Veradigm Inc (MDRX) 2004 Q4 法說會逐字稿

Good afternoon, my name is Sarah and I will be your conference facilitator. At this time, I would like to welcome everyone to the Allscripts fourth quarter and 2004 year-end conference call.

[Operator Instructions].

Thank you, Mr. Tullman; you may begin your conference.

Thank you very much. Well ,I want to welcome all of you to the Allscripts fourth quarter and 2004 year-end conference call. This is Glen Tullman, Allscripts Chairman and Chief Executive Officer. Bill Davis, our Chief Financial Officer and Lee Shapiro, our President, are joining me here today. 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 current beliefs of Allscripts' management as well as assumptions made by and information currently available to Allscripts' management. Wherever practical, Allscripts will identify these forward-looking statements by using words such as may, will, expects, anticipates, believes, intends, estimates, could, or similar expressions.

These forward-looking statements are subject to a variety of risks and uncertainties including those listed in the earnings press release issued by Allscripts today and in Allscripts' filing with the Securities and Exchange Commission, which could cause Allscripts actual results, performance, prospects, or opportunities in 2005 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 would like to turn the call back over to our CEO, Glen Tullman.

Thanks Bill. So, let's begin. For those of you who have already read the press release, I am sure you share my excitement about our results for the fourth quarter and for the year. However, before I talk about our results and share some highlights, I want to spend a few minutes discussing our strategy, the market, and the trends that are moving us forward. Recently, I was meeting with a group of investors and they commented that Allscripts is in the right place at the right time.

I had to remind them that we have been in this place for some period of time. Four years ago, we made a strategic decision to change the direction of the company and to focus on the ambulatory electronic medical record market. We identified a $5 billion market opportunity and since that time we have focused on delivering solutions that physicians need to have and want to use. At that time, we made a number of acquisitions and over the year have invested upwards of $100 million in our products. We also put into place a 10-year strategic relationship with IDX, the leading practice management provider for midsize and larger practices, because we believe that this would help establish Allscripts as the leading player, as the leading EMR player for mid to large size physician practices.

Over the last few years, we have focused on improving the product, implementation and usability, developing reference sites, building interfaces, and continuing to innovate. Recently, we have seen significant expansion in the definition of an electronic medical record. In fact, most people refer to the functionality as an electronic health record, which acknowledges the important role that patients will play and highlights wellness and preventive care rather than treating illness. We are a leader in both areas. Today, it's clear that our strategy worked and that our investments have begun to pay dividends.

Our TouchWorks electronic health record has been recognized by virtually all of the third party independent experts as the leading EHR on the market. However, while the product was ready, there was still question as to whether the market was ready. The good news is that recent trends have and continue to make this the right time to be where we are , the leader in the ambulatory electronic health care records space. We are seeing unprecedented support for electronic health records, starting with the highest levels of the federal government. President Bush's regular mentions of the importance of electronic health records and the extraordinary efforts of Dr. David Brailer, the National Health Information Technology coordinator, promoting use of electronic health records are keeping the attention on the space.

While some people have commented that the government has not made a large financial commitment to EHR, our view is that government leadership is more important than funding and Dr. Brailer has been very effective in signaling to the key health care stakeholders that it is time to change. Last week, CMS also announced new standards for electronic prescribing and we are involved in the soon to be issued electronic health records standards on interoperability functionality and security as well. In addition to the government efforts, employers, payers, PBM's, and private initiatives have become very active, providing directed funding for demonstration projects and pay for performance programs that we believe are effective in encouraging the transition to electronic health care.

But none of this matters if physician groups are not buying in and investing. I just returned from HIMSS, the world's largest health care information gathering with over 20,000 health care professionals in attendance. Walking the floor you could feel the energy around the space and the level of interest in Allscripts' solutions was at an all time high, with 120 private meetings and a record number of leads. It's clear that the market has arrived and the question is no longer should I buy, but rather which one should I buy.

We also introduced our new branding as a way to clearly differentiate ourselves from the pack, reflecting the depth of our thinking and the breadth of our product offering. Three words inform, connect, transform describe what we are do and where we are going. We inform physicians by providing the right information at the right time, which enables them to make better, safer, and more cost effective decisions. We connect those physicians to key healthcare stakeholders like pharmacies, labs, payers, managed care, pharmaceutical companies, and, most important, patients, saving time and adding efficiency.

And we transform the healthcare process by providing information and connectivity at the point of care, which in healthcare is the point of impact. The message really resonated and HIMSS was just one more indicator that the market for electronic health care records is ready.

Just to be clear, when we discuss the market, we look at three distinct segments practices with 25 or more physicians, practices with 10 to 24 physicians, and practices ranging from a single physician up to nine physicians. We also break out in track specialists, like cardiologists and ophthalmologists, which may cross these various categories, and we look at them as a separate segment as well.

The market, especially for larger academic medical centers, integrated health networks, multi specialty clinics, and specialists, has tipped and is moving quickly. The mid market, practices with 10 to 24 physicians, is tipping as we speak, and the smaller, independent groups are probably 6 to 12 months away from really embracing EHR's.

What is especially exciting is that in the top two market segments, we have strong competitive advantage and a very high win rate with physician groups using IDX practice management systems. In that segment, we have identified and targeted accounts worth over $800 million. As you can see, we're well positioned to grow and grow rapidly. Along those lines, we expect to invest aggressively, adding between 10 and 15 sales people in the next few months. These new sales people will focus both within and outside the IDX base. We will also add deployment and support personnel to continue to ensure that we are more than software, we are a solution that gets used by our clients.

