Veradigm Inc (MDRX) 2003 Q4 法說會逐字稿

My name is April and I will be your conference facilitator. At this time I would like to welcome everyone to the Allscripts Healthcare Solutions fourth quarter and 2003 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. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Glen Tullman, Allscripts' Chief Executive Officer. Please go ahead, sir.

Thank you. I'm pleased to welcome all of you to the Allscripts Healthcare Solutions fourth quarter and 2003 year-end call. This is Glen Tullman, Allscripts' Chairman and Chief Executive Officer. Joining me on the call today is Bill Davis, our Chief Financial Officer. Let's start by reading a copy of the Safe Harbor statement. Bill.

The statements made by Allscripts or its representative in this conference call will include certain forward-looking statements that are based on current beliefs of Allscripts' management as well as assumptions 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, expects, anticipates, believes, intends, estimates, could, or similar expressions. These forward-looking statements are subject to a variety of risks and uncertainties included 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 2004 and beyond to differ materially from those expressed in or implied by these statements.

Except as required by federal security laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of any new information, future events, changed circumstances, or any other reason after the date of this release. With that said I'd like to the call back over to our CEO, Glen Tullman.

Thanks, Bill. Some years ago we created a vision, to become an indispensable part of the way physicians practice medicine. And we made ourselves, our healthcare clients, and our investors a promise that by using the clinical software, communications, and information solutions we provided to physicians and care givers; together we would improve the quality and reduce the cost of delivering healthcare, and do so in a way the provided real value for all of the stakeholders.

Our hard work began to pay off this year. Physicians are embracing our solutions, improving the way they deliver care, writing electronic prescriptions more legibly and safely than ever before, documenting patient care more quickly and accurately, creating paperless electronic medical records available anytime anywhere, learning about medications using interactive education programs provided over the Internet, and delivering medications to patients for immediate care.

Physician acceptance is evidenced by an expanding list of prestigious clients, increased client satisfaction, records in every one of our operating divisions, national recognition, and a statistic from our TouchWorks division that I'm most proud of. That 93 percent of our clients would recommend our solutions to a business partner.

Our success with our clients translated directly into bottom-line results for the quarter and for the year. Earlier today we reported a profitable fourth quarter, as we promised investors and positive operating cash flow during every quarter in 2003. Without stealing too much of Bill's thunder, let me highlight a few specifics.

As you know, we report in three areas that correspond to the way we organize our business -- software, represented by our TouchWorks and AIC business units; information represented by Physicians Interactive business unit; and incorporating our RxCentric acquisition, which we no longer break out separately; and medications, which covers our Allscripts Direct repackaging business. Let's start with software.

Our TouchWorks business unit, which markets our electronic medical record, reported year-over-year sales growth of 52 percent, with over $29 million in software and service sales for the year. I'm especially pleased with our sales traction during the fourth quarter. Sales grew from $6.8 million in the third-quarter of 2003 to over $10.2 million this quarter, a strong indication of how rapidly demand is growing. Bill will provide more details on revenue growth and margins, which were both positive as well.

Overall we've seen great progress by the team and we are even more optimistic about the future. A number of industry reports indicate that close to 50 percent of physician practices plan to purchase an EMR solution in the next 18 months. Our research shows that the market for electronic medical records software is greater than $3 billion for physician practices, including those 20 that have 20 or more physicians, where we have strong competitive advantage.

Today we also announced in a separate press release a number of new and expanded client relationships. In the fourth quarter, the State University of New York College of Optometry selected TouchWorks EMR for its clinicians and students. A leading educational facility, the State College of Optometry also operates one of the largest outpatient eye care facilities in the country. Clinicians and residents in training will use the TouchWorks EMR to automate their most common and time-consuming administrative tasks, while at the same time educating the next generation of ophthalmologists on state-of-the-art electronic medical records software.

In the same press release we also underscored the success of our modular strategy by highlighting three existing TouchWorks clients who recently signed add-on agreements. Holzer Clinic, a multispecialty group practice of over 100 physicians located in Ohio, implemented TouchWorks Document and Result Management in 2001 and fully deployed it to all of their physicians in June, 2003. Based on the positive results they were achieving, Holzer added electronic prescribing, charge capture, ordering and clinical notes.

