Veradigm Inc (MDRX) 2004 Q1 法說會逐字稿

Please stand by for the realtime transcript. The Allscripts conference call will begin shortly. Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, you will be placed on music. Hold. We thank you in advance for your patience. Good afternoon. My name is Wesley and I will be your conference facilitator today. At this time, I would like to welcome everyone to Allscripts' first quarter 2004 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 would you like to ask a question during this time, simply press star, then the number one on your telephone keypad. If would you like to withdraw your question, press star and then the number two. Thank you. I would now like to turn the conference over to Mr. Glen Tullman, Chairman and Chief Executive Officer of Allscripts Healthcare Solutions. Please go ahead sir.

Thank you, Wesley. I'm pleased to welcome you to the Allscripts Healthcare Solutions first quarter 2004. This is Glen Tullman, Allscripts' Chairman and Chief Executive Officer. Joining me on the call today are Bill Davis, our Chief Financial Officer and Lee Shapiro, our President. Let's start by reading the Safe Harbor Act. Bill.

The statements made by Allscripts or its' representatives in this conference call will include certain forward looking statements that are based on the 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, expect, anticipate, believes, intends, estimates, could, or similar expressions. These forward-looking statements are subject to a variety of risks and uncertainties including those in the earnings press release issued by Allscripts today and in Allscripts' filing 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 or implied by these statements.

Except as required by federal securities laws, Allscripts undertakes to obligation to publy update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason after the date of this release. With, that I would like to turn the call back over to our CEO Glen Tullman.

Thanks, Bill. We have a number of new people listening in on the call today and I would like to welcome them. I'm excited to share with all of you our first quarter update. Allscripts Healthcare solutions provides clinical software, connectivity, and information solutions to physicians and other providers. Solutions that improve the quality and reduce the cost of healthcare, while providing real value for all of the shareholders. Our vision is to become indispensable to physicians who want to deliver safe and efficient healthcare and to become a standard part of the way healthcare is delivered. We are achieving that vision today. Allscripts is a solid investment opportunity. The company is perfectly positioned for profitability and growth. And I'm pleased to report that we are today, beginning to deliver on profitability and we see very significant growth opportunities.

The market is accelerating and healthcare information technology is receiving increasing focus from the four p's, politicians, payers, providers and patients. For three weeks in a row, President Bush has mentioned how critical both electronic health records and electronic prescribing are to healthcare. I have often joked that it's only -- it's the only thing that both President Bush and Hillary Clinton agree upon. A bi-partisan bill is in the works and will be introduced in the next few weeks in Congress. This week, Newt Gingrich and Patrick Kennedy co-authored a "New York Times" op-ed piece on just this subject. In this election year we expect to see continued interest in activity. In fact, tomorrow I'll be in Washington discussing our solutions and our view of the opportunity with health and human services secretary Tommy Thompson, Mark McClellan, the head of CMS, which is the Centers for Medicare and Medicaid Services and others. But political push alone won't do it.

Fortunately, the other stakeholders are very active. Managed care is leading the way. Last week in a joint press release, Microsoft and Wellpoint announced that Allscripts was selected as one of the two software providers for their $40 million physician technology initiative. Which is targeting 19,000 of Wellpoint's physicians with a funded automation solution. Wellpoint is first, but we expect other payers to rapidly join in this effort, given the benefits of physician automation. We also see organizations like the ehealth initiative starting to act, and releasing grants to fund technology and software solutions through their connecting communities program. Some of our clients, for example Holsten Medical Group, have already been awarded grants. Most important, large academic medical centers, integrated delivery networks and multi-specialty physician groups are making decisions and moving forward with electronic medical records.

This quarter we signed 13 new clients in year-to-year, our software revenues and sales are up 53% and 60% respectively. However, revenues and sales are not the only story here. More and more of utilization which is key to realizing the promise of electronic healthcare will become the key selling point. And this is where Allscripts leads. For example, physicians at Sierra Health, the largest healthcare provider in the state of Nevada wrote over 70,000 prescriptions electronically last month alone. Providing safer healthcare to their patients more efficiently. Say good-bye to script pads and paper charts, the future is here, today. Electronic healthcare is fast becoming "the" standard of care. Now, let me spend just a few moments talking about each of our business units and the progress we've seen over the first quarter and I think you will agree that Allscripts is well positioned to capitalize on this market opportunity. In the clinical software area, our Touchworks EMR received a number one rating in KLAS, the consumer reports of healthcare. In their 2004 ambulatory EMR perception report.