I've discussed strategy, trends, and the market, but now I want to turn to results, because our results are the best indication that the market has tipped and is rapidly expanding. Let me first focus on some highlights from our clinical solutions group and then move to our other fast-growing businesses including Physicians Interactive. On the last few calls, I have said that the most important indicator to watch to determine if the market has tipped will be sales. I also told you that we expected to sign contracts in the 3 to $5 million range with a number of very large and very prestigious physician organizations. We have delivered on both promises. Let me provide some measures of success in our clinical solutions Group where our TouchWorks EMR or EHR reside.

Sales or bookings for the fourth quarter exceeded $25 million, up 118% from the fourth quarter of 2003.Full-year sales growth was equally impressive, with a gain of 22.9 million, growing from 30.4 million to 53.2 million or 75%. Revenues in the clinical business were also a record, growing from 11 million in the third quarter to 14.3 million in the fourth quarter.

From a new client standpoint, one of the most significant contracts of the fourth quarter was signing Sharp Healthcare in San Diego. While many people focused on the fact that Sharp represented our largest contract to date, we believe the message to the market was a strong endorsement for Allscripts. After a very intense evaluation, Sharp, which is one of the largest and most respected IBNs (ph) in the country and has consistently been named one of the most wired organizations in the country, selected Allscripts. Sharp was not alone. We added a record number of new clients, organizations like Community Care Physicians, the largest physician directed multi-specialty practice in the Albany, New York area. They will implement our TouchWorks electronic health records with more than 180 clinicians across 35 practices. More and more larger groups both within and outside the IDX base of concluding the Allscripts is the safe choice for the clinical automation.

Beyond sales, Allscripts also continues to demonstrate leadership in driving the market. Dr. Brailer and Newt Gingrich, who has created a nonpartisan effort to drive electronic healthcare forward, both spoke at our most recent quarterly Executive Summit, where, for those of you who are unfamiliar with the program, we invite 70 to100 prospects to hear from our clients, our partners, key industry leaders, and of course, Allscripts.

Dr. Brailer also visited with some of our leading clients across the country to see physicians and caregivers using the latest technology to improve care and to gather ideas about how to more rapidly implement systems and attain physician buy-in and utilization. Dr. Brailer met with the management from Holsten Medical Group and his team spent time at George Washington Medical Faculty Associates in Washington DC where the latest technology like Welsh Allen (ph) wireless blood pressure monitors that send data directly into the EHR, are in use.

And speaking of EHR leadership, Allscripts released our first book directed towards best practices for implementing an EHR. The title of the book is "The Electronic Physician". We've also taken a key role in driving initiatives. Whether in Washington DC, where our senior executives participate in organizations like the eHealth Initiative where I serve on the leadership council, or the Marco Foundation, where Dr. Peter Geerlofs, our CMO serves on the steering committee for Connecting Communities for Health. We are regularly testifying and providing input into the various standards and initiatives.

RHIOs or our Regional Health Information Organizations are also gaining traction. We have focused efforts underway with the major RHIOs across the country involving full electronic health records deployment as well as efforts to implement electronic prescribing, usually with managed-care participation, encouragement, and often funding. The key differentiator in that space is that our e-prescribing applications represent an on ramp to a full EHR, rather than a dead-end single application. So overall, a significant amount of activity and a very successful quarter for a clinical solutions group.

I also want to spend a few minutes explaining important progress we've made during the quarter and over the course of the year in our physicians' interactive group. Using our core eDetailing platform as a base, we embarked upon a plan to extend the reach of our offerings and build a clinical information and education suite for physicians and patients. The goal was to broaden the offering and move to a higher-level of importance for our pharmaceutical clients. Interestingly, just as we are broadening this suite, we are finding that pharmaceutical companies are very interested in the value we bring to physicians with our electronic health records and our electronic prescribing activity.

As a part of repositioning our offering, we upgraded our sales force, hiring subject matter experts who know the pharmaceutical space from companies like IMS, Merck, and Dendrite. That level of experience, paired with a very exciting product offering, has started to move Allscripts beyond the pharmaceutical marketing function into sales in managed markets, where the interest level and the budgets are very high. It's also translated into immediate progress on sales, and I'm pleased to report that Physicians Interactive had record sales in the fourth quarter of $4.5 million.

And during the fourth quarter, we launched Patients Interactive. Patients Interactive is an innovative solution that redefines the way physicians and their patients work together to better manage diseases and improve medication adherence. Patients Interactive will be integrated with TouchWorks iHealth, a new patient physician connectivity solution that will provide patients secure, online access to their own personal health record and to online consultations with their physicians. Much of this work is being completed in close association with Medem, the physician patient connectivity venture funded by the AMA and over 40 other medical societies.

Market research clearly confirms what we all know intuitively, that physicians are best positioned to influence patient behavior. However, until this point; they lacked the tools necessary to take an active role in the adherence effort. Payers, health plans, employers, and pharmaceutical companies spend billions of dollars each year on disease management and medication adherence efforts that bypass the physician, rather than working with and through them. Patients Interactive puts physicians at the center of the process and offers them the ability to effectively monitor their patient's adherence levels.

What's exciting is that we signed our first Patients Interactive contract, valued at more than $400,000. We also signed, during the quarter, a multi-year strategic partner agreement with a major pharmaceutical firm to be the exclusive provider of integrated marketing services, from eDetailing to Patients Interactive, for all of their franchise brands. The agreement includes a minimum guaranteed financial commitment annually, which we believe should produce between 1 to $3 million over the term of the contract. This is precisely the kind of deal structure our new sales organization is targeting.