Advocate Medical Group in Chicago, Illinois became a TouchWorks client in 2002. Beginning with electronic prescribing, document management, dictation capabilities and charge capture functionality for two of its practices, Advocate recently added clinical note, order processing, result management and document imaging. Advocate Healthcare is the largest healthcare network in Illinois and represents a continued large expansion opportunity.

And the third, Facey Medical Clinic, a 125 physician practice in Southern California, purchased the full TouchWorks EMR for the remaining physicians in their group not already using TouchWorks. And it will also add document imaging capability.

While I'm talking about the successes in our TouchWorks business, I need to acknowledge that we had some help along the way. Our strategic relationship with IDX continues to pay dividends. 81 percent of our TouchWorks electronic medical records sales were made to IDX practice management customers during 2003. Our strong relationships with Microsoft, HP, Intel, and Cisco and consulting firms like Cap Gemini also continue to provide us with strategic advantage with clients as well.

I also want to mention that the market for clinical automation software for smaller independent physician practices, while traditionally slower to automate, is starting to heat up. Independent physician practices understand the need for and benefits of workflow automation, and are increasingly ready to purchase cost-effective clinical solutions that are specifically designed to meet their needs. While we already offer electronic prescribing into this market, I think it's safe to expect Allscripts to significantly broaden our presence in this market in the near term.

Let me change gears and talk a little bit about AIC, which was acquired in August, 2003, because it also falls into the software category. I couldn't be more pleased with our success in integrating AIC into Allscripts. I want to highlight three areas of success for AIC. First, AIC's industry-leading documentation and scanning solution is now a fully integrated part of the TouchWorks Enterprise offering targeted toward large academic medical centers and integrated delivery networks, as well as mid-sized multispecialty groups. It's a value added application and I should add it's selling very well.

Second, during the fourth quarter we signed a three-year agreement with the IDX Groupcast practice management division to integrate the AIC document imaging product into their offering, providing the Groupcast organization with the opportunity to sell and implement a financial imaging solution for their clients while extending distribution for this portion of our product suite. Good news for us and good news for IDX.

Third, it's important to mention that AIC has traditionally focused on the smaller independent physician market. The documentation and scanning solutions utilizes the latest scanning technology to effectively manage patient charts while improving physician workflow efficiency and saving valuable time, space, and money. This turns out to be a perfect solution for smaller independent physician practices, and it was an important part of the reason we acquired AIC.

Today AIC has over 14,000 licensed users and over 250 installations in 40 states, and a strong and growing VaR network. Important assets in this part of the market. AIC is well positioned to lead our expanding presence in the smaller independent physician market. In 2003 AIC doubled revenue for the fourth straight year, indicating the level of interest in their solution, and we expect that kind of growth to continue.

Let me switch gears and talk about the information area of our business, our Physicians Interactive unit. As you recall, Physicians Interactive provides interactive education solutions for the pharmaceutical and medical device industry. PI now counts 80 percent of the top pharmaceutical companies among its clients. This year PI completed close to 100,000 interactive sessions for physicians. And just by way of comparison, it would take 2700 full-time detail reps to get an equivalent amount of face-to-face communication time with physicians. That's the same as the number of reps that a large pharmaceutical company would have, and PI can deliver more cost effectively and faster than any rep force could.

In 2003 Physicians Interactive launched twice as many programs as it did in 2002, and had a record fourth quarter of $3.3 million in revenue, in part due to the incorporation of the RxCentric acquisition into the numbers. Additionally, in 2003 PI acquired the assets of RxCentric, and I should mention that because it allowed us to broaden our footprint internationally, launching 17 different programs in markets outside the United States during 2003.

Overall PI continues to expand, and while the regulatory environment has temporarily slowed the rate of growth, while pharmaceutical organizations attempt to determine what exactly they can do promotionally, longer-term the restrictions on detail reps will help the PI business.

Lastly, I want to make a few comments about our medications area and our Allscripts Direct business unit. Today this business accounts for about half of our revenue, which is down from 63 percent in 2002. We expect this trend to continue as our focus remains on our higher growth higher margin software, communications, and information businesses. That said, it's important for investors to know that after some fluctuation early in 2003 we believe we have effectively stabilized the business.