As I mentioned we signed 13 new clients including Brown and Tollland and Arizona Community Physicians. Two highly respected practices representing over 750 physicians, who will be using the full EMR suite or key modules. And our clients continue to enjoy success. Central Utah published an article in the Journal of Healthcare Information Management, one of the most prestigious publications in healthcare IT, which documented a positive financial impact of almost a million dollars in the first year of deployment of TouchWorks. We just completed our TouchWorks user conference and hosted over 200 clients. A 60% increase over last year and a solid indication of our growing base. And if there is one thing that I could communicate to you today, concerning our company, it would be the excitement level of our clients. Everyday, they are doing what some people said was impossible. Automating physicians and changing healthcare.

During the quarter we also announced the release of touchscripts.net which launches our new effort focused on smaller independent physician groups. Touchscript.net, as the name implies, was co-developed with Microsoft, based on their dot net architecture and is designed to be deployed over the Internet and used with physicians with virtually no training. The application is currently available for electronic prescribing, along with our pocket library reference guide. But we see it as the first step to a complete modular electronic health record. Physicians told us that electronic prescribing is a good start, but they want more. We expect to release more. More modules with full functionality and complete integration with Microsoft office 2003 over the next few months. I also wanted to point out that we signed an agreement with Sure Scripts who, with strong support from the pharmacy industry is developing a national network that will provide additional connectivity for our physicians to more pharmacies across the United States.

This will be valuable to all of the physicians who use our electronic prescribing software. Our AIC unit which provides scanning and clinical documentation that is available as a part of TouchWorks, also is available on a stand alone basis through direct sales and VARs and AIC had a strong quarter. We added eight new VARs and now have a total of 55. Roughly half of who produced revenue in the quarter. These VARs or value added resellers, represent a significant number of the practice management solutions in the independent physician market today. And adding AIC solutions create a complete -- creates a complete offering for their markets. We also announced a distribution agreement with Krenell Imaging. Krenell is the nations' leading value added distributor of document imaging systems with over 600 document imaging VARs in the United States. We expect this agreement the broaden our distribution of service capabilities throughout the United States. Switching to information services, we've made some significant changes in our Physicians Interactive unit. Was we previously announced Mark Thierer, who brings significant industry experience, most recently in a Senior Executive role at Caremark joined PI as President. And will lead Physicians' Interactive on a strategic expansion of our product line.

With increased pressure on pharma to reach physicians cost effectively, comply with recent restrictions imposed by the office of the inspector general and leverage their sales forces e-detailing and other new services represent a ready-made solution. We believe there is significant opportunity to close the loop and to work closely with our pharmaceutical clients to provide targeted physician product education and also to focus on patient adherence, and patient compliance, which both represent huge opportunities for pharma and for Allscripts. And the good news is that independent research that documents the effectiveness of our solutions is now available. Manhattan Research, a leading healthcare marketing and information firm, released their latest report entitled "Taking the Pulse". And noted that of physicians would have utilized edetailing, 60% have participated with Physicians Interactive, compared with 46% with the next closest competitor. Also, Manhattan Research pointed out that PI is more effective in reaching high-volume prescribers, so important to pharmaceutical companies. We're more effective than any other company.

Manhattan research showed that the average PI physician writes 191 prescriptions per week, versus just 161 by non-PI physicians. Finally, our legacy business, Allscripts Direct, continues to see the solid operating performance we promised six months ago when we made a number of operating charges to stabilize that business. And we expect that trend to continue. Overall, we're very pleased with the quarter from a strategic and operating performance standpoint. I expect a lot of focus this coming quarter on how we can convert backlog more rapidly to revenue, even given the stringent rev new recognition guidelines we operate under. And speaking of financial results, I think it's now time that I should introduce Bill Davis, our chief financial officer to comment on the quarter. Bill?

