Veradigm Inc (MDRX) 2004 Q3 法說會逐字稿

Good afternoon, my name is Jeanette. I will be your conference facilitator. At this time, I'd like to welcome everyone to the Allscripts third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. I will now turn the call over to Mr. Glen Tullman, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you, Jeanette. I'm pleased to welcome all of you to the Allscripts Healthcare Solutions third quarter call. This is Glen Tullman, Allscripts' Chairman and Chief Executive Officer. Joining me on the call today is Bill Davis, our Chief Financial Officer and Lee Shapiro, our President. We will begin 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 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, 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 in Allscripts filings with the Securities and Exchange Commission, which could cause Allscripts actual results, performance, prospects, or opportunities in 2004 and beyond to differ materially from those expressed in or implied by these statements. Except as required by federal 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 the call back over to our CEO, Glen Tullman.

Thanks, Bill. I just returned from Washington, D.C., where I spoke at the Health Information Technology summit. The summit assembled over 500 key stakeholders from every area of healthcare, including payors like Well Point, PBMs like Express Scripts, connectivity organizations like Surescripts, large academic medical centers and mid-size multi specialty practices, including a number of our clients, large pharmaceutical organizations and key healthcare leaders from the federal government, including David Brailler, the National Health Information Technology coordinator, and Mark McClellan from CMS. The reason I mention this is that the summit was only two weeks after the AMA Medham conference in Washington, which included over 250 key healthcare stakeholders. In both cases, every attendee was focused on one thing: Accelerating the adoption of electronic medical records and electronic prescribing. I can't overemphasize the momentum behind these efforts. During the presidential debates, President Bush was very clear on the role information technology would need to play in addressing the healthcare challenges we faced. In Washington, as in many other places across the country, Allscripts is right in the middle of the debate.

But I want to be clear that we've moved beyond debate on this issue and we've moved beyond the early adopter phase. Changes happening today at places like George Washington University medical faculty associates in the heart of Washington, D.C. and only eight blocks from the White House. What's amazing about George Washington is not just that they are operating in a paperless environment, but rather that they implemented more than 100 physicians on our TouchWorks electronic medical record in less than 30 days, which demonstrates the speed at which change can happen given the right software and the right leadership from physicians and executives. The end result, better care for patients, delivered more efficiently and at a lower cost. While I've mentioned Washington a number of times and we appreciate the efforts the government is making, the real message here is that all of the healthcare stakeholders are coming together and no one is waiting for Washington or anyone else. So there's a great deal of excitement in the marketplace but the most important take away for everyone listening to the call today is that our TouchWorks electronic medical record and our clinical software offerings are directly benefiting from this high level of activity and are performing extremely well.

TouchWorks revenues were up over $1 million this quarter or 11% quarter-over-quarter. Overall margins continued to improve and we would have seen another very strong sales quarter were it not for a few key deals pushing into the fourth quarter. The good news is that as of today, we have closed these deals worth over $5 million in our software segment and another $1.4 million in our information services segment. While the timing wasn't perfect from a business perspective, the fact that they have all closed within the past few weeks is important from a revenue perspective because we can begin deployment and start the revenue recognition process before the holidays. Speaking of TouchWorks, I wanted to point out some key quarter highlights related to the product, implementation, and reference sites. Let's start with the product. Our TouchWorks EMR was rated the top ambulatory EMR by class in the 2004 perception report. KLAS or K-L-A-S, for those of you who are unfamiliar with it, is the "Consumer Reports" of healthcare and very well-respected in the industry. TouchWorks also received a fourth consecutive five-star rating from the AC group, the most comprehensive evaluation of EMRs on the market and was rated No. 1 EMR at TEPR the abbreviation stands for torn and electronic patient record, for mid to large-size groups. So we are not sitting still. We just released version 10 of TouchWorks, our second major release of the year. So, not only are we receiving third party recognition, but we continue to make our product better at a very rapid pace.

Implementation: In the past we talked about some challenges we had implementing and therefore recognizing revenue. To address that issue, we invested heavily in Six Sigma training for over 60 of our people and have a full-time black belt who is focused on our processes across the Company. It's working. I am pleased to tell you that today our 3-D Six Sigma implementation methodology is now in place at every existing install and is standard procedure at every new deployment. This means faster, higher quality implementations for our clients and more rapid revenue recognition for us. Let me speak a minute on reference sites. If you know healthcare, you know that you can't sell clinical systems if you don't have reference sites. Today we have a substantial number of high-quality reference sites that are so pleased with the TouchWorks solution that they willingly opened their doors to our prospects to show them the benefits of our electronic medical records and these reference sites are helping us to close large deals. That is especially true when we talk about IDX. Our partnership with IDX continues to provide us an inside track and access to practices making EMR decisions right now. With over 100 IDX sites successfully deployed with some or all of our EMR modules, we have become the safe choice for IDX clients ready to make an EMR decision and today most of them are active in some way in the decision-making process. And when we talk about reference types in closing deals, I have to mention the great new clients we are adding every quarter.