At this point I'm going to turn it over to Bill Davis, our Chief Financial Officer, for a more detailed look at our financials.

Thanks, Glen. I will first review our Q4 and 2000 results in more detail and then provide further insight into our expectations for 2004. Turning first to our fourth-quarter results, Q4 included several significant achievements for Allscripts, many of which Glen has already outlined. Our first and most significant achievement is the fact that we delivered profitable results for the first time since becoming a public company, a milestone that we are extremely excited about. Our fourth-quarter bookings of $15 million also represents a record for Allscripts and was driven by all three of our growth businesses, TouchWorks, Physicians Interactive, and AIC.

Our revenue of 23.7 million represents the highest quarterly revenue for the company since going public and represents a 5 percent increase over the third quarter, which was another record quarter for us, and a 19 percent increase over the fourth quarter of last year. Our reported earnings per share of zero cents per share compares to a 2 cent loss in the third quarter and a 5 cent loss in the fourth quarter a year ago.

Finally, we are pleased to report that our operations generated positive cash flow for the fourth consecutive quarter. As I indicated previously, total bookings during the quarter were approximately $15 million. Consistent with prior quarters, such bookings amounts have not taken into consideration the 11.9 million of sales in medications. Our $15 million of bookings compares to $10.2 million of bookings in the third quarter, a 47 percent increase. Total bookings for the year were $43.1 million versus $33.3 million in 2002. Here again, a 29 percent increase.

TouchWorks, the largest part of our software segment, contributed $10.3 million in bookings during the quarter excluding ongoing support. This compares to $6.8 million in the third quarter and 7.3 million in the fourth quarter of 2002, a 41 percent increase year-over-year. TouchWorks bookings of $29.3 million for the year represent a 52 percent increase over the 2002 amount. It's worth noting that more than half of the contracts signed this year were with existing customers in the form of add-on sales.

Average deal size for new customers continues to remain strong in TouchWorks at approximately $400,000 a deal. As Glen indicated, IDX customers represent a significant portion of our bookings. Our Physicians Interactive, or PI unit, the largest part of our information services segment had bookings during the quarter of 3.4 million. This compares to 2.8 million in the third quarter. PI's bookings for 2003 were just under 12 million. Advanced Imaging Concepts, or AIC, contributed the remaining bookings of $1.3 million in the quarter.

Total backlog at the end of the quarter was $46.3 million and represents a 32 percent increase since the beginning of the year. The backlog breakdown is as follows -- our onetime fees which are attributed both to the TouchWorks business as well as the Physicians Interactive business represent $29.9 million of the backlog; prescriptions, which are expected to be brought down over the next three to five years, represent $10.2 million of the backlog; and one year's worth of our service and maintenance agreements in our TouchWorks business makes up the balance of 6.2 million.

Consistent with prior quarters it's important to note that we signed most of our customers up to 10 year license arrangements in our TouchWorks business, so it's reasonable to assume that we have an excess of an additional $45 million of S&A fees not reflected in our reported backlog.

Revenue for the quarter was $23.7 million. This represents a $3.7 million or 19 percent increase over the same period in 2002. Q4 revenue also represents a $1.2 million increase over Q3. The sequential increase was partially driven by an increase in our medication distribution segment, reflective of the stabilization of that business and some amount of seasonality. The balance of our increase was driven by increases in both our software and information services segments.

As we have explained previously, our ability to recognize revenue in TouchWorks, and to a lesser extent PI, is heavily dependent on utilization of their respective delivery resources, similar to a classic consulting model. Consequently Q4 tends to be a slower quarter for them from a revenue recognition standpoint due to the number of holidays and vacation days in the period.

With regards to our acquisition, Glen indicated earlier that we have fully integrated our RxCentric acquisition into TouchWorks interactive, and as such do not track such results separately. Relative to our AIC acquisition though, and consistent with what I spoke about in our Q3 call, the AIC acquisition contributed approximately 1.5 million of revenue net of eliminations and slightly positive bottom-line results in the quarter.

In terms of revenue mix, our software and information services segments continue to grow, representing 50 percent of total revenue for the quarter compared with 42 percent a year ago. The increase in our growth segments year-over-year is due to overall growth in TouchWorks and Physicians Interactive revenue and the addition of AIC and RxCentric revenue subsequent to their acquisition in August, 2003.

