the customer there is Pharma. And Pharma tends to pay in advance on many of these programs. So we don't see an issue in terms of their ability to pay. Last but not least on value propositions, I think I gave an example on the dictation piece, but more and more of our customers are coming back to us with very concrete examples of how they're delivering value. That's probably the most from our perspective, that's the most exciting thing that we see in this business. The customers are coming back and telling the story, we have to do a better job of getting that out. But we really believe that the bulk of our, if not all of our customers, are reference sites for us in terms of their success.

So we continue to see, again, consistent sales and growing sales. Bill gave some numbers on next quarter in terms of some sales growth we see there. And we continue to see that as what we should expect. And the real key now is to make sure that we cannot only build our backlog, but that we can convert that revenue in the backlog to revenue that we can recognize.

You guys did a great job on the operating side this quarter. I guess to put a finer point on it, if you unslip the NEA deal, would you expect to see second quarter bookings in the TouchWorks business to be above a $7.5m number assuming the NEA deal was in the first quarter?

I think you're saying, without counting the NEA deal. And I think we would expect that TouchWorks business will be at least in a similar arena than the $7m to $7.5m number, yes.

Great. Thank you again.

Again, ladies and gentlemen, if you would like to ask a question, press star then the number 1 on your telephone keypad.

Your next question is from Ray Falci with Bear Stearns.

Question on, I want to confirm the cash flow number. I saw cash in the balance sheet is up $1.3m sequentially. Do you have cash flow from ops and then sort of work us through the how do you get to the free cash flow so we get a sense of that ?

Sure, cash flow you have, we had a loss of $2.1m. We had non-cash charges about $1.5m.

Okay.

Then our change in working capital was about $1.2m and we had $200,000 in CAPEX.

Okay. Great.

One thing I want to mention, we had in the first quarter, one of the ways, while we accrue bonuses all year long, we actually paid out bonuses for last year in the first quarter . And so that also, cash frankly would have been more positive than it was had we not made a $1.8m in terms of total bonuses that were charged in the first quarter.

Okay

The only thing is I'm happy they got your name right.

They got it right this time. We actually have a check them. We give them an H there so they pronounce it right when I sign in. The other question on your guidance, you gave us revenue guidance for the June quarter. Are you still sticking I think your 90 to 95 for the full year revenue guidance?

Yes, we are. And both what we portrayed in the first quarter as well as what we just communicated to the second quarter caters to that range.

Okay. And my final question, from a sort of head count standpoint, what are your sort of thoughts -- somebody earlier touched on I think you said two new salespeople in the PI area. But what are your general thoughts on a headcount over the next couple of quarters, where you plan to make additions. I assume there are no more subtractions to be made

Our sense is that we had the right number of people. We may switch around some of the people. But in terms of refocusing people who are focused on one area on another area, but we clearly won't be adding people to the equation. So I think we're pretty comfortable where we are.

Great. Thanks.

I think at that point we said we'd take a certain number of questions. I think we're pretty much wrapped up in terms of questions. We do appreciate everyone's time on the call and again we continue to remain very enthusiastic about what's happening in each of our growth businesses to the company overall. It was a great quarter for us in terms of accomplishing some of our financial objectives in terms of margin, in terms of cash flow and in terms of overall sales. And we tribute that to demand in the market and to some great products and to some great people. So we want to thank you for all of your interest and appreciate you joining us today. Thanks very much.

Thank you, ladies and gentlemen, for your participation. This concludes today's conference. You may now disconnect.