Let's return to trends for just a moment. As you've read, many of the major pharmaceutical companies are reducing their sales forces and reevaluating other traditional programs from a cost and effectiveness standpoint. We see this reevaluation as the first step in moving toward an intelligent electronic dialogue between physicians, patients, and rest of the stakeholders in healthcare. Once again, the trends are with us. And with that, I would like to turn it over to Bill Davis, who is going to talk a little bit about the financial successes in the quarter. Bill?

Thanks, Glen, and hello everyone. As Glen indicated, we are very pleased with our fourth quarter and 2004 accomplishments. I would like to take an opportunity to highlight some of those achievements and then provide an update on our positive internal control assessment. I will finish up by providing you with some insight into our expectations for 2005.

Turning first to some key financial highlights in the quarter and for the year. Total sales or bookings for the quarter were $29.5 million, led by a record-setting 25 million of clinical software sales. The 25 million of sales represents a 118% increase over the fourth quarter of 2003. Total clinical software sales for the year were 53.2 million, representing a 75% increase over 2003. Our clinical software revenue, also increased at a rate of 72% in the quarter, when compared to the same period a year ago. Clinical software revenue for the year was 44.1 million, or a 56% increase over 2003.

Our net income of 1.4 million, or $0.03 per diluted share, represents a 1.3 million or $0.03 per share improvement over the fourth quarter of 2003. Net income for the year of $0.07 per diluted share represents our first full year of profitability and compares to a $0.13 per share loss in 2003. We also generated approximately 4.2 million in positive cash flow from operations, bringing our 12-month total to approximately 12.5 million.

Turning now towards a more detailed look at Q4 performance, as I mentioned previously, total sales during the quarter were approximately 29.5 million. Consistent with prior quarters, bookings do not take into consideration the 9.3 million sales and medications nor does it include any of the contracted ongoing support related to our record-breaking clinical sales. Our 29.5 million in sales, compares to 14.9 million in sales last year in the fourth quarter, and 9 million in the third quarter of this year.

2004 sales for the company were 65.9 million, which compares to 42.4 million for the same period a year ago. This represents a 55% increase. As I previously indicated, Q4 clinical sales were 25 million. As Glen mentioned, we're very excited about the fact our fourth quarter sales includes Allscripts' largest sale ever, to Sharp Healthcare for approximately 4 million.

Average deal size for new customers also continues to improve, and we ended the quarter over $500,000 for new sales. I would also like to mention the fact that we had eight of our deals in the fourth quarter be in excess of $1 million each. IDX customers continue to represent a significant portion of our bookings at approximately 75%. This compares to 90% a year ago, and demonstrates our continued focus on the IDX customers while we began to pursue opportunities outside the IDX installed base.

Our Physicians Interactive business, the largest part of our information services segment, also had record sales during the quarter of 4.5 million. As Glen indicated, this is reflective of our efforts to reposition that business as a clinical and education suite for physicians as well as patients while at the same time rebuild the sales organization. Q4 sales also benefited from the launch of Patients Interactive offering.

As it relates to the physician, Patients Interactive sales, Glen made mention of an exclusive three-year strategic agreement with the major pharmaceutical firm that we believe has the potential of contributing 1 to $3 million of additional revenue over the term of the agreement. I wanted to clarify that we only included approximately 500,000 of such potential in our Q4 reported sales. So the key takeaway, we had record sales in both our critical software and our Physicians Interactive businesses.

Turning now to backlog, we ended the quarter with 67.1 million in sold backlog. This represents a 45% increase over our backlog amount at the beginning of the year. The backlog breakout is as follows, License and service fees related to our clinical software businesses is 35.5 million, software subscriptions represents another 10.4 million, support and maintenance fees for the upcoming 12 months represents 10.6 million. And then finally, Physicians Interactive has backlog of 10.6 million for a total of 67.1.

Revenue for the quarter was 26.3 million. 2004 revenue was 100.8 million, compared to 85.8 million in 2003 representing a 17% increase. Our clinical software business continues to perform extremely well, and contributed 14.3 million of our Q4 revenue, representing a 6 million or 72% increase over the same year ago. Our clinical software revenue grew 3.3 million when compared to Q3 of this year. This increase represents a 30% sequential growth.

What sets us apart is the fact that we continue to benefit from our conservative revenue recognition policy, which affords us the unique opportunity to have strong visibility into our future performance. Consistent with what we have said in prior quarters, we expect the growth in this segment to persist in future quarters as the market continues to accelerate and our backlog continues to grow.

Information services revenue was 2.7 million for the fourth quarter, which compares to 2.9 million in the third quarter. This change was driven by our Physicians Interactive business and an overall decrease in the average price per completed detail and a increase 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. As we indicated previously, we are very encouraged by the record bookings in this business in the fourth quarter. With that said, please note that the takedown of such backlog is over a period of time that spans multiple quarters, and as such we do not expect immediate growth in PI revenue in the first quarter.

Revenue from the medication distribution business was 9.3 million in the fourth quarter, which compares to 11.8 million in the third quarter. This disappointing decline was primarily due to a reduction in revenue from our wholesaler customers, as well as a reduction in volume from our core customers, caused by the removal of Vioxx from the market and related concerns raised regarding that class of medications. As we mentioned last quarter, the medication distribution business also was adversely affected by the absence of flu in 2004. Please note that the reduction in revenue had minimal impact on gross margin, and is reflective of the fact that the gross margin percentage went up in the meds business.