Fourth-quarter revenue by segment is as follows -- medication business contributed 11.9 million versus $11 million in the third-quarter; software and related services were up slightly from $8.2 million in the third quarter to $8.3 million in the fourth quarter; and then information services at 3.5 million, for the total of 23.7 stated before. 2003 revenues were $85.8 million. Revenue from software and information services grew 35 percent to 39.7 million in 2003 from 29.5 million a year ago. The revenue increase was 29 percent when you exclude the effect of the AIC acquisition.

Turning now to our gross margin, here again we also saw reasonable improvement. Overall our gross margin was 39.4 percent in the fourth quarter versus 38.5 percent in the third quarter and 29.3 percent a year ago. The slight increase in our fourth quarter gross margins when compared to prior quarters is primarily due to the relative contribution of AIC. Margins by segment are as follows -- medications business delivered 21 percent gross margin; software and related services grew from 54 percent up to 61 percent; and information services delivered 53 percent gross margin, here again for a total of 39.4.

We're encouraged by the consistent margins being delivered in our medications distribution segment, as well as the progress made in our software segment. As I indicated previously, the software gross margin increase is in large part due to the addition of AIC. Excluding the impact of AIC, our gross margins in our software segment were 48 percent for the quarter. The decline in information services gross margin from 60 down to 53 percent is due to the anticipated impact of certain lower margin engagements that were acquired as part of the RxCentric transaction. We expect margins in this segment to remain in the mid 50s.

Gross margin for the year increased to 35.7 percent from 25.3 percent in 2002. This increase was driven by a significant increase in our software segment, which grew from 25.7 percent in 2002 to 50.5 percent in 2003. This represents a 97 percent improvement in gross margin percentage and is reflective of the substantial growth that we have experienced and the improvement that we have realized in TouchWorks.

The medication distribution segment also contributed to the overall increase by improving their margins from 18.8 percent in 2002 to 21.4 percent in 2003. This increase is attributed to the fact that we continued our process of calling unprofitable client relationships during the latter part of 2002 and the early part of 2003, as well as leveraging our purchasing power for more favorable pricing from our suppliers.

Turning now to expenses. We continue to maintain tight control over our expenses. Operating expenses for the quarter were 9.5 million versus 9.9 million in the third-quarter. This expected $400,000 decrease is attributed to the fact that we capitalized an incremental $800,000 in capitalized software when compared to the prior quarter. Total capitalized software in the quarter was 1.3 million. As I've indicated in the past, this amount will fluctuate from quarter-to-quarter depending on our product development cycle.

R&D expenditures as a percentage of software revenue were approximately 30 percent in the fourth quarter. The software capitalization benefit was offset by the inclusion of AIC and RxCentric related costs for the entire quarter versus only two months in Q3. Such incremental cost includes a $100,000 increase in amortization expense. We also established a $250,000 provision in the fourth quarter related to certain sales and useback (ph) considerations.

Total operating expenses for the year were 37 million versus 37.5 million in 2002. When you take into consideration the $600,000 restructuring charge we recorded in 2002, we held operating expenses flat year-over-year while growing our revenue 9 percent overall and by more than 35 percent in our growth segment.

With regard headcount, we ended the year with 328 employees, which is consistent with how we ended the third quarter. Net income for the quarter was $116,000 or zero cents per share. This is an improvement from a 2 cent loss per share in the third quarter and a 5 cent loss per share in the fourth quarter of 2002. Basic shares outstanding for the quarter were 39 million and fully diluted shares were 40.7 million.

Turning now to our balance sheet. We ended the quarter with 51.3 million in cash and marketable securities. Approximately 35 million of that balance is classified as noncurrent assets due to expected maturities of those investments. Given our positive cash flow from operations, we have extended a portion of the investments to achieve better returns. Positive cash flow from operations were approximately $1.3 million in the quarter, offset by $1 million of disbursements related to the consummation of our two acquisitions.

Accounts Receivable increased approximately $2.4 million in the quarter due to the increase in revenue and timing of certain customer payments. We ended the year with Day Sales Outstanding of 69 days, which compared to 84 days at the end of 2002. Deferred revenue also increased by $1.7 million. Such increase was driven by the increased bookings in the quarter.

