Veradigm Inc (MDRX) 2004 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Allscripts Healthcare Solutions second-quarter earnings call. (OPERATOR INSTRUCTIONS) I will now turn the call over to Mr. Glen Tullman. Sir, you may begin you conference.

It's great to welcome you to the Allscripts second-quarter call. This is Glen Tallman, Allscripts' Chairman and Chief Executive Officer. Joining me on the call today is Bill Davis, our Chief Financial Officer, and Lee Shapiro, our President. Let's start by reading a copy of the Safe Harbor statement. Bill?

The statements made by Allscripts or its representatives 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 a "may", "well", "expects", "anticipates", "believes", "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 an 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 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 reason after the date of this release.

With that I'd like to turn it back to our CEO, Glen Tullman.

Thanks Bill.

To get right to the heart of it, the second quarter of 2004 was a most successful in the Company's history by almost every measure. From an overall Company perspective we achieved record sales, record revenues, and record earnings. We also delivered our sixth consecutive quarter of positive cash flow. However, before I dive into the details, I want to provide you with a broader perspective on where we fit in the overall healthcare landscape.

As many of you know, there is significant activity taking place in Washington D.C. concerning electronic health records. Just last Friday the Secretary of Health and Human Services, Tommy Thompson, stated, "Today I think we have reached the tipping point. We're reaching that critical mass where people are now starting to focus on the fact that technology is actually here for the practice of medicine."

We agree with his assessment. The market has tipped, and there is a strong momentum to accomplish Thompson's vision of a health-care system where patient records are always available and accurate, and where healthcare providers have all the information they need at their fingertips to make the right decisions.

At Allscripts that's our vision as well. However, as Dr. David Brailer, the National Coordinate for Health Information Technology stated, "this change will be a public-private partnership, and it will not be driven solely by the federal government." In fact, his view and ours is that the private sector will drive this change with help from organizations like Allscripts.

Every day we're delivering significant value to the key players in the healthcare equation, including physicians, payors, pharmaceutical companies, and content providers. Let me talk about each.

Physicians are and will clearly be at the center of any change in healthcare. We deliver three things that physicians want most -- automating their most common activities, for example e-prescribing or charge capture; eliminating the paper in their practices; and giving them the ability to move to a full electronic medical record, one that is usable and can be implemented rapidly. Let me explain.

There are a large number of physicians, especially in the smaller independent practices, that want to automate some of their most common activities without committing to a full electronic medical record. However, it's important for those physicians to know that their investment will not be lost when they do decide to move to a full EMR. We provide a unique modular implementation approach that allows physicians to start with any application, but gives them the option to seamlessly add additional modules in the future.

Other physicians may choose to automate, but their real goal is to eliminate the use of paper in their practices and make their patient records available electronically. Our award-winning IMPACT.MD document imaging solution from our AIC business unit allows physician practices to accomplish this goal, to go paperless and achieve rapid and substantial return on investment.

In addition, IMPACT.MD is a part of our TouchWorks EMR. This is important to understand because without scanning a truly fully electronic medical record simply doesn't exist. However, we're finding more and more that physicians want a complete electronic medical record, one that is affordable, easy to implement and easy-to-use. TouchWorks is the number one rated EMR in the industry according to virtually all of the third party independent evaluations. Most recently Allscripts was voted number one at the TEPR Conference. And TEPR, for those of you who are unfamiliar with the term, refers to Toward an Electronic Medical Record. In addition, the AC Group and CLAS (ph), which the industry considers to be the consumer reports of healthcare, have also ranked Allscripts number one.

Physicians, especially those in larger practices, want a robust EMR with instant access to information and the ability to record clinical notes, write prescriptions electronically, capture charges, order in view labs and review transcriptions on a variety of devices, including PDAs and tablets with an option of going wireless. In other words, they want full functionality. And we've become, especially for our strategic partner IDX and their practice management system users, the safe choice in the EMR space with over 100 IDX implementations alone and the functionality physicians want and need.

Turning to payors, as we all know one of the primary reasons the federal government is so interested in healthcare is because they're the nation's largest payor. We're also working with the nation's private payors, which include employers, managed care organizations, and PBMs, to drive results in terms of higher-quality and lower-cost health care.

Large employers are struggling with the increasing cost of health-care and are trying to take control in a number of ways. Many of you are familiar with Leapfrog, which is the industry organization driving quality standards. However, we see a number of employers starting their own clinics on-site or outsourcing to organizations like Wholehealth (ph), one of the leaders in this growing field who provide on-site healthcare services.

Our Allscripts Direct business unit is seeing strong interest here which translates into increased sales. And managed care has stepped up their involvement as well, accelerating their efforts to incentivize physicians to use electronic prescribing applications and electronic medical records.

