Veradigm Inc (MDRX) 2005 Q2 法說會逐字稿

Good afternoon. My name is Ronnie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Allscripts Second Quarter Earnings Call. [OPERATOR INSTRUCTIONS] Mr. Tullman, you may begin your conference.

Thank you. I’m pleased to welcome you to the Allscripts Second Quarter 2005 call. This is Glen Tullman, Allscripts’ CEO. Joining me on the call today is Bill Davis, our CFO, and Lee Shapiro, our President. Let’s start by reading a copy of the safe harbor statement. Bill?

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on 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, 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’ filings 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’d like to turn the call back over to our CEO, Glen Tullman.

Thanks, Bill. Let me begin by telling you how pleased I am with another quarter of strong sales growth in each of our businesses, solid operating performance, and the resulting bottom line EPS of $0.05. While Bill will provide more detail, the business is performing well heading into the two strongest quarters of the year. However, performance is built upon a strong foundation, and I want to spend a few minutes why our leadership and investments position us so well to win in the future.

Many of you who have been tracking Allscripts know that our vision is to become an indispensable part of the way physicians practice medicine. While the industry has traditionally focused on the hospital, we believe physicians are at the center of healthcare today and in the future. Decisions made by physicians direct approximately 80% of the $1.7 trillion annual spend in healthcare. And, physicians spend about 90% of their time in the clinic or at their offices. So, if you want to become indispensable to physicians, focus on delivering easy-to-use software and information services in a medical practice setting. That’s what we do. Perhaps the most important take away from today’s call is that we are achieving our vision right now.

Many of you saw the article on electronic health records in “Time Magazine” a few weeks ago that featured Allscripts and one of our key clients. While we appreciate the attention this has generated, what’s more important is why we were featured. We have an established client base of the leading medical groups in the country, and we are driving the changes that are occurring in the market.

Let’s talk about some of these changes. First, personal health records. As we often say, patients aren’t patient anymore. The need for a personal health record that is readily accessible by the patient, not just the provider, has become a key ingredient for delivering coordinated care in disease management. In May, at the National Press Club in Washington, we participated in the launch of the iHealthRecord for Medem. Backed by the AMA and over 45 leading medical societies and free to all Americans, we believe the iHealthRecord will quickly become the standard for personal health records. The ATM for personal health records. Allscripts will be the first electronic health record to directly integrate into Medem’s offering. And, interest in this offering is evident from the early results. We have already closed sales of close to $500,000, including an agreement we signed yesterday with Community Care Physicians. CCP is a 200-physician, multi-specialty group in Albany, New York, who are planning a full iHealth rollout for their patients. Brown and Toland, a leading innovative San Francisco based MSO of more than 1,500 physicians serving over 200,000 patients was another early believer and was at the iHealth launch in Washington. They consider iHealth an important part of their strategy and are running radio and print ads alerting patients to their offering. They report that Website hits are up 40%, evidence that consumers do in fact want an on ramp to the evolving electronic healthcare system.

The second change I want to talk about is interoperability. Secretary of Health and Human Services Mike Leavitt recently requested proposals for a national health information infrastructure. Allscripts, along with our partners, is playing a key role in six of the proposals that have been submitted. The bottom line is that this effort and the push for interoperability will help accelerate the requirement for open systems, a substantial benefit to Allscripts. We are also playing the leadership role in virtually all of the initiatives you’re reading about on a daily basis, such as the Certification Commission For Health Information Technology, the e-Health Initiative and the [Marco] Foundation’s Connecting for Health Initiative, just to name a few.

Legislation is another EHR market event playing out in the daily press. Electronic health records have become front and center in politics, not only because healthcare is a key economic and competitive issue but also because, increasingly, it is non-partisan. When Senate majority leader Frist and Senator Hillary Clinton joined forces to introduce the Health Technology To Enhance Quality Act of 2005, they made the announcement at George Washington Medical Faculty Associates, one of our clients and one of the most sophisticated electronic health record locations in the country, located about ten blocks from the White House. This was just one of many bills that was introduced as the federal government and state governments began to rally around electronic health records. Allscripts has provided testimony and support of many of these legislative efforts.