Looking now to 2004, we want to reiterate the guidance we provided earlier this year. We expect revenue for the year to be in excess of 105 million with margins in the 40 to 45 percent range and with earnings per share of 7 to 9 cents. As indicated previously, we expect the vast majority of our growth to come from our software and information services businesses. We expect our medications distribution business to deliver consistent results with moderate to no growth in 2004.

Recognizing the emphasis on TouchWorks, PI and AIC and the inherent attributes that each of those businesses possess such as regulatory or seasonality considerations, client timing, the amount of capitalized software in any one quarter, as well as the level of sales, we continue to expect some fluctuation in the performance of these businesses from one quarter to the next in 2004. This concern will be mitigated over time as we continue to build sufficient stacks in each of those businesses.

In summary, the fourth quarter and 2003 as a whole were filled with significant accomplishments for Allscripts. Record sales in all of our growth businesses, positive cash flow from operations in all four quarters, the completion of two successful acquisitions, record revenues, profitable results, and not to mention all of the nonfinancial accomplishments we achieved this year. All of these accomplishments lay the foundation for what we believe will be a strong financial performance in 2004. With I will turn it back over to Glen for some closing remarks.

Thanks, Bill. Let me summarize at two levels. First at an operating level I'll repeat what Bill had said. We had a very solid quarter with strong sales in our growth businesses and our best financial results since becoming a public company. We've seen a stronger demand, stronger than ever before for our products and we're on track for a successful 2004.

Second, from a market perspective, we are more confidence than ever. The trend surrounding healthcare will continue to drive adoption and use of information technology solutions. With the recent comments by President Bush in the State of the Union address and significant initiatives from Congress, CMF, the Leap Frog Group, the Institute of Medicine, leadings payers and PBM's and a number of well funded private organizations and foundations the push for electronic medical records has never been stronger.

Demand is being driven by concerns over patient safety and avoidance of medical errors, the sheer cost and quality concerns of using paper-based nonautomated systems and the improvements in both hardware and software programs available. All signs indicate that physicians want to and are ready to use this technology, which will accelerate demand for the software, communications, and information solutions we provide. And, as a leader in every sector we compete in, Allscripts is perfectly positioned to capitalize on the substantial opportunity in this market today.

We are delivering on the promise to become an indispensable part of the way physicians practice medicine, to provide them with the solutions to deliver better care, more cost-effectively to their patients. And for our investors, our bottom-line results are beginning to reflect the successes we are having in changing health care. We're just getting started with a clear vision and with great opportunities ahead.

So, let me conclude the call today by thanking our clients for their continued support, our employees for their continued dedication to our vision, and our investors for your continued confidence in our ability to make our vision a reality. At this point, Bill and I would be happy to answer any questions you might have. Thank you for joining us today.

(OPERATOR INSTRUCTIONS) Sean Wieland of WR Hambrecht.

I wanted to ask you about the process of converting bookings to recognized revenue. I like the bookings number in the quarter and I thought that it seems like sales are going really well. You made some changes earlier on in the year in how you're getting these products installed. Can you talk about how some of those initiatives have been going and what you're doing to -- are you okay with that process of getting the products installed or is there still more work, more fine-tuning to be done there?

Sean, this is Glen. I think there's always more work to be done. We've made good, solid progress on our ability to rapidly implement. But I would tell you something that I know you're familiar with, and that is as you go into more large complex environments, in some cases the clients aren't ready for us. In some cases when we're selling joint deals with IDX the great news is we're winning those deals and winning more than our share of them, it’s a substantial percentage, but the challenge is that in some cases we have to wait until IDX gets implemented until we can start to install.

So, some of those don't translate directly into revenue as quickly or as rapidly as we might like. There's also some organizations, some of the larger organizations that we've reported on who have a plan to roll out their physicians over a period of time, and that period of time can be 18 months in some cases. And so again, while we could go faster they are worried about the rate of change to their physicians. But that said, we have made solid progress. We have a Six Sigma black belt who's running the implementations today, he's working closely with us. He's on our staff, he's gone through (technical difficulty). So I think we've made good progress there. But that a, it's a realistic point.