In terms of revenue mix, our clinical software and information services segment represents 65% of total revenue for the quarter, which compares to 50% a year ago.

Fourth quarter revenue by segment is as follows, medication business, delivered 35% of our revenue at 9.3 million. Software and related services delivered 14.3 million, which is up off of 11 million in Q3 and 8.3 million a year ago. And then information services contributed 2.7 million, for a total of 26.3 million. The key takeaway for revenue is that the clinical software revenue continues to be very strong and we expect to see meaningful growth from our information services business in 2005.

Looking now to gross margins. Overall, we were able to improve our gross margin to 46.9% in the fourth quarter, from 39.4% in the last year and 43.1 in the third quarter of 2004. Both of these increases are primarily due to the relative contribution from our higher growth businesses and our clinical software and information services segment, as well as a higher gross margin in our med distribution business resulting from the lower contribution from the wholesaler customers. These margin improvements were offset by higher amount of hardware sales in the quarter, as well as an increase in software amortization costs driven by the general release of version 10.0 of our TouchWorks product in the middle of the fourth quarter.

Margins by segment were as follows, meds delivered gross margins of 22%, our software related services delivered margins of 64%, and information services delivered 43% for a combined 46.9%. Margins should continue to improve as our growth businesses continue to become a more significant part of our overall revenue.

Turning now to expenses. Operating expenses for the quarter were 10.8 million, versus 9.9 million in the third quarter. This expected $900,000 increase is attributed to the fact that we had approximately $400,000 less capitalized software in the quarter, as well as an increase in bad debt expense reflective of the increase in the overall revenue and an increase in incentive compensation driven by the improved performance in our clinical solutions business.

Total capitalized software in the quarter was $560,000. This amount compares to 940,000 in the third quarter, and is reflective of our previously mentioned general release of TouchWorks version 10.0. As I indicated in the past, this amount will fluctuate from quarter-to-quarter, depending on our product development cycle. R&D expenditures as a percentage of software revenue is approximately 20% for the year. Amortization expense related to prior acquisition remains consistent at 400,000 for the quarter.

Total operating expenses for the year were 39.4 million, versus 37 million in 2003. Approximately 1 million of this increase is due to the additional amortization expense related to the AIC and RxCentric acquisitions that were consummated at the end of 2003.

Net interest expense was approximately $200,000 related to our convertible debt offering. As we indicated previously, 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 1.4 million, or $0.03 per diluted share. This compares to breakeven results in the fourth quarter of 2003. Net income for 2004 was 3.1 million, or $0.07 per diluted share. This compares to a $5 million loss or $0.13 loss per share for 2003. It is important to note that this $0.20 per share improvement was fueled by our growth businesses and speaks to the leverage Allscripts has in its financial model.

Basic shares outstanding for the quarter were 38.5 million, and fully diluted shares were 41.4 million. The 7.3 million shares issuable under our convertible debt offering continue to be anti-dilutive to our earnings per share, and therefore are excluded from our fully diluted computation. To update what we said 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 $0.14 per share of pretax quarterly profits. It is important to reiterate the fact Allscripts controls the form of settlement and ultimately may choose not to take on the dilution.

With regard to headcount, we ended the quarter with 347 employees, which compares to 339 we reported in the third quarter. Here again, I want to reemphasize the fact that our performance demonstrates the significant operating leverage left in our financial model.

Turning now to our balance sheet, we ended the quarter with 128.2 million in cash and marketable securities, up 3.6 million over the prior quarter. Such increase is reflective of the 4.2 million in cash generated from operations and 1.5 million in option exercise proceeds. An additional 500,000 investments in our previously announced relationship, 560,000 of capitalized software and approximately 500,000 of capital expenditures offset these sources of cash.

Accounts receivable increased approximately $1 million in the quarter, primarily due to an increase in advance billings to customers as evidenced by the $800,000 increase in deferred revenue. We ended the quarter with day sales outstanding of 73 days, yet another industry leader.

Turning now to our internal control assessment. As many of you know, as a public company Allscripts is subject to provisions of Section 4.04 of Sarbanes-Oxley. I'm pleased to report that both the company and our external auditors are substantially complete without documentation and testing of our internal controls. And as a result, we anticipate issuing a clean opinion highlighting the fact that Allscripts controls are appropriately designed and are operating effectively.

Looking now to 2005, we are very excited about the opportunity that lies before us. And as a result, expect revenues for the year to be excess of 120 million, with margins in the 45 to 50% range, and with earnings per share of $0.22 to $0.24. As indicated previously, our growth will come from our clinical software and information services businesses. We expect our medication distribution business to deliver consistent results in 2005.

Recognizing the emphasis on our clinical solutions and Physicians Interactive businesses, and inherent attributes that each of those businesses posses, such as regulatory or seasonality considerations, client timing, the amount of capitalized software in any one quarter as well as the level of sales, we continue to expect some level of fluctuation in the performance of these businesses from one quarter to the next in 2005. This concern is mitigated over time as we continue to build sufficient backlog in each of those businesses.

Please note that such guidance does not take into consideration any tax effect on earnings. As we have believed, we have sufficient NOLs to offset such profits. Such guidance also doesn't contemplate the effect of expensing stock based compensation, which we will start doing in Q3 of 2005, pursuant to the new authoritative guidance. Our estimate at this point is that such non-cash expense will be in the range of 2 to $3 million for the second half of 2005.