Pay-for-Performance is yet another key initiative for healthcare. In terms of efforts to effectively lower the cost of an electronic health record for physicians, Pay-for-Performance is the most important trend to watch. The key take away is that our clients continue to set the pace. Many people think Pay-for-Performance is down the road, but it is happening today. Blue Cross of California announced a total payout of $72 million in 2004 based on the Blue Cross quality score card. One of our clients, Facey Medical Group of Los Angeles, was named the top performer in all of southern California. In other words, they received a significant part of the payout. Why? Because physicians actually used our application to improve quality. Providing incentives is not unique to California.

During the quarter we announced that we signed an agreement with Horizon Healthcare Services, the largest insurer in the state of New Jersey, to bring electronic health records and e-prescribing applications to hundreds of physicians, as well as an agreement with Hawaii Medical Services Association, or HMSA, the largest insurer in the state of Hawaii, to renew their e-prescribing agreement with us and to promote electronic health records to over 600 physicians. Lastly, when CMS decided to pilot a pay-for-performance program, they chose one of our clients, [Dartmouth] Hitchcock, as one of the key participants.

So, when we look at the important trends in healthcare today: personal health records, legislation, interoperability and pay-for-performance, Allscripts is front and center in driving the market. However, the most important trend from an investor’s standpoint is our traction in the market. During the second quarter, sales of our clinical software products were $13.3 million, and revenue grew 62.5% over the prior year. We ended the quarter with our largest backlog ever and with the most identified deals in the pipeline that we’ve ever had. One of the sales trends I wanted to highlight is that we are starting to see traction in specialty markets, signing groups such as Cincinnati Eye, one of the largest ophthalmology practices in the country, joining our other key ophthalmology leaders in this field, Dean McGee and [Ohini] Eye. Tennessee Oncology, one of the nation’s largest physician-owned oncology groups, with whom we are partnering to develop oncology-specific templates, and we’re seeing solid traction from other groups at existing clients. For example, Pinehurst Surgical, one of the largest surgical groups in North Carolina, who will be first in their region to provide a chart-less practice and is intent on driving interconnectivity in their region. We’re also seeing key clients like the University of Florida at Jacksonville renew and expand their agreements with us. For example, Jacksonville, in an agreement valued at $700,000, added 375 additional licensed modules to complete their rollout.

It wouldn’t make sense to talk about our successes here without providing a status on our strategic relationship with IDX. IDX continues to provide solid competitive advantage for us in the larger electronic health record market with flowcast practice management systems users. I’m especially pleased how well our sales force and operational folks are working with the IDX groupcast practice management team to focus on the mid-sized market. I believe we will see very positive results in the near future in that market. In two weeks, we’ll be very visible and active participant in the IDX National Users Conference with speaking slots, sponsorships and a host of one-on-one client meetings. This will further strengthen our position as the safe choice for IDX clients.

Before I transition to Physicians Interactive, I wanted to comment on some recent press on Vista [ph], the Veterans’ Administration Electronic Medical Record. With much fanfare, CMS announced that they would be providing Vista free. Let me first say that we support all efforts to get more physicians utilizing electronic health records, and we think this will provide additional visibility and publicity to the activity already taking place around electronic health records. That said, having talked with our clients, I wanted to make three points. First, this is not new. Vista has been around and available to doctors for almost two years without much uptake. The feedback we received is that it was viewed as difficult to implement and difficult to use. Second, the headlines stressed that Vista was free, and this has received a great deal of attention. While we understand there is no charge for the software, the primary cost of an electronic health record do not go away. Those include hardware, interfaces to other systems, implementation, training and deployment, help desk services and third-party software. A successful electronic health record application is much more than just the basic software. Third, and finally, as we understand it, there is not an upgrade process that includes clients, and the software is not on the latest technology, which may significantly increase the overall cost. Moreover, there is no e-health component and no real management reporting capabilities, which are critical to future pay-for-performance initiatives. I believe what is important is that there is more publicity about electronic health records and that there is an implicit threat to healthcare that if we don’t solve our own problems, the government will. Both points are helpful, but the bottom line is that we don’t see Vista in any way as competitive to our offerings or delaying any decisions that we would have or having any market impact.