Earlier today we issued a press release, highlighting a number of our new clients, including Cardiovascular Associates in Louisville, Kentucky, one Microsoft respected cardiology practices in the country. Cedar Valley medical specialists in Waterloo, Iowa, a large multi specialty practice with more than 50 physicians and Granger medical clinic in Salt Lake City, Utah. Another large, independent multi specialty group with 55 positions. All of these are wonderful groups with great physicians and practice leadership. Today we signed Olean medical group, the largest multi specialty group in southwestern New York and an IDX group cast client. Olean, like others I mentioned was focused on proven technology, proven return on investment and rapid implementation. And from this small sampling, you can see the changes happening across the country at all size groups and all specialties, not just the largest ones, but not everyone in the market is ready for a full EMR deployment, which is why we have a broad range of offerings, including e-prescribing and document imaging, which both represent a great entry point for a full EMR. And what we increasingly hear is that practices want the option to move easily and seamlessly to a full EMR solution, even if they are not ready today. They are not interested in stand-alone applications unless they have a path to an EMR. Fortunately, we provide one. And we continue to remain the leader in the electronic prescribing space, processing more electronic prescription transactions than anyone else and offering the most comprehensive set of solutions.

However, let me be clear, this is a tough business and it's not just about software. It's about ease of use, providing value to physicians and their support staff and saving them time. We deliver those benefits through relationships like sure scripts, which allows us to write prescriptions -- route prescriptions electronically and importantly automate the refill and renewal process, saving time. We deliver value through relationships like RX Hub, which allows us to provide real-time eligibility information and through our Wolters-Kluwer relationship, where we're increasingly able to provide realtime contact-sensitive best practice information and evidence-based medicine, we improve healthcare. So, relationships matter, as does a path to the future. I also want to take a minute to comment on our Physicians Interactive business unit. Other the leadership of Mark Thayer, who joined us from Care Mark, we have built upon our successes in leadership in e-Detailing while preparing to take the business to the next level. And what exactly is that next level? While Physicians Interactive has typically worked with pharmaceutical organizations on physician product education, we see more and more connections between the full EMR and the ability to provide physicians and patients with the information and education they need. Working with organizations like Medham, the physician patient connectivity network sponsored by the AMA and 42 other medical societies, as well as our pharmaceutical clients, we have developed a number of new and exciting physician-driven, patient adherence and compliance offering, that we expect to positively impact our sales number in the fourth quarter of this year.

These e-health offerings are designed, working both with managed care and pharmaceutical clients, to better manage health. It's a win-win. From a financial standpoint, I'm pleased with our progress. Our bottom line is solid and getting better. Once again, we were cash flow positive, which makes seven quarters in a row, generating over $8 million in operating cash flow year to date, and importantly we see a great opportunity for leverage from increasing sales. For more detail on our financials, I'm going to ask Bill Davis, our Chief Financial Officer, to comment at this time. Bill?

Thanks, Glen. As Glen indicated, our third quarter was marked with a number of accomplishments and other exciting events, so, I'd like to first highlight some of those accomplishments and then provide more details on our third quarter performance. Turning first to some key financial highlights in the quarter. Our net income of $742,000 or 2 cents per share represents our fourth consecutive quarter of profitability. It also represents a $1.7 million or 4 cents per share improvement over the third quarter of last year. Our revenue of $25.7 million represents a 14% increase over the third quarter of 2003 led by a 34% increase in our software and related services revenue. We generated approximately $3.3 million in positive cash flow from operations. As Glen indicated, bringing our nine-month total to approximately $8.2 million. Finally, we consummated our $82.5 million convertible debt offering in July, which contributed to our balance of approximately $124.6 million in cash and marketable securities as of the end of the quarter.

Turning now to a more detailed look at our Q3 performance, total bookings during the quarter were approximately $9 million, consistent with prior quarters, bookings do not take into consideration the 11.8 million of sales and medications. Our 9 million in bookings compares to 10.2 million in bookings in Q3 of 2003. Year-to-date bookings for the Company were 36.3 million, which compares to 27.3 million for the same period a year ago. This represents a 33% increase. TouchWorks, our electronic medical record, our EMR business, contributed $5.4 million in bookings during the quarter, excluding ongoing support. This compares to 6.7 million last year. Q3 bookings do not include approximately 5.1 million of sales that have already taken place in October. As Glen mentioned, many of these deals were expected to close in Q3 and had they closed in September, Q3 would have been another strong sales quarter for TouchWorks. With that said, we are off to a very strong start for Q4. Year-to-date bookings for TouchWorks were 24.9 million, versus $18.9 million for the same period in 2003. This represents a 32% increase. Average deal size for new customers remains consistent at approximately $.5 million dollars and IDX customers continue to represent a significant portion of our bookings.