Finally, as it relates to 2005 guidance, Glen mentioned some key investments that we are making in the business in areas of sales, marketing, and customer support. We believe such investments are important to Allscripts' longer-term success, and as such, want to highlight such incremental cost in advance of future revenues, as you think about our first and second quarter performance.

In summary, we're very encouraged by accomplishments in the fourth quarter in 2004 as a whole. With record sales, positive and improving results, positive cash flows, and strong interest in the marketplace for our products and service offerings. We are very focused on delivering profitable growth in future quarters and we believe we're well positioned in part due to our financial strength, to capitalize on some substantial opportunities that exist in all our markets. With that, I would like to turn it back over to Glen for some closing remarks.

Thanks, Bill. I'd like to conclude by not talking about 2004 and our successes, but rather, about building on our successes and what we plan to accomplish in 2005. The market has arrived and we have focused the entire company on execution. Our corporate goals are straightforward, growing market share, drive utilization, and meeting our financial commitments. When we talk about growing market share, we're focused on share and not just on dollars, because in a market like this everyone can grow. The trick is to grow faster than our competitors and gain more than our proportional share. That is our number one priority and why we are adding so many sales people.

But as you grow, you need to ensure that the product is being fully utilized and that your clients are not only satisfied, but raving supporters. I have set a goal to make 100% of our sites referenceable. It's not enough to sell software; our goal is to help our clients be successful. And finally, we are committed to continuing to meet our financial commitments, which allows us to support our clients, compensate our people, and invest in our future. Three simple goals-- not easy to do, and that is why it is all about execution. And people often ask what I worry about; it is all about execution and complacency.

Some people would be satisfied with the year we had, but I think we're just getting started and most of the growth and the rewards are just in front of us. So with that, I will close our formal comments and open it up for questions, but not before I think our clients are helping as be successful, our people, the most committed in healthcare, and our investors, for your support. Thank you very much, and at this point, Bill and I would be happy to entertain questions.

[Operator instructions].

Your first question comes from Carmen Slate (ph) from Gravitas (ph).

Hi, Carmen Slate from Gravitas. How are you Glen and Bill? Congratulations on excellent results.

Thank you.

I want to clarify a couple of points. I wasn't quite sure heard this right, did you gave then, guidance for '05 of $0.22 to $0.24?

G Bill Davis That is correct.

And what did you give on margins, you said something about 45%?

We expect margins to come in at 45% or 50%.

That leads me to my next question. I want to clarify a little bit on margins this quarter. I was interested to see the different margins for the different lines. I noticed in software you had a decrease this quarter vis-a-vis the last quarter. I was wondering if you could clarify that and you also had a decrease PI and you had an increase in SG&A, so I was wondering you can comment on that please?

Relative to the gross margin change in our clinical software business driven principally by two factors, I highlighted the fact we did have a little bit higher hardware sales in the quarter which is lower margin as well as the fact that, by virtue of the release of 10.0, the TouchWorks product, we began to amortize some capitalized software costs. So it was principally due to those two reasons. That is not a trend. I have commented before that I expect that business to operate in the mid to high sixties and we're still comfortable with that.

Relative to the Physicians Interactive business, we have talked in prior quarters about the fact that by virtue of how we recognize revenue in that business, it's really a function of prior quarter sales. By virtue of the performance from sales perspective in Q1, Q2, Q3, we're feeling the effect of that now from a revenue standpoint. So, as we have stronger sales quarter like we did the fourth quarter, my expectations is you will see that improve going forward.

Finally, as it relates to the SG&A or operating expenses, there were really two -- really three primary drivers that I highlighted for that change. One was capitalized software to the tune of about $400,000. We had a lower amount of capitalized software in the quarter and that is in number that will fluctuate from one quarter and that depending upon where we are at in the development cycle. Second, is that by virtue of the stronger performance had some incremental incentive compensation both in terms of commission as well as bonus expense that we recognized and then finally, to provision for the increase in sales and corresponding receivables, we put forward a little bit more in bad net expense in the quarter.

Okay. Thanks very much.

[Operator instructions].

Your next question comes John Weiland from WR Hambrecht.

It's actually Sean Weiland. Congratulations, Bill, can you remind us again, what that TouchWorks sales number for the quarter?

Clinical software sales were 25 million -- that would be 25.0.

Congratulations, that is a great number.

Sean, I can't believe you didn't ask me that question.

Sharp was obviously a key contributor to that number in the quarter, and with a number of other IDX accounts kind of in the same league as Sharp, can you set any kind of expectations for future deals in that size range going forward? If you can't give specifics, what is the outlook on that particular segment of the pipeline look like compared to last quarter versus last year?

Sean, I'll take that. Let me answer it in a few ways. The quarter was exciting because in addition to Sharp, we had a number of deals, I think Bill mentioned the number, eight deals in excess of $1 million. And what we are seeing is larger and larger groups. I mentioned community care physicians, but we have Resurgeons, which is the orthopedics leader in the Atlanta area, we have Midwest Physicians, which is 90 physician's right outside of Chicago. More and more larger groups are coming into the pipeline and moving quickly through it.

In terms of the larger deal and visibility there, as I had said on a prior call, that pipeline remains healthy as well. I think it is reasonable to assume that we will continue to sign to deals and Sharp won't be our largest deal for a very long. There's a lot of competition in the sales force to get the larger deals done as well. So there is a lot of focus on that any pipeline is very, very healthy.