As we announced earlier today, ConnectiCare, a leading Connecticut-based managed care company, will provide Allscripts e-prescribing technology to physicians in their network. And at least some of their practices are using this funding as an opportunity to expand into a full EMR. In a separate press release we announced that Metropolitan Healthcare, a Minnesota-based HMO, has contracted with Allscripts to provide the TouchWorks EMR to their network care providers in their mental health division. These developments follow WellPoint's announcement of Allscripts' participation in their $40 million physicians automation initiative.

Clearly managed care is taking a more active role in helping physicians automate with the tools they need to improve healthcare for their patients. And Allscripts is proving to be an important partner in their efforts.

Another key player in the healthcare equation is pharmaceutical companies. Pharmaceutical companies need to effectively connect with physicians with real-time product education, and our Physicians Interactive unit does that more often and more effectively than anyone else in the world. The most often used service, e-Detailing, is just one form of electronic communication and education that PI offers to connect pharmaceutical companies with physicians. Working with our pharmaceutical clients, key players in industry and physicians, we're about to broaden our communications offerings with adherence and compliance tools designed to reinforce the physician-patient relationship, improving patient outcomes and delivering a very valuable service.

There is one other important player in the healthcare equation that we impact. That is the information providers, the people who create and published content. And since our business is not just software, but using software to enable conductivity and easier access to information, working closely with content providers is a critical part of the solution for a physician. We're not only ones who realize that.

Leading providers of clinical information for physicians have concluded that clinical automation solutions like e-prescribing in the EMR, are rapidly becoming one of the most important communication channels to reach physicians. And Allscripts is ideally positioned to capitalize on this growing and very important trend.

Last week we issued a press release on an agreement we signed with Wolters Kluwer, the industry leading drug and disease database management company and healthcare information provider, which will allow them to both license and distribute our e-prescribing technology to physicians, which helps them see the market and of course brings us added distribution. This is the kind of win-win we always look for.

So as you can see, Allscripts is in the right place at the right time, with the right set of products and services -- or better said, solution -- that clients want, and importantly are willing to pay for. And the results for the quarter are evidence of this. While Bill Davis will provide you with the details, I do want to hit some key second-quarter highlights for each of the business unit. Let's begin with TouchWorks.

Our sales team closed over $10.5 million of new contracts this quarter, which included a number of $1 million deals. And while we appreciate the talk and the positive momentum coming out of Washington, the groups that are making decisions and implementing today are the ones really driving the change in the use of electronic medical records as the standard of care in healthcare.

One of these is George Washington University Medical Faculty Associates, right in the heart of Washington D.C. Following the President's call for an electronic medical record for all Americans in the next ten years, this leading academic-based physician practice accelerated their implementation of the full TouchWorks EMR with over 100 of their physicians going live in 30 days, setting a new record for rapid implementation and setting a great example for other practices of across the nation.

Another great example is Piedmont. The largest physician-owned multi-specialty group in the Charlotte, North Carolina area, Piedmont will begin installation immediately by educating their 88 physicians across 35 locations on the TouchWorks EMR. TouchWorks will provide a centralized electronic chart for all of their patients at what ever location they are seen.

Piedmont and George Washington are two of the country's leading healthcare providers who also happen to be leading change in health care.

However, once you sell the software you have to implement it to make it useful for the clients and to recognize revenue. And during the second quarter our TouchWorks service group booked over $8 million, representing a 14 percent increase over the first quarter. This accomplishment was in part due to our new implementation methodology called 3-D (ph), which is based on the Six Sigma work we've been investing in. 93 percent of the new contracts signed after January 1st of this year are utilizing the 3-D process, which results in faster and more effective implementation for our clients and more rapid revenue recognition for Allscripts. The methodology was the basis for the roll out of the entire TouchWorks EMR at George Washington.

While we continue to gain traction in the market, we are increasing our investment in business development. During the quarter we held an executive summit with over 60 prospects and clients attending. We also conducted our third annual TouchWorks users conference with over 230 attendees, nearly doubling attendance from the previous year. Next quarter you'll also begin to see the first advertising for TouchWorks. The pace is picking up in this market, and we feel it's critical that we be known well enough to be a participant in every deal.

The third quarter will also bring our 10.0 Version of TouchWorks, which will add substantial new functionality to our product. Currently 10.0 is in beta testing with two of our clients.

Let me switch gears and talk a little bit about Physicians Interactive. While we continue to broaden the Physicians Interactive offering in the marketplace, I'm pleased to say that in the second quarter of 2004 we delivered the third largest number of e-Detailing sessions in the history of the Company with over 26,000 sessions conducted, and the largest number ever if you were to include international e-Detailing.