Our Physicians Interactive or PI unit, the largest part of our information services segment, had bookings during the quarter of$2.5 million. Here to we have had significant bookings occur in October that position us very well for strong sales in Q4. Year-to-date bookings for PI were $8.2 million. Total backlog at the end of the quarter was 51.8 million, the backlog breakout as follows. One-time fees make up 32.7 million of that balance, subscriptions, which will be recognized over a three to five-year period of time, depending on the length of the arrangement, make up 10.7 million of the balance and the next year, or the next 12 months worth of SMA makes up the balance of 8.4 million. Consistent with prior quarters, it's important to note that we do not track in our backlog -- or report in our backlog, rather, an additional $45 million of SMAs that it's been contracted for via our TouchWorks clients. Turning now to revenue, revenue for the quarter was 25.7 million. This represents a 3.2 million or 14% increase over the same period in 2003. Year-to-date revenue was 74.5 million compared to 62.6 million -- $62.2 million, rather, in 2003. Representing a 20% increase. Our software and related service businesses contributed 2.8 million of the 3.2 million year-over-year revenue increase. This represents a 34% increase. Both our TouchWorks and AIC businesses drove such growth. This growth is indicative of the fact that our clinical solutions are really gaining traction in the marketplace.

Our software and related services businesses grew $1.1 million when compared to Q2 of this year. This increase represents 11% sequential growth. Consistent with what we said last quarter, we expect the growth in this segment to persist in future quarters as the market continues to accelerate. Physicians Interactive revenue was 2.7 million in the third quarter, which compares to 3.1 in the second quarter. The anticipated PI change was driven by an overall decrease in the average price per completed detail, offset by a slight increase in the number of details completed in the quarter. The PI revenue recorded this quarter is also reflective of the lower bookings realized earlier this year. We continue to be encouraged by the progress PI is making with regards to its pipeline and expect pipeline conversion to quicken in the fourth quarter of this year. Revenue from the medication distribution business was 11.8 million in the third quarter, which compares to 12.4 million in the second quarter. This slight decline was primarily driven by lower volume from our base customers, offset by a slight increase from our wholesaler customers. Some of the decline in our base customer volume is attributed to the business interruption experienced in Florida due to the multiple hurricanes encountered in that state. As Glen mentioned, the medication distribution business also was hindered by the absence of flu vaccine.

In terms of revenue mix, our software and information services segment represents -- I'm sorry, 54% of total revenue for the quarter. Third quarter revenue by segment is as follows: Medications contributed 11.8 million, software and related services contributed 11 million and information services contributed the balance of 2.9 million for a total of 25.7. Looking now to gross margins, overall our gross margin was 43.1% in the third quarter versus 38.5% in the third quarter of last year and 39.4% in the second quarter of 2004. Both of these increases are primarily due to the continued improvement in TouchWorks gross margins, driven by the previously mentioned improvements in our implementation process, as well as a lower contribution on a relative basis from hardware sales. More specifically,software and related services gross margin percentages increased from 54% in the third quarter of 2003 to 64% last -- in the second quarter to 67% in the third quarter. Our third quarter gross margin percentage also benefited from a 8 percentage point increase in our information services segment, from 43% in the second quarter to 51% in the third quarter. Such increase is reflective of an improved mix of higher margin customers and our PI business and relative contribution of transaction revenue. The sequential improvement is consistent with our expectations that this segment will operate in the high 40s to low 50 gross margin range.

Margin by segment are as follows: Medications business delivered 19% gross margins, as indicated before our software and related services business delivered 67% gross margins and information services delivered 51% gross margins. For a combined 43.1. Turning now to expenses, operating expenses for the quarter were 9.9 million versus 9.6 million in the second quarter. This expected $300,000 increase is attributed to the in fact that we had approximately $200,000 less capitalized software in the quarter and an increase in bad debt expense. Total capitalized software in the quarter was $900,000. This amount compares to 1.1 million in the second quarter and is reflective of the significant progress we've made with the development of TouchWorks version 10.0 over the past three quarters. As I've indicated in the past, this amount will fluctuate from quarter-to-quarter, depending on the product development cycle. R&D expenditures as a percentage of software revenue were approximately 30% in the third quarter. With regards to head count, we ended the quarter with 33 -- 339 employees, which compares to 344 we reported in the second quarter. Amortization expense remained consistent at $400,000 for the quarter. Consistent with the guidance we provided last quarter, net interest expense from the convertible debt offering reduced our operating results by approximately $600,000 or a penny per share. We expect net interest expense to decline in future quarters as interest rates continue to rise and we invest the capital in higher yielding marketable securities in the short-term.