So, let’s switch to our Physicians Interactive business. We followed up a very strong sales effort in the first quarter with another $4 million bookings quarter in Q2, and we’re off to our strongest start ever for PI business in Q3. This sales trend makes us very optimistic about the business. That said, it’s important to understand that the nature of what we’re selling is beginning to change, and as we move to larger, more integrated platform agreements, which is very positive, it does lengthen our revenue recognition. Bill will give more detail on this in his comments. Second, with a record-breaking backlog, our ability to deliver revenue is an area that we’re focused on with new initiatives to speed this process up.

And finally, to move to our Medication Services, our Medication Services unit turned in a strong quarter from a revenue perspective at $11.5 million, while continuing to perform on the bottom line. We anticipate consistent performance from this unit.

So, overall, we are seeing a very strong demand for our products in each of the markets that we serve, and that’s translating into bottom line results. At this point, I’ll ask Bill Davis, our CFO, to take you through the financials for the quarter. Bill?

Thanks, Glen. As Glen indicated, our second quarter was marked with a number of record performances and other exciting events. I’d like to first provide you with detail on those accomplishments, and then I will comment briefly on our outlook for the balance of the year.

Turning first to our second quarter results and some key financial highlights in the quarter. Our net income of $2 million, or $0.05 per share, represents our most profitable quarter ever and represents a $0.02 per share increase over the first quarter. This accomplishment demonstrates our continued ability to drive improved and profitable results. Total bookings in the quarter of $17.2 million represents a 22% increase over the same period a year ago. Our revenue of $29.5 million represents a 15% increase over Q2 of last year, led by a 63% increase in our software and related services revenue. Finally, we generated approximately $4.7 million in positive cash flow from operations, bringing our year-to-date total to approximately $6.1 million.

As indicated previously, total bookings during the quarter were approximately $17.2 million. Consistent with prior quarters, bookings do not take into consideration the $11.5 million of sales in medications. Our $17.2 million in bookings compare to $14.1 million in bookings in Q2 of last year. Year-to-date bookings were $36.2 million, which compares to $27.4 million for the same period a year ago. This represents a 32% increase. Our clinical software, or Electronic Health Record business, contributed $13.3 million in bookings during the quarter, excluding ongoing support. This compares to $11.8 million in the second quarter of last year. It’s worth noting that approximately 70% of our bookings this quarter were with IDX customers. We are also continuing to be very encouraged by our strong average selling price to new customers. Year-to-date bookings for our clinical software business were $28.2 million versus $21.7 million for the same period in 2004. This represents a 30% increase. Our Physicians Interactive business had bookings during the quarter of $4 million, our third consecutive quarter averaging over $4 million, representing a very positive trend in this business. Year-to-date bookings for PI were $8 million versus $5.7 million for the same period a year ago. Again, this represents a 41% increase.

Turning now to backlog, we ended the quarter with $76.3 million in sold backlog. This represents a 46% increase over our backlog amount at the end of Q2 of last year. The backlog breakout is as follows. License and service fees related to our clinical software solutions group makes up $40.5 million of that balance. Software subscription arrangements which will be recognized over the next three to five years makes up another $10.5 million. Support and maintenance fees for the next twelve months makes up $12.1 million. And, then finally, our record backlog and Physicians Interactive makes up the balance of $13.2 million, for a total of $76.3. As I’ve indicated before, our reported backlog does not include anything related to our meds distribution business, which we view as recurring in nature. I also wanted to mention that we continue to be encouraged by the level of visibility that our backlog provides us.