During the quarter we also signed a strategic partnership agreement with Zestica, a Europe-based life sciences strategic consulting firm and our new international partner. PI is now doing business in nine countries and with nine of the top ten pharmaceutical companies in the world.

But what I am most excited about is the new set of offerings we will release to pharmaceutical companies working closely with physicians to address the challenges of patient compliance and adherence, a significant opportunity to improve healthcare and one area in which pharmaceutical companies are increasing their investment. You'll hear more from us during the third quarter on this area and the product developments there.

Switching gears again to our AIC unit, AIC continues to perform well as the demand for going paper-less in healthcare continues to increase. AIC will also be leading our efforts in the small to medium-sized physician office space which will be a key beneficiary of our new .NET products, including TouchScript.NET for e-prescribing, the product we use for managed care organizations, and also a lighter, more rapidly deployable EMR that is under development and expected to be released soon.

Finally, let me turn to Allscripts Direct. As I previously mentioned, we're seeing solid results from our Allscripts Direct unit. Revenue was up, although as Bill will explain some of it was at a lower margin than we would like. But most interesting is the growth in employers providing on-site health care, a trend we will continue to watch. Overall, the direct business is both healthy and stable.

So across each of our operating units you see a combination of solid product offerings delivered effectively to clients who have an increasing demand for them. All of this translates into better operating performance on the top line and the bottom line and our most successful quarter ever.

So at this point let me ask Bill Davis to provide more detail on the financial progress we've made during the second quarter.

As Glen indicated, our second quarter was marked with a number of record performances and other exciting events, so I'd like to first provide you with the detail of our accomplishments and then provide some insight into the convertible debt offering that we announced at the end of the second quarter. I will then comment briefly on our outlook for the balance of the year.

Turning first to our second quarter results and some key financial highlights in the quarter, our net income of $696,000 or 2 per share represent our third consecutive quarter of profitability. This accomplishment demonstrates our continued ability to drive improved profitable results.

Total bookings in the quarter of 14.1 million represents a 66 percent increase over the same period a year ago. Our TouchWorks bookings were a major contributor with a 76 percent increase year-over-year. Our revenue of 25.6 million represents a 30 percent increase over Q2 of 2003, led by a 65 percent increase in our software and related services segment.

Finally, we generated approximately 1.4 million in positive cash flow, representing our sixth consecutive quarter of positive cash flows from operation.

As indicated previously, total bookings during the quarter were approximately 14.1 million. Consistent with prior quarters, bookings do not take into consideration the 12.4 million of sales in medication. Our 14.1 million in bookings compares to 8.5 million of bookings in Q2 of 2003 and 13.3 million of bookings in the first quarter of this year. Year-to-date bookings were 27.4 million, which compares to 18 million for the same period a year ago. This represents a 52 percent increase.

TouchWorks contributed 10.6 million in bookings during the quarter, excluding ongoing support. This compares to 6.1 million in the second quarter of 2003. It's worth noting that approximately 60 percent of bookings this quarter were with new customers. We reached another significant milestone with our average deal size for new customers exceeding $500,000 per deal for the first time. As in prior quarters, IDX customers continue to represent a significant portion of our bookings. Year-to-date bookings for TouchWorks were 19.4 million versus 12.2 million for the same period in 2003. This represents a 59 percent increase.

Our Physicians Interactive or PI unit, the largest part of our information services segment, had bookings during the quarter of 2.3 million. Year-to-date bookings for PI were 5.7 million versus 5.8 million for the same period a year ago.

Turning now to backlog, total backlog at the end of the quarter was 52.3 million and represents a 13 percent increase since the beginning of the year. The breakdown of backlog is as follows -- onetime fees makes up 34.7 million of the balance; subscription arrangements in our software businesses make up another 10.6 million of the balance; and our support and maintenance arrangements with our software-related clients for the next year or next 12 months make up the balance of $7 million for a total of 52.3 million.

It's important to note again that the amounts indicated for support and maintenance arrangements of 7 million does not contemplate the additional contractual amount that we have with our customers for the remaining terms of their arrangements. And that could add an additional $45 million to our contracted backlog amount.

Revenue for the quarter was 25.6 million. This represents a 5.9 million or 30 percent increase over the same period in 2003. Year-to-date revenue was 48.8 million compared to 39.7 million in 2003, representing a 23 percent increase. Our software and related services businesses contributed 3.9 of the 5.9 million year-over-year revenue increase. Both our TouchWorks and AIC businesses drove such growth. Our prepackaged medication business contributed 1.2 million of the $5.9 million increase, resulting from additional pull-through opportunities from certain of our wholesaler customers. Our information services segment contributed the remaining $800,000 through an increase in both e-Detailing and transactional revenue.