Net income for the quarter was 742,000 or 2 pennies per share. This compares to a 2-cent loss per share in the third quarter of last year. Net income for the first nine months of 2004 was 1.7 million or 4 cents per share. This compares to a $5.1 million loss or 13-cent loss per share for the same nine months in 2003. Basic shares outstanding for the quarter were 38.8 million, and fully diluted shares were $41.2 million. The 7.3 million shares issuable under our convertible debt offering are anti-dilutive to our earnings per share and therefore are excluded from our fully diluted share computation. As I mentioned last quarter, we do not believe the 7.3 million shares associated with our debt offering will be dilutive until such time that we generate approximately 7 cents per share of quarterly profit. Turning now to our balance sheet, we ended the quarter with 124.6 million in cash and marketable securities, up 69.9 million over the prior quarter. Such increase is reflective of the 68.3 million of proceeds realized from our convertible debt offering, net of the 11.3 million used for stock repurchases, executed in conjunction with the offering as well as approximately 2.9 million of deal-related costs. Please note that approximately 62.-- 62 million of our cash and marketable securities balance is classified as a non current asset, due to expected maturities of those investments.

Positive cash flow from operations was approximately 3.3 million in the quarter, bringing our year-to-date total to approximately 8.2 million. Proceeds from option exercises contributed another $.5 million in the quarter. These sources of cash were offset by 1.1 million investment in our previously-announced Medham relationship as well as $900,000 of capitalized software and approximately $300,000 of capital expenditures. Accounts receivable increased approximately $1.4 million in the quarter due to an increase in advanced billings to customers as evidenced by the $1.3 million increase in deferred revenue. We ended the quarter with day sales outstanding of approximately 70 days. I expect our DSOs to migrate back down into the mid-60s in future quarters. The 82.5 million of convertible debt is classified as long-term debt. Our related debt issuance cost of approximately 2.9 million have been classified as other assets and are being amortized into interest expense over the original five-year term. The change in stockholders equity is reflective of the previously-mentioned $11.3 million treasury stock acquired in conjunction with the convertible debt offering. In summary, we are very encouraged by our accomplishments in the third quarter, with positive operating results for the fourth quarter in a row, positive cash flow and strong interest in the marketplace for our products and service offerings. We are 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 the substantial opportunity that exists in all of our markets. With that, I'd like to turn it back over to Glen for some closing remarks.

Thanks, Bill. In closing, the key story of the quarter is that EMRs, especially in the ambulatory space, have arrived and no one in the market is better positioned than Allscripts with our industry-leading ambulatory EMR to take advantage of this trend. While we are delivering in product and building sales with a stronger pipeline than we've ever had and with more sales activity than we've ever seen, we're also pleased that we are delivering on the bottom line. As Bill mentioned, with 2 cents earnings per share, which represents our fourth consecutive quarter of profitability. With over $8 million in operating cash flow and in excess of 125 million in cash on the balance sheet, the Company is well-positioned across-the-board and ready to take advantage of all this growing market has to offer. We are looking forward to finishing the year off with a very strong fourth quarter and are already planning for 2005. As always, we couldn't do it without our employees who really believe, along with the management that our Company can and will change healthcare for the better. We also want to thank our clients who believe in us and teach us how get better every day and our shareholders for your confidence in our vision. I want to thank you for joining us today and Bill, Lee, and I would be happy to entertain your questions at this point. Thank you very much.

(OPERATOR INSTRUCTIONS) Your first question comes from Sean Wieland with WR Hambrecht.

Hey, guys. Two questions. Number one, can we go into a little bit more detail on TouchWorks' bookings? It seems like the numbers a little bit beyond just seasonality and so specifically of the deals that -- that slipped, how many deals does that represent? Give us an idea of why they slipped and just add some color there? And then I want to come back to information services.

Sure, let me take that, Sean, well, first of all again, you know, I think as you know, the momentum in the market is terrific. Relative to the specific question on the sales, you know, what we saw is a number of these deals that probably could have been pushed into the quarter perhaps with additional discounting and other tools that we might use, you know, we chose to work those deals and bring them to closure and frankly because of timing, they didn't get closed in the quarter but they closed in some cases, in one case, literally a day later because of our process we missed the signature and came in a day later. Represents about 5 deals -- four to five deals and they tended to be some of the larger deals that we were signing this quarter, hence the 5.1 million, I think, is the number that we've closed. You know, the good news is that the early signing from a business perspective is not all that much difference. I know from a -- you know, we would have loved to have had them in the quarter, but net-net, that level of sales represents -- it's on par with the level of sales that we've been doing quarter-to-quarter, maybe slightly larger. So, you know, we -- we'd love to be able to time the deals perfectly. I think the real message is the momentums there, the sales are there, the closings are there and we missed it by a few days this time around.