Okay. Can you comment -- you mentioned ramping up on implementation and support resources to support these new businesses, can you talk about headcount or incremental expenses expected with that?

In terms of the investments that we're speaking of, I would think of it in the order of magnitude of call it, $1 to $2 million on an annualized basis initially.

Okay, thank you very much. Great job on the quarter.

Thank you.

Your next question comes Ryan Stewart with Piper Jaffray.

Congratulations on some great numbers there. Quick question just on what Sean was asking there relative to the larger pipeline and having larger deals in there. From a sales force perspective, can you talk a little bit about some realignment that you may have done as well as the additional people that are coming on? Clearly we have got a land grab out there over the next 18 to 24 months. What percentage would you say you are going to have focused on the larger deals, let'ssay, three quarters of a million and up or 1 million and up versus some of those $500,000 deals we'll call them now more singles and doubles versus triples and home runs.

Well, a few things. As you may recall, I'll just mention in the call Scott Leisher, our Executive Vice President who previously headed our sales force, we actually moved him out of that position just over a quarter ago and asked Scott to focus exclusively on deals in excess of $3 million. He is building a team to do that. He will have between three to five full-time people focused on those deals in excess of $3 million.

In addition, we have segmented, further segmented the sales force to make sure that we have the appropriate focus on IDX and non IDX. And last, but not least, on making sure we don't forget the deals that are important to us but in today's environment seems like smaller deals. These deals there into 200 to $300,000 range. We have a lot of identified focus and I think the good news is this year more than ever we have the accounts identified, we know the names of our people and their people, and we measuring it very closely.

From a payer pipeline, can you put any sort of box around the type and size of deals you're seeing in the payers space?

I think it is early because there is a lot of experimentation going on in that area. We are active in that area. I think it is reasonable to assume that there will be deals that get announced over the course of the next few months in the payers space. I wouldn't quantify it at this point.

Lastly, any update you can give on the whole about transaction business?

We continue to see that business moving along nicely. This year, we talked about having 8 million transactions that were done, that's electronic prescriptions written this year. To give you a sense of that, an organization like Sharp, given the number of physicians there, if they were fully implemented, they alone could probably handle 6 to 8 million transactions. So, you get a sense of how rapidly that can grow. We have previously indicated that next year we expect transactions to grow from the 8 million number in '04 to in the range of 20 million transactions. So we have started to model some growth that we think is not too aggressive, but reasonable.

Operationally, from a connectivity perspective, you can expect quarter to quarter that you are interconnecting with more of vendors across the continuum, albeit PBMs, labs, and so on?

We are connecting with more, although I would say that we feel pretty good about where we are in terms of our various partners. As you know, all of our connectivity is completed with Rx Hub, with SureScript, we have connectivity with a number of the major PBM's and a number of payers as well directing activity and we are working with a number of the largest lab providers. You have seen some of our press releases there.

Sure.

And I think they are most important, you know we are one of the leaders in driving interoperability with all of the vendors. So, that's going to be very beneficial to us.

Great. Okay, well, thanks a lot, guys.

Thank you.

Thank you Ryan.

Your next question comes from Derrick Winger (ph) with Jefferies & Company.

Yes. Three quick factual items. Capital expenditures for the fourth quarter and the outlook for next year and also the depreciation and amortization for the fourth quarter?

Yes. Capital expenditures were right around $0.5 million in the fourth quarter; expectations for '05 would be in the $3 to $4 million range. And depreciation, let me actually look that up and if you can ask your next question I'll come back to that.

That's all I need.

Okay.

Your next question comes from Corey Tobin with William Blair & Company.

Hi, good afternoon and nice quarter guys.

Thanks Corey.

Thank you.

Let me switch gears for a second here and talk about the Physicians Interactive product line. Given the strong bookings we saw in Q4 here in the enthusiasm in about the Patients Interactive product, can you give us a rough gauge as what type of expected growth we can expect to see there in 05?

The growth in PI I would stay with what I said previously in the kind of 30% plus range, so 30% to 40% range is the band I put on it.

The good news is that with the Patients Interactive product, that has a high selling, you know, price on a relative basis, on the other hand, we have a limited amount of experience. We just sold our first agreement on it and so we are modeling that, you know, conservatively and we will continue to update that each quarter.

And to come back to the depreciation question very quickly, depreciation was just under $1 million. That does not include the 400,000 of amortization expense that we break out on the face of our income statement.

Okay, Bill and just to clarify the responses, you are saying that 30% to 40% year-over-year growth for the full year is that a good estimate for that that's for the Physicians Interactive line?

That's correct.

Okay and that again is despite Q1 probably being down?

That's correct.

Sequentially or when you said down sequentially or year-over-year?

Year over, well year-over-year.

Year-over-year.

Okay.

Okay. And then so I guess the other way to say that is you expect a big ramp up in the second half of the year.

That's correct.

Okay and then little quick did you mention that the average detail that the price of the average detail approximately was down in the fourth quarter?

It was down in the fourth quarter and now again -- reflective of what was being sold in the earlier part you know earlier part of the year. Glen highlighted as it relates to Patients Interactive you know what we're seeing in terms of real value there. And so part of our expectations moving forward is that we will see some firming up of that as well.

Okay. So, we do expect just the traditional eDetailing business to post I guess growth in '05 as well?

Yes. I mean actually and we have commented on that before. We're actually seeing a resurgence of eDetailing in part due to what is what's going on in pharma and where they're directing those dollars. But we also are seeing a pull-through effect from our Patients Interactive offerings. So, we definitely see growth coming from both vehicles.