Revenue for the quarter was $29.5 million. This represents a $3.9 million or 15% increase over the same period in 2004. Year-to-date revenue was $55.7 million, compared to $48.8 million in 2004, representing a 14% increase. Our clinical software business contributed $11.6 million of the six-month year-over-year revenue increase, representing a growth of 62% for the first six months. Our strong growth in our clinical software business was offset by our performance in both our pre-packaged medications and Physician Interactive businesses. Our second quarter revenue of $29.5 million represents a $3.3 million increase over the first quarter of this year. Our clinical software business contributed incremental revenue of $1.8 million. This increase represents 13% sequential growth. Consistent with what I’ve said in prior quarters, we expect the growth in this segment to continue in future quarters.

We continue to see strengthening in our meds business as well, as evidenced by the $1.7 million increase delivered in Q1. We continue to remain comfortable with our guidance that the meds business will deliver consistent revenue when compared to 2004.

Finally, PI experienced a slight decline due to timing of some key client program launches. As Glen indicated, it’s important to note that we are selling more enterprise related or platform programs in longer term deals in this business. As such, the take down of PI backlog is generally taking longer, as evidenced by our record backlog level at the end of the quarter. With that said, we continue to benefit from stronger visibility in this business as we look out to future quarters.

In terms of revenue mix, our software and information services segment represents 61% of our total revenue for the quarter. This compared to 52% a year ago. Second quarter revenue by segment is as follows. Again, our meds distribution business delivered $11.5 million. Our clinical software business delivered $16.1 million compared to $14.3 million last quarter. Our information services business delivered $1.9 million for a total of $29.5. The key take away for revenue continues to be that our clinical software revenue business is delivering very strong results, and we expect to see meaningful growth from Physicians Interactive for the balance of 2005.

Turning now to gross margins, this is an area we are also seeing improvement. Overall, our gross margin was 47% in the second quarter. This compares to 39.4% in the second quarter of 2004 and 46.4% in Q1. Both increases were primarily due to the continued improvement in and relative contribution from our clinical software and Physician Interactive businesses. Such increases were offset by a decline in the medication gross margins that resulted from an increase in wholesaler revenue in the quarter. Our clinical software gross margin improvement is reflective of the fact that hardware as a percentage of revenue was lower in the second quarter. We also benefited from an increase in license-only deals to existing deals, which typically have higher gross margins associated with it. Consistent with the guidance that we have previously given, we expect this business to deliver margins in the mid 60s in the future. Physicians Interactive gross margin improvement was driven by the closeout of certain e-detailing projects at higher than expected gross margins. Again, in the future, we expect gross margins in this business to remain in the mid 40s. Margins by segment are as follows. Our meds distribution business delivered gross margins of 16%. Our software and related services business delivered gross margins of 68%, and improvement of almost 5 percentage points over Q1. Our information services business delivered 62%, for a total of 47%. Consistent with what I’ve said in prior quarters, overall margins should improve going forward as our growth businesses continue to become a more significant part of our total revenue.

Turning now to expenses, we continue to maintain tight control over our expenses. Operating expenses for the quarter were $11.9 million and compares to $10.8 million in the first quarter. The expected $1.1 million increase is explained by the addition of head count, incremental marketing expense driven by our very successful annual Users Conference in the quarter, and an executive summit that was also held in the quarter, both related to our clinical software business. The cost was also impacted by a slight increase in our allowance for doubtful accounts, reflective of our overall increase in revenue.

Total capitalized software in the quarter was $800,000. This amount compares to the $600,000 we capitalized in the first quarter. As we have 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 was slightly less than 20% in the second quarter due to the increase in revenue. Amortization expense remained consistent at approximately $400,000 for the quarter.

Net interest income was $100,000 in the quarter. As we’ve indicated previously, we expect net interest income to continue to improve in future quarters as interest rates rise and we benefit from higher short-term rates. Net income from the quarter was $2 million or $0.05 per share. This compares to $0.03 per share in the first quarter of this year and $0.02 per share in the second quarter of last year. Year-to-date net income was $3.4 million or $0.08 per share. This compares to $1 million or $0.02 per share for the same period last year.

Basic shares outstanding for the quarter were 39.8 million, and fully diluted shares were 43.1 million. Again, the 7.3 million shares issuable under our convertible debt offering continued to be anti-dilutive to our earnings per share and therefore are excluded from our fully diluted computation.