Are there incentives still on the table through Microsoft and HP to get certain deals done?

No, you know, most of those incentives, and again, you know, I think we don't particularly name any of our partners who provide incentives, but in the past, where there have been incentives, most of those incentives go away at the end of the third quarter, primarily because the fourth quarter tends to be, as you know, the strongest quarter for healthcare IT sales across the industry. So, you know, we tend not to see nearly as many incentives used in the fourth quarter.

Okay, so a lack of those incentives didn't contribute to any weakness in the bookings number?

No, I don't think a lack of incentives, I think, you know, again, as we see the market strengthening, our own level of discounting has been reduced and our willingness to -- to try to bring in a sales number, because as you know, given our conservative revenue recognition, you know, closing a sale the last day of the quarter, as opposed to the day after the quarter, from a revenue standpoint, has no impact for us.

Okay.

So, so I think it's -- to make a bad business deal to try to make the, you know, to try to make a one-day difference wouldn't make sense. Again, the real message here, the pipeline is growing and the deals are getting done.

On the information services side, I think last quarter you gave us a PI bookings number. Bill, did you give us that this quarter and maybe I missed it?

Yes, I did. PI bookings in this quarter were 2.5 million.

Okay.

And year-to-date brings the total of 8.2.

So, can you take another crack at describing the -- the change that's under -- that I'm gathering is under way in this business? I mean not the PI, but information services and your agreement with Medham and how should I think about the information services business? I historically have thought about it as primarily PI.

Well, I think -- I think you look at information service as comprised of really three different areas. The first you know and the shortcut to that, we call it physician product education, the shortcut to that is e-Detailing. We're the leader in that space we continue to see that as being a very strong business for us and it will continue to be a strong business, I think, you know, that's indicated by the 1 -- $1.1 million in sales that we've already recorded in this quarter. So, that's level 1. Level 2 is the transaction piece of that number and as we've discussed with the market, we see the number of transactions we're processing both in the electronic prescribing area but also other areas where we're providing information or moving lab information or the like, all of those are starting to contribute to that transaction number and that's in the information services number. Last but surely not least, in fact, an area for real excitement comes from the Medham transaction and our ability to begin to offer both adherence and compliance programs that really are built upon and built on top of the EMR and the ERX platforms and what that really offers, the biggest challenge in healthcare today is not only to get the proper prescription written, but to get patients to comply and to continue to take the medications that they were prescribed. And increasingly that, you know that used to be an interest and a wish just of pharmaceutical companies but increasingly what we're finding is things like beta blockers, everyone, managed care, the physician, the pharmaceutical organization, everyone wants that patient to be compliant and to continue to adhere to the prescription.

So, what we are beginning to offer, working with Medham is the ability to send reminders and the ability to keep that patient compliant. That is as you might imagine very valuable to -- to patients but also very valuable to pharmaceutical organizations. Now, the only way you can do that is by leveraging the physician patient connectivity. If you try to go direct to patients, you're going to hit HIPA, confidentiality issues, you know, you're going to interrupt patients, but working through and with the physician, which has always been our approach and happens to be Medham's approach in the AMA and all of the medical societies, what we've really done is identified an area where everyone can work together. So, three areas of information services, e-Detailing, the transaction piece and the Medham piece, bringing those all together, what we call closing the loop, we're very excited about what that's going to do and as I mentioned in my comments, we expect to see sales traction beginning in the fourth quarter, you know, with deals signed that are part of that new Medham adherence compliance offering.

Okay, so which of those three pieces, then, is responsible for the -- the weak information services revenue number this quarter?

Well, right now, you know, we have just introduced the Medham offering. So, that's not a part of this.

Right.

And the transactions continue to grow and be strong. So, I think e-Detailing, right there, our bookings in that were down. As Bill referenced, that really relates to earlier in the year when the OIG became active and a lot of programs got put on hold that slowed down deals which impacts our revenue recognition today and has impacted some of the traction that we were making in that business. That said, we've seen it changing and we've seen it closing.

Is that still a business you want to be in?

Absolutely!

Okay.