Okay. Thanks. That's great. And one last question if I could in the information services revenue for the full year 2004, can you break out how much of that was related to e-prescribing? Thanks.

Yes, transaction. Transaction. I think what you're asking is transaction revenue and that number. And it was a little less than $1.5 million.

Okay. Thank you.

Your next question comes from Peter Duboy (ph) with Morgan Stanley.

Hi, guys this is Peter. I have two questions. One if things are so good there, why does one of your directors continue to hit the market every week?

Sure, I can take that. I think we are referring to is actually a bit of a misperception. One of our directors, who is identified as a director of a fund, that would be Liberty Partners. Liberty has been in an investor in the company with the fund for I think 10 years and so this is one of the first times other than that our secondary that they have ever taken any money out of the company. And it's a limited amount, but his name kept showing up. I've talked to him personally and he sold no personal stock and he holds a fairly sizable investment. So, this was the fund exiting after probably the longest holding period that I've ever seen a venture fund stay in a company. So, it's not a cause for concern for us. I'm also under the belief that the arrangement they had to sell has been discontinued. So, but that's something that you know just to clarify, there has been no director selling.

And, when you say discontinued, I know there was some news today that there were some more shares sold. Is this, when does that discontinuation take effect?

Well, it's my year and again I really don't want to comment too much on what an individual fund is going to do, but it is was my understanding that their inclination, because they knew the way it was showing up and there was some concern in the market, and they have been great partners, that they're going to discontinue selling. So, I think the arrangement was they had a certain number of days and a certain number of shares to sell and it was, it either had run out or it was very close to running out. It's a 10B51 program that they had put in place.

And my second question is with regards to GE seems to be entering the market I am on CNBC today Dr. Brailer was on and they talked about GE's product called I think it's Patient Keeper. And if you could comment on that and that's going to affect any of your pricing. Just a little update.

I don't think it. I don't believe Patient Keeper is actually a separate company. Centricity is actually the GE product that we are aware of, although GE has used Patient Keeper occasionally for connectivity and kind of for middle ware. That said, I think what you're seeing the deal that was announced in GE, at least to our understanding from what we read, is a deal that really is primarily focused on inside hospitals. And what we have seen is a lot of the traditional health care players have basically provided CPOE and pharmacy services and the like to larger hospitals. And as the ambulatory market has developed on each of those the larger players have basically said they have ambulatory offerings and to try to extend those hospital offerings into the ambulatory space. It continues to be our view that the ambulatory space is a very different animal than inside the four walls of a hospital.

And I guess that you know the more evidence of that is if you recently, I know Siemens started to offer an ambulatory program as well through a partnership with one of our competitors. And I think the news that I take out of these developments is one, ambulatory EMRs are increasingly driving these decisions. So, in the past, people believed that both the hospitals would drive the decisions and other people thought practice management would drive the decisions, but what we're seeing is physicians are becoming more empowered people understand that physicians ultimately control about 80% of the dollars spent through their hands, what they order, prescriptions their write, labs they were, and the like.

And so everyone is trying to move in and position themselves in the ambulatory space. That said you know the ambulatory space is very different in terms of speed of implementation and in terms of the kinds of products and usability and the like. So, we think the focus on the ambulatory space is good. But we have always expected that we will have more competition overtime in that space, but we remain very comfortable in terms of where we are and we look forward to competing with some of the other folks that are going to be joining us.

Thank you very much.

Your next question comes from J. Hingorani from Thompson, Davis, and Company.

Gentlemen, good afternoon.

Good afternoon James.

Thank you I will go on. Real quick, what is the penetration level in the IDX space right now? I know you mentioned at one time I think it was third quarter or second quarter last year. I haven't had an update in a while?

Yes, so IDX penetration, the rates just crept over 15% if you comp prior quarters we were right around 11 and 12%. We saw some improvement by virtue of the sales strong sales in the quarter.

I'm sorry, you said 15%?

Just over 15.

Just over 15. And that combined with the fact that you know you are expecting to see larger size deals coming along within that space. How about outside of IDX are you pursuing? What is the strategy of trying to pursue the same or similar size deals?

Just to comment on the IDX, for a moment you know about 15% penetration, we crossed the hundred deal mark. Very important because again in this space you know having a lot of other reference sites and organizations who've made the decisions makes it much easier. So, we also identified that we have about $800 million of runway in the IDX space that we have identified so, tremendous growth opportunity there.

In terms of outside the IDX space, I think Bill mentioned that the number in terms of IDX share of our overall sales, that is sales to IDX customers or customers who have an IDX practice management system, has actually been dropping because we are already seeing good progress in terms of sales progress outside the ideal space. For the first time, we expect to focus attention outside the IDX space in a big way and that is part of new hiring.

We will go at that in a few different ways. One is the specialty focus, and you will hear more about this in particular areas where we think we can go in and make real progress on specialties like ophthalmology and cardiology and other practices. And then, just general practices to see large players like the Sharps of the world, like the Community Care Physicians, Midwest Physicians and Resurgeons. And they see that happening and they want to get on board as well. Inside the base, outside the base, we expect to be competing very aggressively.

Okay. And then with regard to the iHealth announcement of a couple of days ago, iHealth has been integrated with Medem, looking forward to interoperability and interchange of data. How do you see this, especially resolution with ambulatory side and the hospital side in terms of networks and so on, and one of the keys there was Allscripts having how iHealth help and interact with various solutions? Give us more color there.