This is Bill. The other thing that I would add, Sean, is that unlike a lot of software companies, from a revenue recognition standpoint we do, in fact, recognize both our software and service revenue ratably over the implementation period on a percentage of completion basis. And so that by fact alone doesn't translate in terms of our ability to pull the backlog in as quickly as some other software companies do. And I commented on the fact that as you think about availability of the implementation resources, especially in Q4, there are some limitations there, given the amount of holidays that we're confronted with.

So just two follow-up questions to that. How many quarters should I think about -- when you guys sign a deal in Q4, how many quarters should that -- on average should that take to be recognized for a typical deal?

I would think about it typically as four quarters, with the caveat, as Glen just indicated, that as we get into these larger deals, especially where IDX is involved, it's likely that their system will go in first.

And is that the case at Santa Barbara?

At Santa Barbara I think the timeframe is probably on the order of six months.

That you'll start the installation or that you'll complete it?

I think in the process we're doing some work there now, but frankly it's probably in the six to nine-month range before the process is complete.

Before it’s complete, okay. Great. Thank you very much.

Jim Kumpel with Raymond James.

Good afternoon, guys. Can you talk a little bit about why the AR did go up 14 percent sequentially when revenues were up 5 percent? And if seasonality has something to do with it or the timing of some of the deals, could you also give us a sense for just how much revenues the two acquisitions, AIC and RxCentric, represented in the third quarter relative to the fourth quarter?

This is Bill. I can answer both of those. Typical billing terms on our arrangements entitle us to bill a certain amount of the license and service fees upfront in the order of magnitude anywhere from 10 up to 30 percent of the deal value. And so there is a correlation to the amount of bookings that we have and the amount of receivables that we put on our books. I would focus you on the corresponding increase in deferred revenue, which is in effect where the offset of that increased receivable went.

There is a small amount of seasonality, if you'd like to call it that, in terms of accessibility of customers in terms of getting payment. We had one particular situation of the order of magnitude of about $600,000, $700,000 that literally came in on the 6th of January, but I wouldn't put a lot of the emphasis on that as it was mostly tied to the increase in sales of bookings in the quarter and our ability to get some of that billed in the quarter.

Relative to the contributions of AIC and RxCentric, as I indicated, in the third quarter combined they contributed about $1.5 million of our third quarter revenue. We had fully integrated the RxCentric activities or operations into PI, and so I don't have a corresponding number for the fourth quarter. But what I did indicate was that AIC themselves have contributed about 1.5 million. So there was actually helpful growth there in the AIC business quarter-over-quarter.

And so out of the 1.1 million sequential increase in revenues, I'm going to estimate that 750,000 to 1 million of that came from RxCentric alone?

No, no, no. There again, I would -- as I've indicated before, RxCentric and AIC combined contributed about 1.5 million in the third quarter, so at most I would think about the sequential growth being attributed to the acquisitions being in the $300,000 to $500,000 range.

And is it fair to say then that if not for the full quarter of revenue recognition from AIC and RxCentric versus the third quarter you only had two of the three months? That given the nice ramp up that you had in medication sales that software and services were pretty much flat excluding those acquisitions?

There again, for the reasons that I stated in response to Sean's question around the seasonality and the way we recognize revenue in the quarter in the absence of the same number of days in the fourth quarter as we had in the third quarter. I think if you looked at just the TouchWorks business alone, it was relatively flat for that reason. And as you indicated, the contributions by the meds business were helpful as well as the contributions from the acquisitions.

As we talked about before, though, we are very, very encouraged by the fact that in the TouchWorks business we had a substantial increase in sales or bookings, which grew from 6.8 million in the third quarter all the way up to 10.2 million in the fourth quarter. So it's a function of pulling that backlog into revenue.

Last question is just on cap rates. You talked about an $800,000 incremental capitalization relative to the third quarter. Is that correct?

Yes.

Can you give us a sense for the magnitude of capitalization fourth quarter last year and what you think would be an appropriate seasonal way of modeling that over the course of '04?

The way I look at it, and it is a challenge from a forecasting standpoint, from your vantage point, and I appreciate that -- I’d look at it on an overall year-over-year basis. Capitalization in 2002 was approximately $2.4 million and we had a like amount in 2003. So year-over-year we had virtually no change in the amount of capitalization. It was a little more back end loaded in 2003 simply because of the timing of the release. I don't have readily available the amount of the specific capitalization in the fourth quarter of '02, but I can get that to you.