That business is -- again, I think if you look at that business, it's not unlike what happened in EMRs. In EMRs, initially we started off and we saw individual applications. Now this concept of closing the loop, of educating physicians, of educating patients, of continuing that adherence and compliance cycle have become more valuable. So, it's an important part of the mix, it's a profitable business for us. We've seen some bumps along the way, but frankly, you know, we've added some new sales people there because of the opportunity.

Okay, thanks a lot.

Okay, thank you.

Thanks, Sean.

Your next question comes from Ryan Stewart with Piper Jaffray.

Hey, guys, how are you?

Great, Ryan.

Good. Hey, on the transaction side, Glen, could you just talk a little bit more detail about kind of exactly where you're seeing the traction right now relative to scripts -- you know, scripts going to mail order, scripts going to the retail pharmacy, formulary presentation at the point of care and lab? What's kind of more mature, what's least mature, what hasn't happened yet? And kind of where that's all going?

Sure, what we're seeing -- we're seeing growth in transactions across-the-board, probably the strongest growth is in the electronic prescribing area, where we're seeing great takeup. I've mentioned in prior calls, organizations like Sierra, which will process over a million transactions in the year and, you know, RX Hub reported to us that we're the number one provider of physician-initiated transactions to them. We represent over half of their transactions. So, we're seeing that start to happen. Labs and other transactions that we do are growing but you know, that's still relatively new. So, Bill, probably 90% of our transaction revenue comes from the prescription area today?

That's correct. That's correct.

And would you still be on kind of a run rate for about like a -- I don't know if you can comment on this or not, but, you know, a million and a half or so this year -- not run rate, but basically about 1.5 to $2 million of transaction revenues?

Yes, our expectations are still consistent and the amount of relative contribution in the third quarter, I think, is consistent with that. I think do it's important to note that -- and consistent with what we've discussed in the public market, our expectation is this is going to be a significant contributor for us moving into the latter part of '05 and '06. So, I think that expectation is appropriate.

Okay, great. And Glen, I know that you've taken some folk -- or I think one person in particular, one of your rainmakers and sort of put him on these 3 to $5 million deals, working closely with you. Can you talk a bit about what the process -- where you're at right now in ferreting out these deals and closing them? And then secondly, you know, I believe you've re-organized a small group internally just to look to capture the managed care opportunity that's probably, you know, the wind of about 12 to 18 months, I think you've commented in the past, you know, any color on those two fronts?

Yeah. I think we're making significant progress on these larger deals. We've been identified as vendor of choice in a number of larger deals that are in excess of $3 million each and, you know, we -- those larger deals take a little bit longer to close so we're hopeful that they get closed soon. That's all I can comment on. Relative to the managed care piece of the equation, you know, we have said that we expect, prior to the end of the year, that we'll see additional activity in the managed care area, perhaps not as large as the Well Point deal, but other significant, very targeted efforts by managed care. There's a tremendous amount of activity there and, you know, we're working hard to try to secure some of that.

Okay. Great. And just with what about from an implementation perspective, what type of difference, once you close one of these 3 to $5 million deals, and this is my last question, what will be the difference in timing to get those types of deals implemented? How should we be thinking about that?

Well, I think that -- I'm going to ask Bill to comment on -- I will just make one general comment and that is when you have a larger deal and you can take implementation teams, put them on site, you tend to be more efficient in terms of your implementation capability so that's one of the benefits of doing a larger deal. You know where your people are going to be deployed for the next, you know, 3, 6, 9, 12 months, depending on the size of the deal. And that allows you to be more efficient in terms of deploying the application. In terms of the take down of those deals, Bill?

I would just say that in terms of the take down and those larger deals, the amount of implementation services, in relation to the total deal value, you know, tends to be smaller or less. And so point being that the expectations is the take down, the amount that we get for each incremental hour of work, should be significantly greater. So I would expect that kind of the margin implication of that and bottom line performance, you know, would be improved in those situations.

Okay, great, thanks a lot, guys.

Thank you.

Your next question comes from Duane Kennemore with First Capital Alliance.

Gentlemen, congratulations on a quality quarter. I had a few questions. I wanted to first verify that the 4.1 million -- I'm sorry, 5.1 million in software sales and 1.4 in information systems sales that were not booked from the previous quarter because they closed in October, is that correct?

Yeah, I missed the first part of your question.

I think you asked what the October bookings were in TouchWorks?

That's correct.

That's the 5.1 million.

Right. And 1.4 in information systems?

1.1.

1.1. Oh, okay. Thank you for the correction. Okay. And also, more generally, the larger deal that you're working on and the -- I guess your pipeline generally, do you see any trends with your sell-in, if you will, into the IDX customer base, as in are you increasingly signing more deals that do not require IDX as the practiced management system?