With regard to overall head count, we ended the quarter with 360 employees. This compares to 346 we reported in the first quarter. As previously indicated, such increase is primarily focused in our clinical software business.

Turning now to our balance sheet, we ended the quarter with $134.9 million in cash and marketable securities, up $4.5 million over the prior quarter. Such increase is reflective of the $4.7 million in cash generated from operations and $2 million in option exercise proceeds. Such sources of cash were offset by our final $800,000 deferred purchase price payment related to our AIC acquisition and an additional $450,000 previously committed investment in our Medem relationship. Cash also was impacted by the previously mentioned $800,000 of capitalized software and approximately $400,000 of capital expenditures. Accounts receivables remained relatively flat at approximately $23.2 million, which resulted in day sales outstanding of 71 days.

Finally, it relates to our outlook for the balance of 2005, we continue to execute against the plan we laid out for you earlier this year. As such, we are still comfortable with our earnings per share guidance of $0.22 to $0.24 per share. With that said, we do not believe our Physicians Interactive business will deliver the 30% revenue growth this year based on its year-to-date performance. However, we are very encouraged by PI’s sales traction and remain confident in its long-term growth prospects and ability to deliver 30 plus percent annual growth in the future. More specific to 2005, we expect to see PI deliver 10 plus percent sequential revenue growth starting in Q3.

In summary, we are very encouraged by our accomplishments in the second quarter, with positive operating results, strong bookings and positive cash flows. We are very focused on continuing to deliver profitable growth in the 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’ll turn it back over to Glen for some closing remarks.

Thanks, Bill. Healthcare is at an inflection point as it rapidly moves from the paper-based system we have today to the electronic healthcare system of the future. That future powered by software and systems that inform and connect physicians, patients and the other key healthcare stakeholders will literally transform healthcare as we know it. Companies that are well positioned and are ready to take full advantage of the opportunity will be successful. As I discussed, we believe that the strength of our software, our people, our efforts in addressing the key challenges facing healthcare today and our ability to execute position Allscripts as a winner in this exciting market. This quarter was another solid step in that direction.

We want to thank all of you for listening today, and we’re now ready to take your questions. Thank you very much.

[OPERATOR INSTRUCTIONS] Sean Wieland.

Could you give us an update on the small physician practice market and your efforts to come up with a solution to serve that end?

Yes. As we’ve commented before, we think the small physician market is probably six to twelve months away from really catching fire, and we’ve released our first offering, TouchChart, into that market, which is really building upon the AIC document and imaging system that were so successful with smaller practices. In addition, because we have a tremendous amount of experience with e-prescribing that’s been sold to smaller physician practices, we have the opportunity to leverage that experience as well. We see that with many of the managed care players, who are initially providing e-prescribing and then building upon that with subsequent offerings. If you look at HMSA, what you’ll see is they started off with a successful e-prescribing offering that was funded. Now they’ve taken the next step and are marketing the full electronic health record. That’s one approach. A second approach is that we are working very closely with some of our anchor clients to leverage our blue chip client base and have them provide, essentially, an MSO/ASP type offering to many of the smaller practices in their area. We really see this as in the market 1 to nine physicians as one set of offerings, in the 11 to 25 market, that’s another set of offerings, and of course, at the high end we feel very comfortable with the success we’ve been having.

Do you need a distribution or marketing partner or strategy to go after that market that you maybe don’t have today, or do you think you have the assets in place to go after that market?

We believe we have the assets today to go after that market. Again, if you look across the board, whether it’s our clients with an MSO offering with our customers as our business partners, that’s one approach, Sean. The second approach is going direct and/or through VARs with our TouchChart offering. Then, finally, our e-prescribing offering is a great on ramp to a full electronic medical record.

Okay. Great. And on the other side of the market within the core IDX flowcast market – the large groups – are you seeing any increased competition there among other players in the electronic health record market?