Sure, well this is great news for us. The whole initiative that David Brailer has pushed with the interoperability and the CCR really plays into where we are because what that says is you can pick the highest ambulatory clinical player and the idea that used to be used kind of competitively that said it would be hard to connect with other systems has really gone away. The whole centerpiece of our inform, , connect, transform strategy, that idea of connecting is really important and this allows us to say that if you are operating under the standards that David Brailer has talked about, you can use our software whether it is connecting to a hospital or whether it is connecting to anyone else. That has been great news for us and we're very supportive about the open standards and the connectivity. And it really allows physicians to choose the system that is best for them. And again that plays right into our strategy.

And lastly, you talked about the large pharm deal. Can you elaborate a little bit more on that?

I think you unfortunately unlike the physician side of the equation, on the pharma side of the equation they're pretty stringent about releasing names and what they're doing with their strategies. We are under a non-disclosure relative to the agreement that I mentioned. I think we are comfortable enough to share the fact there is guaranteed revenue, that it's platform deal and that it is exclusive in nature. So they've focused on one.

Congratulations and we will follow-up later on off-line.

Okay, great. Why don't we take one more question? I know this has dragged on, but we're trying to accommodate everyone.

Your next question comes from Jackson Spears (ph).

Couple of quick questions first, what is your strategy going after large physician integrated networks and where do you stand going beyond the Sharp type deals?

We feel very comfortable. We're in the midst of competing for a number of those larger deals that stretch the 3 to $5 million range and we're very active in that space right now. We're seemingly doing very well relative to our competitive positioning there. I think some of the strengths of the product, the inherent strength, the fact that it is web based, the fact that we have already been selected for a number of large deals and that we do good with multiple locations and that we have tremendous flexibility in terms of everything from wireless to the different platforms and types of equipment we use, as all work to our benefit there. All that is good.

I think the other piece is that we're really building off of the national centers of excellence that we have. When you take people like an MIT, like a Sharp, like Dartmouth, a Sierra (ph) the largest player in Nevada, University of Minnesota, 600 physicians there, George Washington Medical Faculty Associates, the leading player in the Washington DC area, and you go on and on. These big names carry a lot of weight and they make it easier for others to make the same kind of choices.

Your sales in the fourth quarter and software was nothing less than spectacular. What are you doing to manage the implementation cycle and it doesn't put too much pressure on your own staff? Are you going to outsource part of that function so you don't have to hire too many people too quickly?

I think there is a few things. ONe, we do have a commitment to delivering for our clients is extremely important for us. And for some of these larger clients, we are actually creating dedicated teams. So for Sharp, for example, we are physically moving people to San Diego. They will be focused full- time on making Sharp successful. So that is number one.

Number two, terms of hiring, we are in the market and hiring additional people and have a number of people today on accelerated training, so it is not all new expense. We've hired ahead anticipating some of these deals. So that is the second piece. Three, we do have some outsourcing partners. Joe Carey, our Chief Operating Officer, in part, to manage what he saw coming started to certify a number of outside providers on our products. So, organizations like Global Works and Abreon are two of the companies that we look to and have already successfully used to help us accelerate training. In fact, the Abreon folks were very key in our George Washington Medical Faculty Associates 30 day implementation for 100 physicians. They actually jumped in and did a first class job there.

And last but not least, you talked about reducing the pressure on our people and I think our people have done a really super job. They operate very well under pressure and may have just done a first-class job. They're very excited about what is ahead of them.

If I could add to that, Glen, because I think it is important to note that we are-- you know, the hiring that Glen speaks to, we're doing it in a very systematic manner. We are very focused on the productivity of our existing resources, so to hire what we need to hire and do it in a way that is not detrimental to our overall financial performance. We're keeping our eye on those commitments as well.

When I talked about the objectives for the company, they were very well thought out. We wanted to grow market share, we want to drive utilization, but the financial commitment piece was in there because the idea was to do that in a disciplined fashion. You could grow easily and frankly could implement this easily if you had no focus on doing it cost effectively or efficiently. Of course, the trick is to do all three at the same time. That is what the entire team is focused on.

Last question, you mentioned you are talking to a number of payers and you didn't quantify, is that primarily for e-prescribing or are they looking at investing in a total solution to incent integrated health or hospitals in that area, doctors in the area to adopt an e-health system?

The answer is both. We see all the variations out there. We do see that the e-prescribing is an entry ramp, it's an on ramp to the full EMR solution, just as our document management and imaging solution was a great on ramp to the overall solution. So practices would come to us who aren't ready for a full electronic medical record, may decide to go paperless using our scanning solutions. That has been very, very cost effective and has great return on investment. Similarly, on e-prescribing, we see real interest in that. But we've already learned, because we lived this once before in the e-prescribing world, that if all you have is e-prescribing, if it is a single application, it is just not going to be effective longer-term. We think we're well positioned in both of those market and we see strong interest in both of those markets.

Great. Congratulations on your record. Bookings were fabulous. Thank you.

Thank you. Unfortunately, we really made a promise to people we try to keep these manageable, but we appreciate all the questions. It is been a very solid quarter for the company, very exciting from the sales perspective, very exciting from a product perspective in terms of some of the new product announcements and we are looking at building on the success that we have had in the market to date. We think we're very well positioned and for those of you who have been with me for a while, I am pleased to say that we are highly confident that it is really nice this time. You can see the numbers and we expect that's going to continue.

So, well thank everyone for joining us on the call today. Again, a special thanks to all of our clients who are helping to keep us successful and to all of our people who are performing so well. Thank you, very much.

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