I'd say two things. First of all, I want to make sure not to let our sales folks off the hook. There is still time left in the month of October and I expect to see the -- the teams in our respective businesses continue to bring in additional deals. So --

Okay.

But month to date, that's roughly where we were. In terms of the IDX base, again, great penetration in the IDX base, we continue to learn more and more about their database, we're working closely together. You know, that said, what we've also determined, now that we have a solid operating model with IDX, we're also starting to focus time and attention on nonIDX customers and we're having good success there. In fact , a number of the deals that we mentioned this quarter that we had announced publicly, I think two of those deals were non-IDX. So, so again, we're seeing good traction, we're starting to see nice traction outside the IDX base, as well. So ultimately what that means, continued growth in IDX, but added growth outside of IDX.

Okay. And do you see any progress on determining what you're going to do with the cash you've received as the result of the convertible offering?

You know, what we have found is two things, one, our clients see us as a stable, even more stable long-term partner given the cash, I think the message to our clients was that we're here to stay, that we're a builder in this business and that helps our sales process, No. 1. No. 2, we've seen increased deal flow. So for those organizations that -- that, you know are interested in perhaps exiting or selling their businesses, we're seeing more deal opportunities. However, we have indicated consistently that we do not need to acquire anything to build the business, to continue to grow the business the way we've grown it but we're going to be opportunistic, and so we look at the market very closely and, you know, should we see an opportunity, you know, we will -- we will aggressively pursue it. We've also indicated that we want to be very careful not to do anything that would be dilutive.

Great.

So, you know, we are -- we are not -- it's not burning a whole in our pocket as Bill is shaking his head that's right. But, you know, we think there will come opportunities and we're going to be ready for them when they come.

Okay. And following this is my last question. In terms of the margin increase this full year in your three lines of business, do you see any particular trend there for the future? Or are they more or less where you expect them to be going forward? I'm thinking particularly as you increasingly do larger transactions, that might shift the margin mix somehow?

Yeah, relative to the margin improvement, I continue to believe that the information service business, as I commented before, you know, you can expect to perform in the -- in the mid-high 40s and, you know, creep into the low 50s, depending on mix of the customers that we're working on an in particular point in time, relative to the software-related services business, there again, I think we've been consistent in commenting that we do see some opportunity for that to continue to improve up into the higher 60s I would point out that we do have an incremental cost in terms of the -- to the royalty payments that we do in fact pay to IDX, so, that has some impact, you know, to be mindful of. And then the Meds business, there again, I think consistent in the high teens, low 20s is where we see that business operating now.

Well, congratulations again and keep up the good work. Thank you.

Thank you.

Again, if you would like to ask a question, please press star, 1 on your telephone keypad. Your next question comes from J. Hingorami with Thompson, Davis & Company.

Glen, Bill, how you doing?

Great, thank you.

Just wanted to see how -- you guys still staying with the 105 million guidance for the year? Did you reiterate that? Did I miss that?

We have not changed our guidance for 2004 and so the guidance has been out in the marketplace at 105 million of revenue and EPS of 7 cents per share.

Got it. So, this 5 million that -- on the software side and the 1 million on the information services side, that slipped in, into the fourth quarter, is over and above what we might have expected in the fourth quarter?

Yeah that would be -- I think you can -- you could consider that as additive to the fourth quarter.

Okay. That's helpful. And the other question I had was when you were talking about non-IDX customers or non-IDX related deals, what segment -- is that in the mid-size or small size positions office?

We see the -- sweet spot there tends to be the mid-sized multi specialty groups and then also specialists, one of the groups that we highlighted, you know, was a cardiology group. We're making a lot of -- we're getting a lot of traction in cardiology and certain other specialties. Those might be smaller but, you know, overall we're also seeing it again in just solid groups of 50 plus positions, a real sweet spot for us.

50?

Yeah, 50, 5-0.

Yeah, okay. And lastly, from the health IT sum, what was your take away if you had to come up one, two or three catalysts over the next year or so that are going to really take the thing into overdrive?

Well I think --

Your IT spending?