Thanks, Glen. As Glen indicated, I will provide a little more insight into our Q1 performance and then comment briefly on our outlook for the balance of the year. Turning first to our Q1 results. Key financial highlights in the quarter include our net income of $267,000, or a penny per share, represents our second consecutive quarter of profitability. Total bookings in the quarter up 13.3 million, represent a 40% increase over the same period a year ago. Our software bookings were a major contributor to this increase with a 60% increase year-over-year. A significant accomplishment given how seasonally soft Q1 tends to be for software companies. Our revenue of 23.2 million represents a 16% increase over Q1 of last year, led by a 53% increase in our software-related services revenue year-over-year. Finally, we generated $2 million in positive free cash flow, fueled by improved accounts receivable collections.

As indicated previously, total bookings during the quarter were approximately 13.3 million. Consistent with prior quarters, bookings do not take into consideration an dle 11.2 million of sales and medication. Our 13.3 million in bookings compared to 9.5 million bookings in Q1 of 2003 and 15 million of bookings in the seasonally strong fourth quarter. TouchWorks, the largest part of our software segment, contributed 8.9 million in bookings during the quarter, excluding ongoing support. This compares to 6.2 million nifert quarter of last year, a 44% increase yeers-over-year. And 10.3 million bookings during the record and seasonally strong Q4. It's worth noting that more than half of the bookings this quarter were with new customers. Average deal size for new customers continues to remain strong at approximately $400,000. IDX customers also continue to represent a significant portion of our bookings.

Our physicians interactive, our PI unit, the largest part of our information services segment, had bookings during the quarter of 3.4 million. This compares to 3.3 million a year ago, and is consistent with the prior quarter. Advanced imaging concepts or AIC contributed to the remaining bookings in the quarter. Total backlog at the end of the quarter was 50.9 million, and represents a 10% increase quarter-over-quarter. The backlog breakdown is as follows. One-time fees represent 33.1 million of the balance, subscriptions, which are recurring revenue streams which we realized over the next three to five years, represents 10.8 million of the balance, and then our support and maintenance agreements for the upcoming year represents 7 million. Once again for a total of $50.9.

It's important to note that our backlog reports only the next year SMA given that most of our customers signed a ten-year license agreement, it's reasonable to assume that we have in excess of an additional 45 to 50 million of SMAT's not reflected in our reported backlog. Revenue for the quarter was 23.2 million. This represents a 3.1million, or 16% increase over the same period in 2003. Such increase was fueled by all three of our growth businesses, PI, Touchworks and AIC. With regards to our quarter-over-quarter revenue performance, our software and related services businesses improved revenues by $600,000, or 7% in the first quarter. Both our TouchWorks and AIC businesses drove the Q1 revenue increase.

We expect the sequential revenue growth in this segment to accelerate in future quarters, such that our revenue increase year-over-year is expected to be in excess of 40%. Physicians Interactive, once again the largest part of our information services segment, experienced a slight decline in revenue quarter-over-quarter. Such softness is attributed to the lower sales in the middle of 2003 given by the affect of the OIG guidelines at that time. This is coupled with ongoing client delays. PI revenue also was adversely impacted by an accounting change made effective in the first quarter of this year, related to the development portion of our contracts, that is now being recognized rateably over the contract period. We previously recognized such revenue at the time of delivery to the customer. The medication distribution business, delivered 11.2 million in Q1. Versus 11.9 million in the fourth quarter.

This expected decline in revenue is attributed to the pact that we had fewer sales to wholesalers in the quarter. This actually resulted in a slightly higher gross margin percentage being realized in the quarter. We continue to remain comfortable with our expectation that this business will remain relatively flat year-over-year. In terms of revenue mix our software and information services segment represents 52% of total revenue for the quarter compared to 39% a year ago this. This increase in our growth segments year over year is due to the overall growth in TouchWorks and Physicians Interactive revenue and the addition of AIC and RxCentric revenue subsequent to their acquisition is August. First quarter revenue by segment is as follows: Our meds distribution business delivered 11.2 million, our software and related services, once again delivered 8.9 million, up off of 8.3 in the prior quarter and our information services business delivered 3.1 million for a total of 23.2 million. Our gross margins also improved. Overall, our gross margin was 39.5% in the first quarter, versus 30.9% in the first quarter of 2003 and 39.4% in the fourth quarter.