Our second quarter revenue of 25.6 million represents a $2.4 million increase over the first quarter. Our software and related services businesses contributed incremental revenues of $1 million. This increase represents 11 percent sequential growth. Consistent with what I said last quarter, we expect the growth in this segment to continue to accelerate in future quarters.

Physicians Interactive experienced a $200,000 or 7 percent increase in revenue quarter-over-quarter. The PI increase was driven by an overall increase in the number of e-details completed in the quarter, offset by a slight decline in the average price for such completed details.

The medicated distribution business delivered the remaining increase of 1.2 million. 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 segments represent 52 percent of total revenue for the quarter compared to 43 percent a year ago. The increase in our growth segment year-over-year is due to overall growth in TouchWorks and PI revenue and the addition of AIC and RxCentric revenue subsequent to their acquisition in August of 2003.

Second quarter revenue by segment is as follows -- our medications delivered $12.4 million; our software and related services delivered 9.9 million; and our information services 3.3; once again for a total of 25.6.

Turning now to margins, our gross margins also improved. Overall, gross margin was 39.4 percent in the second quarter versus 33.1 percent in the second quarter of 2003. This increase is primarily due to the continued improvement in TouchWorks gross margins and the relative contribution of AIC. Software and related services gross margin percentage increased from 43 percent in 2003 to 64 percent in 2004. Such increase was offset by a decline in our information services segment caused by the transitional impact of the accounting change announced last quarter, as well as the relative contribution from customers acquired through our RxCentric acquisition, which has lowered expected gross margin than our existing PI arrangements. As I indicated previously, I expect margins in this segment to migrate back up into the high-40s, low-50s over the next few quarters. The software gross margin increase also was offset by a slight decline in the medications gross margin that resulted from the previously mentioned increase in wholesaler revenue in the quarter.

Margins by segment are as follows -- our meds delivered margins of 19 percent; our software and related services delivered 64 percent and as indicated before compares to 43 percent a year ago and 61 percent last quarter; and our information services remained consistent at 43 percent.

Overall gross margin for the second quarter was the 39.4 percent, and is relatively consistent with the first quarter of this year. With that said, it's important to note that we are encouraged by the 3 percent margin improvement delivered in our software segment. Such increase was driven by the implementation efficiencies discussed by Glen, as well as continued favorable contributions from our AIC business unit. The sequential software increase was off-set slightly due to the decline in the meds business that I mentioned before.

Turning now to expenses, we continue to maintain tight control over our expenses. Operating expenses for the quarter were approximately $9.6 million versus 9.2 million in the first quarter. This expected $400,000 increase is attributed to the fact that we had approximately $200,000 less capitalized software in the quarter and a slight increase in overall employee compensation, driven by a slight increase in overall headcount and incentive compensation associated with the improved performance of the Company.

Total capitalized software in the quarter was 1.1 million. This amount compares to 1.3 million in the first quarter, and is reflective of significant progress we made with the development of 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. I expect such amounts to decrease in Q3 and Q4, and potentially by as much as $0.5 million in each quarter.

R&D expenditures as a percentage of software revenue were approximately 30 percent in the second quarter.

With regard to headcount, we ended the quarter with 344 employees, which compares to 333 we reported in the first quarter.

Amortization expense remained consistent at $400,000 for the quarter. Net income for the quarter, as indicated before, was $696,000 or 2 cents per share. This is a penny per share improvement from the probable results we reported last quarter and compares to a 5 cent per share loss in the second quarter of 2003.

Net income for the first six months of 2004 was $963,000 or 2 cents per share. This compares to a $4.2 million loss or 11 cents per share loss for the same six months in 2003.

Basic outstanding for the quarter were 39.5 million and fully diluted shares were 42.4 million.

Turning now to our balance sheet, we ended the quarter with 54.7 million in cash and marketable securities, up 1.4 million over the prior quarter. Approximately 31 million of that balance is classified as non-current assets due to expected maturities of those investments. Given our positive cash flow from operations, we continue to hold a portion of the investments longer-term to achieve better returns.

Positive cash flow from operations was approximately 2.1 million in the quarter net of unrealized gains and losses. bringing our year-to-date total to approximately 4.4 million. Proceeds from option exercises contributed another $1 million in the quarter. Both sources of cash were offset by the 1.1 million of capitalized software and approximately $600,000 of capital expenditures.

Accounts receivables increased approximately 1.6 million in the quarter, due to the increase in revenue and advanced billings to customers, as evidenced by the $2.1 million increase in deferred revenue.