With AIC presumably capitalization will go up just a smidgen I suppose because now you've got a little bit more work to do I suppose.

Actually the AIC addition really didn't have any meaningful impact on the amount of capitalized software.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) David Francis of Jefferies & Co.

Since Jim beat you up on all the nitty-gritty operating numbers, I will ask a couple bigger picture questions first. Relative to the amount of new business coming from IDX, I think you said about 80 percent of bookings in the year came out of the IDX base. Do you expect that mix to be the same going forward or to begin to move down as you get more and more acceptance in the marketplace?

Dave, this is Glen. I expect it will probably stay pretty consistent. The good news is that we're having tremendous traction in the IDX base, and we have only penetrated roughly about 6 percent of that base, 6 to 7 percent probably of that base. From that standpoint we've got a long way to go, and that is increasingly low-hanging fruit because when you have reference sites, our system becomes a safe choice for IDX customers. They have a lot of places to look where it is up, where it is working and we have delivered. That said, we will also begin to focus and continue to focus on clients that are outside the IDX base, but everything else being equal, I don't think we would want to shift dramatically because our selling costs and all of our implementation costs and timeframes are less in the IDX base.

That's helpful. One follow-up, if I could. You guys are talking about a meaningful step-up in revenues '04 over '03 for the first time in a while for the company. At the same time, the earnings impact is not showing through nearly as meaningfully. I guess the question is what kind of incremental infrastructure investments do you need to make to put on the additional 20 some odd million of revenue that we're talking about? And at what point do you start to get some earnings leverage out of the high margin business that you're selling? Thanks.

Dave, this is Bill. I would answer that in that we are continuing to make substantial investments in all of our product offerings. As I indicated before, about 30 percent of our revenues are being reinvested back into the products. And we are expecting similar levels in 2004. And so part of that compression that you're speaking to is being driven by that. From a G&A back office infrastructure standpoint, there is really no meaningful additions to the plans that are driving that, so I would attribute it largely to the investment that we're putting back into the product.

I guess again what else needs to be invested in? And again I am talking in broad numbers I understand, but you've done a hell of a job of rationalizing the infrastructure over the last 6 to 8 quarters, and I would imagine that you are in a position where there is not a whole lot of additional investment that needs to go into that. At what point should we expect to see some meaningful drop down to the bottom-line from a margin perspective?

I think you'll start to see that in the second half of the year. And again, one of the things we're doing is we're being pushed in some respects and led, we're learning from our clients about a number of different areas which include some communications aspects of the product and other functionality that we heretofore didn't really contemplate, but things like physician-patient communication and the like are areas where we're doing an increasing amount of development work.

That said, I think the second six months of 2004, the second half of this year is where we'll start to see some of that leverage layer in. You'll also see that in the sense that our earnings, while our 2004 results -- we didn't model them quarter by quarter, but on the other hand I think you can assume that as more and more leverage is created in the second half of the year, that's where you'll see stronger results. So I think that's when you start to see the leverage and, of course, next year is where it really all breaks open.

So we've just crossed over the 45 minute mark and we've taken I think now 10 questions, so I want to keep to the schedule that we promised all of you, and that is to keep the calls relatively short. We appreciate again the questions and your support. Just in closing I will repeat what I said, which is we think that the quarter was a very strong quarter, strong sales in our growth business are a good lead indicator for what's going to happen in 2004 both from a market perspective but also from an operating perspective at the company.

Sometime ago investors said to us we need you to do three things. We need you to start cash flowing positively, we need you to cross over the profitability line, and we need to see sales start to jump at a significant rate and at that point we'll understand that the opportunity has arrived. If you look at the results this quarter, we have for the past four quarters cash flowed positively. This quarter we did cross over the profitability line. And last but not least, sales grew almost $4 million just in the TouchWorks unit alone.

So I think what we're seeing is the market has tipped. We're seeing very solid results and we're making the investments that are going to position us to take advantage of a growing and exciting market in the future. So, thanks very much for your support and we look forward to talking with you next quarter.

Thank you. This concludes today's conference call. You may now disconnect.