Year-over-year increase is primarily due to the continued improvement in TouchWorks gross margins, and the relative contribution of AIC. Such increases were offset by a decline in our information services gross margin. Such decline is attributed to the transitional impact of the accounting change previously mentioned, as well as our decision to write off certain project-related costs, that were associated with projects that we do not expect to continue. I do not expect either factor to have an ongoing effect and therefore expect margins to migrate back up into the high 40s, low 50s in a relatively short period of time. Such improve will be impacted by the relative contribution from customers acquired through our RxCentric acquisition which have lower acquisition than the P.I arrangements. Margins by segment or as follows: Our meds distribution business delivered 21%; software-related services is 61%; and our information services of 43% for a combined 39.5. As I indicated before, we are encouraged by the consistent margins being delivered in our sotware and medication distribution segments. The software gross margin increase year-over-year is in part due to the addition of AIC. But even without AIC, we made significant improvement in our software segment.

Our gross margins in that segment without AIC were 49% for the quarter. This compares to 43% a year ago, and 45% in the fourth quarter. Turning now to expenses. We continue to maintain tight control over our expenses. Operating expenses for the quarter were 9.2 million, versus 9.5 million in the fourth quarter. This expected $300,000 decrease is attributed to the facts that we established a $250,000 provision in the fourth quarter, related to certain sales and used tax considerations that did not recur in the first quarter. Total capitalized software in the quarter was 1.3 million. This amount is consistent with the amount we capitalized in the fourth quarter and is reflective of significant progress we have made with the development of our version 9.2, and version 10.0 over the past two quarters. As I have indicated in the past, this amount will fluctuate from quarter to quarter depending on our product development cycle.

Consequently, I expect such amounts to decrease in Q2 and Q3, once again based on where we are at, as it relates to version 9.2, and 10.0. R&D expenditures as a portion of software revenues were approximately 30% in of the first quarter, consistent with past quarters. Amortization expense remained consistent at $400,000 for the quarter. With regard to head count, we ended the quarter with 333 employees which is relatively consistent with the 328 we reported in the fourth quarter. Net income for the quarter was $267,000, or a penny per share. This is an improvement from the break even results we reported last quarter, and compares to a five cent loss in the first quarter of 2003. Basic shares outstanding for the quarter were 39.2 million and fully diluted shares were 41.9 million. Turning now to our balance sheet. We ended the quarter with 53.3 million in cash and marketable securities. This is a $2 million increase over the prior quarter. Approximately $37 million of that balance is classified as non-current asset 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 cashflow from operations was approximately 2.5 million in the quarter. Proceeds from option exercises contributed another 1.1 million. Both increases were offset by 1.3 million of capitalized software and approximately $300,000 of capital expenditures. Accounts receivable decreased approximately 1 million in the quarter, due to an increase in customer collections. I continue to be encouraged by the improvements we are making in this area because because I believe that the clear indication of customer satisfaction. We ended the quarter with day sales outstanding as 67 days which compares to 69 days at the end of 2003. Looking now to the balance of 2004, as many of you know, we announced an auditor change earlier this year. I am pleased to report that the change has gone very well. And we are very excited to build a long-term relationship with Grant Thorton.

As indicated previously, there were no disagreements or unresolved issues with our former auditors, rather we decided to make a change based on beliefs that Grant Thorton is is better to meet the needs of Allscripts given their focus on midcap companies. As Glen indicated earlier we are also very excited about another announcement we made recently with regards to our involvement in the Wellpoint initiative. I believe this announcement signifys the leadership role Allscripts Healthcare Solutions plays in bringing technology to the physician. With that said, I believe the financial benefits associated with this transaction may take some time to realize as physician adoption accelerates. Consequently, I believe the impact of this transaction, as well as our recently announced dot net e-prescribing initiative on our 2004 results is still unknown.