We ended the quarter with days sales outstanding of 66 days, which compares to 67 days at the end of the first quarter. I continue to be encouraged by the improvements we are making in this area, because as I have stated before I clearly view it as a clear indication of customer satisfaction.

Turning now to our debt offering, as many of you know at the end of the second quarter we announced that we would sell $75 million of 3.5 percent convertible senior debentures due in 2024 via a private placement pursuant to Rule 144-A of the Securities Act. In addition, the Company granted an option to purchase up to an additional $7.5 million. The $82.5 million offering closed earlier this month. The debentures are convertible under certain circumstances and to shares of the Company's common stock at initial conversion price of $11.26 cents per share or 7.3 million shares.

In conjunction with the transaction the Company used a portion of the net proceeds to repurchase approximately $11.2 million or 1.4 million shares of its common stock. This was done in an attempt to minimize any potential downward pressure on the stock caused by executing this transaction. Such repurchase will be classified as treasury shares starting this month, and our weighted average shares outstanding will be reduced by a like amount.

Taking the repurchase into consideration, plus approximately $3 million of deal-related expenses, Allscripts generated approximately $68.4 million in net proceeds, which puts our total cash and marketable securities position in excess of $123 million.

So why did Allscripts go out and raise so much capital? The answer is quite simple. First, as Glen indicated we fundamentally believe that the HCIC (ph) market is heating up and we want to position Allscripts such that we can take advantage of strategic alternatives as they present themselves.

Second, is a fundamental belief that we're in a rising interest rate environment, and we were presented with the opportunity to raise capital on very attractive terms. One of the things I liked best about the debt instrument is that the fact that the Company effectively controls the form of settlement -- cash versus stock -- until such time that our stock price appreciates greater than 80 percent from the closing price on the date of issuance. We view such flexibility to be significant leverage.

Finally, as it relates to the debt offering, there has been a lot of recent press regarding the proposed accounting change related to a common feature of convertible debt instruments like the one we issued.

Such feature is referred to as the contingent convertible or COCO feature. This proposed accounting change in no way changes the economics of the debt offering. Rather, it calls into question when the diluted shares associated with our debt offerings must be included in our fully diluted EPS calculation. Under the existing accounting rules, the 7.3 million shares associated with our debt offering are not to be included in our EPS calculation until such time that our stock price reaches $14.63 per share. The proposed accounting rule change would have issuers like Allscripts include the 7.3 million shares immediately.

What has not been focused on in the market is the fact that our earnings will be adjusted to add back the associated interest expense generated by the debt offering. That means that the 7.3 million shares associated with our debt offerings are deemed to be anti-dilutive until such time we generate approximately 28 cents per share in profit.

Turning now to 2004, we continue to execute against the plan we laid out to your earlier this year. Based on our performance through the end of the second quarter, we believe revenue of at least 105 million is still reasonable. Excluding the incremental interest expense associated with the convertible debt offering, we would have expected our bottom line performance to be in the middle to higher-end of the previously communicated range of 7 to 9 cents per share. At this point we're assuming incremental interest expense of approximately $1 million or 2 cents per share for the balance of the year, and as such believe it is likely that we will perform at the low-end of the 7 to 9 percent share range once you have taken into consideration the incremental interest expense.

In summary, we are very encouraged by our accomplishments in the second quarter with positive operating results for the third quarter in a row, strong bookings, and positive cash flows. We're very focused on delivering profitable growth in future quarters and believe we are well positioned, in part due to our strong financial position, to capitalize on substantial opportunities that exist in all of our markets.

With that I will turn it back over to Glen for some closing remarks.

I will go ahead and summarize as well.

I'm very proud of our results for the quarter; not only the top line and the bottom line, but what we have been able to deliver for our clients and their patients, which really translates into better health care through automation. We see the market is ready, and we're very excited about the products and the solutions we deliver, and we're ready to do just that.

Allscripts Healthcare Solutions is perfectly positioned from a product, people and financial standpoint to capitalize on the trends in the market and the opportunity to make healthcare better. 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, we would be happy to answer any questions you might have. Thank you very much.

(OPERATOR INSTRUCTIONS) David Francis.

Congratulations on a great quarter. A few quick questions.

First, can you tell us how much of the new bookings activity on the TouchWorks side of the business came from IDX clients relative to the whole? And second, can you remind us what kind of holes you guys might be looking to fill with opportunistic acquisitions with the reloaded balance sheet?

With regards your first question, consistent with prior quarters IDX continues to represent a meaningful amount of our overall book of business. As it Relates to the quarter, I would think about it in the 75 to 80 percent range.

And relative to the second question in terms of holes, first off I will make it very clear that we do not need to acquire anything in order to deliver our numbers for the year. So from that standpoint we have got what we need. We have the product and we can continue to sell it.