I think one of the -- one of the strong catalysts that has really not been identified, you know, regional health improvement organizations or RHIOs, you know, what will be interesting there, they're talking about payments for people who are using Medicare and Medicaid and crediting physicians on the tune of $50 perhaps as much as $100 per patient for using an electronic medical record and submitting certain aspects of that information, making it available publicly. To the extent they do that, it doesn't take a whole lot of patients to fund a full electronic medical record. So in the areas where RHIOs are operating and we're working with RHIOs in a number of areas already, to the extent that funding comes through, that could be a real additional catalyst. That's No. 1. No. 2, as you get these large groups together and they see that everyone is pushing for electronic medical records, there's this momentum that builds and I think what I would say is as recently as six months ago you could approach CEOs of multi specialty groups or of academic health plans or the like and they might say that we are evaluating an EMR. In today's world, there is not anyone we meet with who doesn't say that they are going to have an electronic medical record. It's only a question of which one and when, but it's kind of like quality. It is the thing to do, everyone's going to do it. To qualify for paper, performance, you need it, to qualify for funding dollars you need it and so there's this real momentum which I don't think you can overestimate in terms of driving this market. And last but not least, you asked for three, return on investment is accepted today, whether you're talking about going paperless, they're seeing examples all over the country of people being successful, you know, we talk about Central Utah Medical Group and it's, you know, they're seeing a savings of $20,000 per physician in year one. So, pretty dramatic results documented in a paper an independent paper they submitted to HIMs so, you know, those three factors are really I think the biggest take aways. Third party funding, you know, the idea that everyone's doing it and last but not least, the solid measurable return on investment.

Got it. Great. Well, look forward to the next one now.

Well, thank you.

And we'll talk to you offline, as well.

Thank you, I think we have time for maybe one more question.

Your next question comes from Jackson Feers with Show Me Research.

Glen and group. Congratulations on your numbers. Where do we stand in the e-prescribing marketplace? Are larger practice groups and major managed care organizations putting it in their budgets now? Will that ease up -- will that get even easier next year? Or are they still watching what's happening at Well Point and some of the other pilot projects?

Well, I think that we are seeing e-prescribing as a catalyst and really as a great entry point to a larger strategy and that's moving to the electronic medical record. The larger groups, frankly, while they're happy to get started on e-prescribing, they are not interested unless there's a path to a full EMR because that's been the driver for larger groups. So, again, virtually all of our EMR customers are electronic prescribing customers and then there's a secondary group of electronic prescribing customers who have said we want to start with electronic prescribing but we want to know that we can easily add the other modules and eventually get to a full EMR. So that's what we're seeing out there in the market. You know, as to the number, I think it's acknowledged that we are the leader, that our application has the most flexibility, the most strength and importantly, the most connectivity because you have to be able to informate these transactions. In other words, bring in all of the formulary information. You have to be able to route to mail order. You have to be able to route to a local pharmacy and, you know, again, our partners are very key in that. And, you know, at the end of the day, we're the only leader, the only organization in both electronic prescribing and electronic medical records so there's a real advantage there and, you know, someone asked earlier in the call what areas are we focused on, what size groups? Obviously given our IDX connections, we're very strong in the larger groups, academic, practice plans, academic medical centers, integrated delivery networks, we're very strong in the mid-range groups, the multi specialty practices, where the IDX group caste system is so dominant and in the -- in the smaller groups we're starting to see strength there and that's coming from this entry level electronic prescribing. So, that's what we're seeing happen in the market today. People have seen Well Point and the real -- the real lesson there is not so much their results per se, but the fact that they went out, they did it and we're going to see more of that.

You raised a clear question: The other EMR vendors who don't have e-prescribing, how are they going to respond? They can't give you a free ride?

Well, they I think what they're going to have to do, remember, the market to date has not been -- has generally been an all or nothing, you get the EMR, you automate everything you do or you don't. And that's not the way physicians like to change. They would rather a modular approach, which is what we have. So, what you see is some of our would-be competitors are kind of scrambling, trying to separate out, you know, one big clunk into a modular approach and they're trying to go out and do through marketing what their products aren't designed to do. You know, down the road do I expect some of these larger competitors to have an EMR offering that's stand-alone? I think they will. I think they have to, but, you know, that's some time off and as we've learned, you know, the -- the electronic prescribing is not just about software, it's about learning to deploy it, it's about learning to deploy it cost effectively and it's about making it work. So I think we have a substantial advantage in that market as it starts to develop more aggressively.

And the last question, is it possible to give us -- how large a base of doctors you have using your e-prescribing solution?

We have not released that to date. I think what we've said is first of the year we're going to start to re-evaluate that, although we'll probably do it more by transactions and less by the number of docks. That can be deceiving because if you have a physician in an academic Medical Center, he or she may only write 10 prescriptions a month if they're research-based and so what you really want to focus on is how many transactions are you generating in electronic, you know, electronic prescribing, rather the number of physicians.

I agree.

That's where we'll kind of guide the market in the future.

Thank you, Glen.

Okay, thank you very much. Well, again, I want to thank the group for spending the time with us today and thanks for your confidence. We are very excited about what's happening in the market. We continue to believe that Allscripts is extraordinarily well-positioned to take advantage of this growing market and that's what we plan to do. Thank you very much and we'll look forward to talking with you next quarter.

This concludes today's Allscripts third quarter earnings release conference call. You may now disconnect.