As it relates to the rest of our businesses, we continue to execute the plan -- against the plan we laid out earlier this year. An area of concern continues to be the soft performance comes out of our Physicians Interactive business. We are taking the necessary steps to leverage that asset and the deliver the returns our shareholders expect. Along those lines I'm encouraged by the new leadership we have brought in to address the challenges we face in that business and look forward to their improved contribution in the near term. To reiterate a point I made last quarter, it is important to recognize the inherent attributes that all of our growth 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. Based on these considerations, 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 backlog in each of those businesses.

In summary, we are very encouraged by the accomplishments in the first quarter, with positive operating results for the second quarter in a row, strong bookings in positive cash flow results. We are very focused on delivering profitable growth in future quarters and believe we are well-positioned to capitalize on the substantial opportunities that exist in all of our markets. With that, I will turn it back over to Glen for some closing remarks.

Thanks, Bill. Let me add one other financial point. I wanted to let the market know that we intend to put in place a 10B-51 plan which allows some of our folks to diversify over a period of time. I've been fortunate to have a very talented experienced team that has been with me through a number of companies. Many of those folks have never sold a single share at Allscripts and it's appropriate that they, in a measured fashion, be given the opportunity to benefit from their efforts and hard work. Given the length of time some of our team has been here, we thought that this was very important to do. So let me summarize, relative to the business, at two levels, first, at an operating level, we delivered another successful quarter with profitability and record operating cash flow. Software revenues, as stated previously were up 53% year-over-year, and we have a very solid pipeline.

Second, from a strategic perspective, we are better positioned than ever to take advantage of the trends surrounding healthware -- healthcare that will continue to drive adoption, and use of information technology solutions. The industry is taking off, and most important, all signs indicate that physicians want and are ready to use this technology, which will accelerate demand for the software, connectivity and information solutions that we provide. Allscripts represents both a growth and earnings opportunity for our investors. Solid management, innovative solutions and an exploding market. It's happening. So let me conclude the call today by thanking our clients for their continued support, our employees for their dedication to our vision and our investors for your confidence in our ability to make our vision a reality. Thank you very much and at this point, Bill and I, and Lee Shapiro would be happy to answer any questions you might have. Thank you.

At this time I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from David Francis with Jeffries.

Good afternoon. Glen, I have to say quite frankly it scares the hell out of me when companies start talking about government initiatives relative to the healthcare IT sector and revenue opportunities coming out of those. Can you talk more tangiblely about, A, the current pipeline relative to new business activity, both in the IDX channel and outside, and B, what the Wellpoint opportunity means to you guys, with a contract in place both from a total revenue opportunity, as well as a timing perspective? Thanks.

Sure. Thank you, Dave. Well, first of all, let me be clear that I think the government programs and various private programs all represent additional opportunity, but I don't believe any are necessary for our continued success and growth. I will say, however, that programs like the e-health initiative which are government related and their connecting communities program, they are, in fact, already giving grants, as I mentioned to some of our clients and that money is coming back to us in terms after additional software purchases.

That said, in terms of the pipeline, the pipeline has never been stronger. If you talk to many of our customers, they are absolutely moving forward on these solutions. Many are doing so in a modular fashion, others are committing to the full EMR or what's now being called the EHR, the electronic health record. Relative to Wellpoint, as Bill said, it's a little early to understand the financial results relative to next quarter or the quarter thereafter, but needless to say, they've already done a mailing that hit 19,000 of their network physicians that gave those physicians an opportunity to purchase either a paperwork reduction package, which is essentially a PC and a printer with software and internet connectivity or e-Prescribing package, which is a hand held device and a wireless setup that actually is set up on site.

So both of those represent real opportunities for us, and orders are coming in -- orders are coming in today relative to some of those. It is subscription based and, again, we're not sure of the exact impact that will have so far.

Thank you.

Our next question comes from Mark Anderson with XEL Capital.

Yes, just a couple of quick questions on the revenue opportunities on the Wellpoint deal. Regarding the PC package, do you get or do you or any of the software vendors, whether it's you or Zigs Corp, receive any revenues on the P.C package?

If you're talking about the paperwork reduction package?

Yes.

At this time, we do not revenues unless the physicians opt to also include and buy directly from us our ePrescribing application. I wouldn't want to comment on the future, but I think there's a probability that, you know, we'll see ePrescribing either included directly or included as an option for those physicians.