That said, what we do see is an opportunity to extend both the application into broader areas, especially some of the areas I mentioned like physician-patients communication and other potential areas. And we see opportunities that may be realized to actually grow the base as well. So those would be the two areas that we look at. As this begins to consolidate we think there may be unique opportunities, and that's really the reason we went to the markets to raise the additional capital.

To make sure I'm clear, I think this is the first time we've heard you saying this, that you would look to opportunities to potentially put on competitors as acquisition targets at this time.

I think that's safe to assume based on the fact that we believe, given the substantial progress we're making both as the safe choice in the IDX space and working more and more closely with IDX, we see the opportunity to really broaden that base and potentially go after that.

I would mention that we have made one acquisition in RxCentric in the Physicians Interactive business. And RxCentric was a competitor of ours. So it's not unheard of for us to do that. We just want to make sure that we're careful how we do that.

Thank you.

Ryan Stewart, Piper Jaffray.

Congrats on a nice quarter. Glen, would you mind just providing a little bit more color around -- you guys just quickly touched on the transaction side within PI and kind of where that stands, and what your expectations are for the year and as we look into next year.

Let me make sure I understand the question correctly. You're talking about PI e-Detailing transactions?

I apologize. In the information services line, the actual opportunity for transactions -- prescription transactions as you start routing more and more scripts to PBMs, to retail pharmacies; start presenting more formularies at the point of care.

Sure, I'd love to talk about that because we think that's a very exciting part of the business. It's one of the reasons I came to Allscripts. And we see the connectivity and information components of the business to represent substantial opportunity.

I have talked before about the fact that we have a number of sites now that are exceeding in prescription transactions alone -- in electronic prescription transactions -- 50,000 transactions a month. So that's an area that both presenting formulary, routing those transactions either through SureScript or through RxHub, and adding value to those transactions through messaging and the like, represents a solid growth area for us, both for the remainder of this year and in the future. While it is small today -- and Bill help me here, but I think it is somewhere in the order of $1 million -- we would expect that grow substantially next year as we start to actually implement many of the contracts that we've sold and as those contracts ramp up.

I will also mention that prescription transactions represent only one piece of the transactional business we're focused on. Lab transactions and other kinds of transactions also represents an important part of the overall value that we add.

Relative to the payor, you're getting more and more payors in your pipeline. In the sales process, or in the initial courting process, if you will, is one of the reasons they're coming to you, is one of the top of mind things that they are most concerned about generic substitution?

I think payors are concerned about generic substitution. They are concerned about formulary compliance. Increasingly they are starting to be concerned about disease management, and the ability to both messaging and manage not only the physicians but the patient base. That I think is kind of a good inkling of where some of our products are going to head.

We see more and more pay for performance. We also see payors who are seeing this as a solid way to sure up their provider relationship. So number of reasons driving that. And if I hadn't mentioned it, I would say that there continue to be payors in our pipeline that we expect to close prior to the end of the year.

One last quick question just on the payor front. Dr. Bluestein (ph) from ConnectiCare is quoted as saying that he believes TouchWorks is the right solution for their initiative because (technical difficulty) prescribing, but then the practices can roll out to a full EMR. Would that suggests -- they had had a prior pilot in place. Would that suggests that you guys are going to be the meaningful player for ConnectiCare going forward given the opportunity to move beyond e-prescribing and to roll out the modular EMR? Because we're seeing a lot of e-prescribing pilots out there, but I thought his comment was interesting; it's kind of e-prescribing is the first dynamic. Am I thinking the right when I am looking at the ConnectiCare deal?

Absolutely. While I won't comment specifically on ConnectiCare, what I would tell you is that more and more physicians, while they may start with e-prescribing, they want to make sure that what they choose it is not a dead-end; that they have a way to grow into a full EMR application. That's becoming increasingly important.

And remember, we lived through this once before through an e-prescribing push. And what you saw is all of the single application providers didn't survive. The reason they didn't survive is people say this is the first step and automation but we need a path to grow, and that path is going to be with companies like Allscripts. So we've already seen that with the ConnectiCare. As I mentioned, one or two of the practices they approached basically said this is a great; we'd like to do e-prescribing, but we will use this as a way to step into a full EMR with Allscripts.

Got it. Thanks so much.

Sean Wieland, WR Hambrecht.

First on the meds business, that looks a little stronger than I thought. Do you think -- is that going to back off a little bit from here? Do you think that if you're looking at leveling that out, is this the new base?

I continue to believe that for this year I would think about the meds business in the 46 to $48 million range, and so it's a bit of a leveling out to get to that point.

You said 46 to 48?

Yes.