Okay. So but for right now the answer is no, just on the actual Wellpoint, the current initiative of the $40 million?

Yes that's correct. But, you knw, again keep in mind one of the biggest hurdles for smaller physician groups is making sure they have in place, you know, the up-to-date PCs and printers and that capability. I think I mentioned earlier that they have included Internet connectivity. While we were seeing a lot of physicians go ahead and get that, that's actually is not funded directly by Wellpoint, so I understand it. So -- but they are getting equipment.

And I have one last quick question. Regarding the hand held package, I guess Zigs Corp mentioned it was mentioned that it's about a $600 per Doc option and I guess the data out so far is that, I guess 90% of the Docs have chosen the paperwork reduction package so that leaves about 10% or 1100 doctors of the current trial that have chosen the hand held ePrescribing option. I'm just trying to quantify the actual revenue opportunity from the Wellpoint deal because the rest of it is sort of people trying to pen out, you know, if it actually latches on, where does it go? Maybe could you help me figure out exactly what the revenue opportunity is on the current split in terms of, I guess the 1100 doctors that have chosen the hand held option.

Yeah, I don't think I want to comment. And, in fact, we're prohibited from commenting on exact pricing relative to the Wellpoint and the Microsoft initiative that we have. What I would say that that there were some comments made by Wellpoint on the initial sampling of physicians who are coming in and the percentages that they were seeing, those were relatively early in the program.

We believe that there's an opportunity either way, because, again, remember, that we see electronic prescribing as the first step in a broader deployment, a modular deployment of a full electronic medical record, or an electronic health record.

So many of these physicians, who are equipping themselves with the latest PCs are coming back and saying, well, we didn't select electronic prescribing, because we need more than just electronic prescribing, and we said for a long time, that the single application provider, having only electronic prescribing with no upgrade path, isn't really viable longer term, because physicians, the minute they get that are going to want more. So that is very -- is a very good thing for us. So we think we win in either case.

Okay. So for you, it's additive and -- I mean, am I completely off base to think it's $500 $600 a Doc, times 1100 doctors for the initial opportunity. Is that ballpark what it is worth? Is it worth a half a million bucks.

Yeah, again, I can't really comment on the numbers other than to say out of -- out of the 19,000 Docs offered, you know, thinking that only 1000 will opt for the ePrescribing, I think is very low.

Okay. Well, thanks for your time.

Once again I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. That's star one on your telephone keypad. The next question comes from James Kumpel with Raymond James.

Okay, good afternoon. I just wanted to get a sense from you guys, the type of reaction you are getting within the IDX sales force and if you are seeing any kind of trends now that you have been working with them for so many years, as to -- as to what the hurdles are? You know, just talking yesterday on the Zigs Corp conference call, they seem surprised by the reaction and the slow uptake by physicians for their offering and I was wondering what kind of strategies and actions you have taken to help physicians maybe get over the hump?

Well, let me, again -- I don't want to comment specifically about a competitor; although, I will say that, you know, single application providers, providing only electronic prescribing, you are going to get a slower uptick.

We've seen very solid uptake and if you look at two of the deals that we talked about that I referenced, one the Arizona Community Physicians, again, that's a long-time Groupcast customer, from IDX that has now said that they are going to go forward and they have equipped 71 of their physicians and physician assistants and nurse practitioners with the full EMR. If you look at Brown and Tolland, a much larger group, very significant group as you know, they will have literally hundreds of physicians using some of the applications, some smaller group will use all of the applications.

But -- so we're seeing very solid uptake. You know, we don't have that adoption problem because we have a path to get them to a full electronic medical record or electronic health record.

Can you talk a little bit too about the confidence that you feel that other payors willing to jump on, kind of the Wellpoint bandwagon of underwriting systems? Because we've seen examples in the past of PBMs, for example, offering to underwrite the uptake of ePrescribing systems without a whole lot of success. I just wanted to see what gives you the confidence level that other payors are looking the this.?

This is Lee Shapiro. I think that what you will see is that the Wellpoint initiative has stimulated the thinking on the boort part of a number of players in managed care and the PBMs to look at initiatives and not only enhance the relationships with their physicians but also to take advantage of some of the efficiencys the adoption of these technologies create in those physician offices. So I would expect that we will see going forward renewed interest and continued benefits in the market place from them.

Okay. Thank you.

See, I would just add to that, that, you know, I think it's highly likely that there will be -- you know we've seen very strong interest and I think it's highly likely that there will be other deals like the Wellpoint deal announced in the very near future.

Okay. Great. Thank you.

Our next question comes from Ferose DeWinn withTiger Technology.

Hey, guys congratulations on the quarter. Two quick questions. First, when you look across your competitive landscape, could you help us categorize your competitors who you consider deliver a full EMR-type solution and those would are on the other end of the spectrum delivering more of a point eprescription solution. I think [inaudible] it would be helpful for the investing public to understand what the competitive landscape looks like. That's question one.

Okay. By the way, they told me that, you know, once we started posting profitability, that the questions would come to me and not Bill. I'm not sure if I -- you know if that's a good thing or a bad thing.

You can take the next one!

Okay. In terms of -- you know we really see kind of three markets if you look at the competitive landscape for electronic medical records. You know, I'll start at the lower end. The lower end we just announced an initiative and there's no real true competitive offering that dominates the lower end of the market. And I would say, you know that's zero to 20, 25 physicians, excluding specialties. As you move into the midmarket, I think the clear competition that we see most aggressive competition there is Next Gen and, you know, in that respect, I think that, you know, Next Gen is is has generally said they tend to win three out of four deals and we said we tend to win three out of four deals and people say, how can that be?

And, you know, the reason is we're focused primarily in the IDX base, that's where 80% of our sales are coming from and they're focused the outside of the IDX base. So that tends to be where, you know, where we see the midmarket. There are a few other people, you you know kind of up and coming companies but I think there's concern about the viability of the other companies. They're not yet public. They don't have enough market share. Finally at the high end, you know, our primary competition there is Epic. The good news is that, you know, after Epic successfully signed their deal with Kaiser in California, we've seen virtually all of their focus go to Kaiser.

I think customers have understood that's where their attention is going to be and that's frankly, made them a bit less competitive in the high end of the market. So that's where we see the competitive space for EMR. I think in each one of those spaces, we win our fair share or more than our fair share and when you talk about the IDX market, I think we're winning 75 to 85% of the deals. If we -- your second part of that question was: How do we look on ePrescribing and who are the competitors are there? Again, that space is really brand new. You know, having lived through this once before, what we saw is simply giving physicians an ePrescribing application, even if you gave it to them free, by itself, without a path of where to go and how to add other applications, was not going to be a successful strategy.

I think the other thing is as you go forward, people start to ask some questions, one, are you making money? Because everyone knows that now that we're outside of the old Internet days if you are not making money on a quarterly basis, there's only so long you can sustain your viability. They also start to ask questions in addition to the upgrade path, what's the technology? Can you actively deploy wireless? You know, we have the best partners in the business, people like Microsoft, who helped us co-develop our independent smaller physician office applications, and Cisco and Intel on the wireless side of the equation.

And, of course, last but not least, HP. So, you know, we're getting their hardware sooner. We're making sure it works for clients and we have people like Sierra, who are writing 70,000 electronic prescriptions a month, you know. So I think in the ePrescribing space, we feel pretty good because of the attributes we have, not just the application and the experience, but the strong financials in the upgrade path.

Go got it. That's very helpful. The second question I had was it sounds like you have a number of guys who started off in the -- a number of players who started off in the exMR world and who are beginning to address eprescriptions? And it sounds like you have another camp of players who started off in the eprescription world, and, you know, may or may not have an upgrade path? Could you comment on sort of which of those two camps will end up -- it doesn't sound like there's space for sort of both, or sort of point solutions in this space? You know, and whether you think some of the larger healthcare IT vendors are going to begin to enter the space, given the press its receiving.