On the TouchWorks business, any additional color on the bookings that you can give us? Like maybe talk about number of large deals greater than $1 million, trend of average deal size, and may be sales reps that you have in the field.

Let me say without identifying that, one, in terms of sales deals I think we've put some press releases out. I think it's reasonable to assume there may be more press releases coming that give you more detail on additional deals.

We're seeing more and more of these deals start, and start with a full EMR as opposed to the modular approach that we've had. So that's good news. And that in part is borne out by the increase in the average deal size. But as we look at the pipeline, we're seeing more and more that.

In terms of Metropolitan, which is one of the deals, that's substantially in excess of $1 million for us. That's one of the ones that we announced.

I would comment, as I did in my remarks, in terms of an average deal size trending, we did deliver average deal size of about $0.5 million in the second quarter, which is up almost $100,000 off of last quarter. So pretty nice movement there as well.

The deals that were done with IDX, can you give us kind of roughly speaking, are most of the deals coming from Groupcast customers or are more coming from Flowcast customers and Carecast for that matter?

It's a combination, although I don't believe this quarter we have any Carecast deals. I think it's both Groupcast and Flowcast. It is about 60-40 with Flowcast being the 60, although we see strong efforts in the Groupcast base and we're see a strong pipeline in that base.

On the PI business, it seems like that kind of plateaued where it's actually maybe a little range-bound. Is there something there that's going to get that -- break that business out of the range of the $3 to 3.3 million range?

I think what we've talked about there is the fact that in PI we have a few things going on. One, we have a number of new products that we will be releasing prior to the end of the year that focus on both adherence and persistence, and that is those are very key areas to pharmaceutical organizations.

And again, because our business is the physician-driven, to the extent that your physician both tells you to take these medications, provides information that educates you on the medication, and provides reminders, renewal reminders and the like, you're more likely to take the medications, you're more likely to get better faster, stay better. And pharmaceutical companies like that. And surprisingly managed care companies like that as well.

So we expect to see strong interest. We've already seen strong interest in those products. Some are being developed with some of our clients, and that will lead to grow.

Second, we are upgrading some of the sales force in that area because we think the average sale can be substantially larger than it is as we start to move into the compliance, adherence and persistence areas. So that's going to be extended and driven by -- it's going to build upon the success of the e-Detailing.

Last but not least, as you know we announced last quarter a new President for that business, Mark Thierer. Mark brings with them a substantial background in the industry, and knows a lot of the players; is in the process of helping us reinvent parts of that business, again to build on the success we're having, but to take it to the next level.

One quick last question. The $1 million in added interest expense, is that net of the interest income?

That's a net number.

Thank you very much.

Julie Peterman, Wachovia Securities.

Congratulations on a good quarter. Two questions.

I was wondering, first of all, if you could tell us what percent of IDX customers are left to be penetrated? And then second of all, if you could talked a little bit about the grants that are coming out in the industry, like what we've seen from The American Association of Family Physicians, and how that could potentially impact your business.

Let me start with the first one, and that is a fun one because we believe that about 90 percent of the IDX base is left. We believe we have penetrated about 10 percent of the IDX base. So we have substantial runway and opportunity to grow within the IDX base. As I've mentioned, we're also starting to expand our efforts to focus outside the IDX base as well, both through our AIC unit, which is focused on small to mid-sized markets and using the our network to help penetrate that market, and through some of our other marketing efforts. So substantial opportunity to grow within the IDX base where we are the acknowledged (indiscernible) choice; where we have interfaces; where we know how to install. So that's very good news.

Relative to the grants, first of all, relative to The American Association of Family Physicians, that was really more of a discount program that they had announced as opposed to a grant program. So I'm not aware that they've actually issued grants.

However, EHI, the eHealth Initiative out of Washington, run by Janet Marchibroda and a number of other organizations -- the Marple Organization and the like -- the Tad Marple Foundation (ph) and the like, have issued grants. Some of our customers have received those grants. And so we see those as very helpful in the process.

One point that's very interesting, and frankly helpful to us, is that those grants tend to go to organizations that are already in the process of implementing electronic medical records software, or in some cases already have it up and working. And in some respects that would seem kind of counterintuitive. But what these organizations don't want to do is actually give money to people for experiments. What they want to do is they want to reinforce the process.

So overall the grants are helpful, but as I said earlier we're not waiting for Washington to drive this process forward. They will help their leadership and the attention that Tommy Thompson and President -- and Dr. Brailer are all giving very helpful. But again, what we see is the market is really driving the change.

Thanks.

Duane Kennemore (ph), First Capital Alliance (ph).

Congratulations on your quarter. I had two questions. The first is have you seen any structural changes in either a compensation or strategy arrangements between Allscripts and the IDX salesmen, keeping in mind that I think a powerful sales force is what will successfully place Allscripts technology nationwide? And the second question was whether you had any revenue estimates presently available from the contracts from which you made press releases today. Thank you.

Let me handle the first one. In terms of structural changes and compensation for IDX salespeople, we have not made any particular changes in the IDX relationship relative to how their sales force is compensated.

However, I would say two things have happened. One, the market has changed. And as they approach new customers the likelihood of any customer today selecting a practice management system without working closely with the critical electronic medical records is very small. So that has essentially forced -- in a positive way, but forced their sales force to embed us and incorporate us in the sales process. That's number one.

Number two, if sales is focused on making more money, and you're in a hot market where your customers are saying, what do you have to sell me? And remember, they've got an enormous installed base. That's why we structure the relationship with them to begin with; 70 percent share in academic medical centers and the like. What we see is the salespeople are very interested because we've added more for them to sell to existing customers and a better ways to sell to new customers.

Make two other points. One, next week is their national users conference in Boston, and not only are we a co-sponsor, not only are we presenting at various sessions there, but we have a significant number of our salespeople there. And that gives us a great exposure to that IDX base that is so important us.

So we will see that in a Flowcast base next week. And then two weeks following there's a Groupcast national meeting, and we will be they're in force as well. So great marketing vehicle, very strong relationship with IDX, and their sales force really is getting more engaged than they've ever been.

Your second question I'm going to ask Bill to answer.

Relative to individual deal terms, we historically have not disclosed those. I just would reiterate, though, what Glen commented on specific to Metropolitan. And that transaction was one that was well in excess of $1 million. So we see a trend as evidenced by the overall increase in average deal size, but it's in terms of the sheer number of large full EMR purchases growing. We're very encouraged by those trends.

I think you'll also see deals announced that are joint deals between us and IDX as well.

Why don't we take maybe one more question, and then we will wrap it up just to keep the time manageable.

Jackson Fierce (ph), Show Me Research (ph).

Congratulations on the quarter. Could you give us a background and flavor for how the WellPoint initiative is going? And I had another follow-up question.

We continue to be excited about the Wellpoint initiative, both from the standpoint of leading managed care, and we've already seen some of what has happened with managed care. But we're excited about the number of orders we're taking from WellPoint. We're not allowed by contract to disclose the exact sales numbers, but clearly the number of orders is exciting. It's increased the visibility. And what you saw today is two of the deals that we announced; ConnectiCare and Metropolitan are also managed care related deals.

So I think it's also important to understand that as was asked earlier in the call, those electronic prescribing deals are going to be leveraged for a full electronic medical record. So physicians want individual prescribing, but they also want a path to grow to a full EMR. We see WellPoint seeding the market for us, even in those deals where they have simply select a new computer, select the automation package. They have a new computer; that reduces their costs of adopting our products.

Are you giving the physicians any incentives to adopt it?

We're not. WellPoint has provided the physicians with the incentive in terms of both free hardware and paying their first year of subscription. And we believe that is incentive enough. Again, we're excited about the number of orders. As I mentioned, you should expect to see more deals with managed care like WellPoint prior to the end of the year.

On the TouchWorks side could you give us any flavor with all the focus at the federal government and at the payor level on EMR, how has that impacted your sales cycle? Has it shortened it, and if so how much?

I think it has. It's in the process of shortening the sales cycle. There is probably no senior level executive today at a physician plan who would admit that they're not in the process of either installing or considering an electronic medical record. It's no longer if, but when will they adopt and which one will they adopt. And there is just a very strong pressure to get this done, and increasingly it's starting to come from physicians now as well who are saying we need this automation to do our job, to do it in a quality fashion.

So again, this can only help our business. It can only help the sales cycle, both in terms of interest level. And it's part of the reasons why we have decided to go to advertising as well. These decisions are going to get made, they're going to get made quickly. We want to make sure that there's no deal that we're not right in the middle of, whether it's IDX or outside the IDX space.

The last point I would make is CLAS which I mentioned is kind of the consumer reports of healthcare IT, has indicated that 80 percent of the remaining groups that do not have an EMR will purchase one in the next 12 to 18 months. So I see just very, very strong interest.

And I think that's a great point to conclude the call on because we are sitting on top of a very strong market, strong interest. Every trend in the market says this market is going to automate, it's going to automate quickly, and we have in place the solution that physicians are looking for, that payors are looking for, that pharmaceutical organizations are looking for, and that are going to benefit patients. So we think the Company is very well positioned from a financial standpoint, from a product standpoint, and from a people standpoint to make this change happen.

And we appreciate all of your support. We thank you for your participation in the call today and we look forward to talking with you next quarter. Thanks very much.

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