Well, if I could predict perfectly, you know, I would be on the investment side of the equation, but I think I can give you some guidance there. One, I do believe that the single application providers, you know, just there's not a path for them. So unless they get a full path to an EMR, that by and large, it's a dead end solution. Whether it's funded or not. You know so that's one piece of the equation. Second, you know, if you are not in today's environment, realistically, if you are not, you know in a position where you are well capitalized and making money, then you aren't going to get significant investment and buy-in from the physician community. These are smart buyers and especially as you get the bigger practices they want to know that you are going to be viable. So those are two of the pieces.

I think from a healthcare information technology and the bigger players you talked about, it's very clear that everybody has figured out that healthcare is moving outside the four walls of the hospital and into the ambulatory space. And frankly it is not only into the ambulatory space but it's moving home. So it's going from hospitals to clinics, to physicians offices, to home health. And consequently, all of the larger companies are desperately trying to find solutions in the ambulatory environment. We're seeing that in two respects.

One, some of those companies are trying to extend their hospital presence in the ambulatory market. I think they are finding that trying to force down solutions that were developed for hospitals not physicians is generally not a successful approach. And then second, you have a number of those organizations who are developing ambulatory solutions and I believe those will be competitors in the future.

Got it. Thank you very much.

Why don't we take one more question. And try to keep this call to a manageable length. So if there's one more question, we'll go ahead and take it.

Our final question comes from Jim Bartlett with Bartlett Investors.

Two parts. First, you mentioned in a move in the second quarter to generate more revenues out of the backlog. Could you comment a little bit more about that?

Sure. You know, what I would say is that one of our challenges, two-part challenge has been, you know, taking our backlog and converting it into revenue. Because as we continue to build the backlog we have to be able to convert it more quickly. It's a two-part challenge, because, one, from a revenue recognition standpoint, I believe we have some of the most conservative policies in the industry. And in that respect, it makes it very difficult to recognize revenue. You know, we take as an example when we sign a contract, we take -- we recognize no revenue on signing. You know there's other companies out there who recognize a significant amount of revenue on signing. So we actually have to do the work, and be in an install to start recognizing revenue. And that itself is conservative. Then in terms of actually doing the work, we have another -- we have a number of initiatives to speed the implementation process. You know, one, sometimes we'll sign a deal and the good news is that if it's an IDX deal, if it is a net new deal, sometimes the client will say to us we want to get the practice management system installed first before we install your stuff.

So that's in backlog but it's not readily accessible where we have accessible backlog, which is the bulk of it, we have to -- now that we're getting into a process where we're installing so many of these, we're getting faster and faster at our ability to convert but it's an area that -- that Joe Carey, our Chief Operating Officer and Lee Shapiro, our President, are very focused on in terms of converting backlog into realizable revenue and doing so more quickly.

When should we look forward to seeing the results of that initiative.

We have a number of initiatives and clearly they are ongoing initiatives. We would expect that some of that would begin to show in the second quarter but I think the third and the fourth quarter where we see pretty dramatic improvements in terms of our ability to convert that much more quickly. It is, I can tell you, it is other than sales, the most important initiative we have in the company today.

And your comments on guidance?

I'm going to let Bill answer this one! [ LAUGHTER ]

Yeah, consistent with what I said in my remarks, you know, we continue to execute against the plan that we laid out for the street back in the first quarter in conjunction with our announcement of Q4 results, which, just to reiterate, our expectations are we'll have revenues of 105 million or greater in earnings per share in the 7 to 9 cent range. So we are still working towards that, and, you know, comfortable in what we communicate to the marketplace.

And that's with no growth in the medications distribution business?

That's correct.

Thank you.

I want to thank everyone joining us on the call. Thanks to the people who joined who hadn't heard the call before, we know there's a number of people judging by the overall participation and we remain very excited about the opportunity for the reasons I mentioned. The company is today profitable. The company is cash flowing. We have very good prospects and we continue to convert those prospects at an increasingly rapid rate. In addition we think that the prospects from a strategic standpoint for the industry have never been brighter.

We can't look anywhere in the space without someone talking about electronic medical records or electronic health records or electronic prescribing and each one of those categories we believe we have a strong leadership position and a very well-defined product offering. So we continue to execute against our plan. We remain confident in the plan that we've communicated to the street and we look forward to updating you next quarter as we continue to drive the business forward. Thanks very much for joining us.

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