Nothing more than we’ve seen to date. That is, we believe in the IDX base and the core flowcast base that we win 80% to 85% of the deals we compete in. There are always going to be exceptions, and we’ve seen exceptions kind of from a variety of people across the board who may buy business, who may have a prior relationship with a hospital or the like. But, by and large, we feel very good about that customer base and expect that a lot of our future growth is going to come from those clients.

Great. Thank you very much.

Jay Hindgarani [ph].

You said EPS guidance was still $0.22 to $0.24. What about the revenue?

As I indicated, what I am encouraging people to think about is in the PI business that we’re seeing sequential growth coming off of Q2 at 10 plus percent Q3 and Q4 and relative to other businesses, we continue to be comfortable with the guidance that we’ve provided there.

Okay. So, that will be the modified number. But, the old guidance I think was somewhere in the $1.20 to $1.22 range or something like that.

Yes. Keep in mind that, again, the PI revenue and what we’re describing here are not a significant difference in terms of relative to the $1.20. But we continue to see some positive movement in performance in our other two businesses, meds distribution and our clinical software business, and we obviously continue to focus on our operating expenses as well. It’s really a combination of all of the three that gives us confidence and comfort about the $0.22 to $0.24.

Do you feel comfortable that meds will actually just kind of hold its own year over year? This was like, I think, down 8%.

We continue to be comfortable that the meds business will deliver comparable revenue results as they did in ’04.

If you can help me better understand this Physicians Interactive revenue recognition one more time real quick.

Sure. Again, not too dissimilar to our clinical software business, we recognize revenue in that business over a period of time. In that circumstance it’s tied to our performance of the services that we’re doing on behalf of pharma. What we’re seeing in terms of a trend is that we are entering into more enterprise-wide type solutions or initiatives for pharma. They tend to be longer in duration. Where I maybe historically was talking about take down being six to nine months, we’re seeing that move closer to twelve plus months today. So, as a consequence, the take down out of backlog has been elongated. The very positive aspect of that is, though, that as backlog continues to grow as a result of the strong sales quarters that we’re having, our visibility and it’s building off of itself. We feel very good about it in terms of what the balance of this year looks like and going into ’06.

So the $13.2 million; what kind of schedule can I think of in terms of that revenue being recognized?

Again, if I’ve talked in the past about it being close to six to nine months, I would move that out closer to twelve plus months to get a better sense of what our expectations are.

Okay, so twelve months for this $13.2, and this is today. You’ve got another two months for the third quarter to go. I don’t think bookings now would increase that, so you pretty much see the third quarter, and that’s where the 10% plus guidance is coming from for Physicians Interactive business. And, just to reiterate, margins, you said, mid 60s for the software, mid 40s for PI, and we’re still doing roughly 20% give or take in the meds?

Yes. High teens. Again, I’ve typically said high teens and low 20s. So, I’m still comfortable with that for the meds business overall.

Okay. We did 16% this quarter, but last was 21.5%. We get spoiled with that sometimes. Okay. And, then just a last thing, Glen or you. A question I get asked often times is how big will this interoperability thing? Will that be a hey, everybody; stop what you’re doing? First, let’s address interoperability? Or, no continue to do this; it’s something that has to get done anyway, and it doesn’t stop people from implementing the software?

Yes. I think interoperability, first of all, is a very good thing for us because it ensures that many of the hospital-based systems who have hidden behind the ability to connect to ambulatory systems can no longer do that. That’s a very positive trend. In terms of interoperability first, you can’t really think of it that way. To have interoperability, you need a system to interoperate, and that’s where we come in. So, as people hear about interoperability, they want to make sure that the systems they’re buying will interoperate and will interconnect with other systems, and Allscripts is a leader on that front. In fact, at the HINS conference, we actually demonstrated interoperability with another major player – in fact, another major competitor. So, we feel very good about that, and we believe it will help accelerate adoption.

So, as a company that’s trying to stay ahead of the curve with all of these different initiatives, what in your mind are maybe the top three issues relative to interoperability? Is it data interchange, is it security and is it standards, or all three? Or, is there anything else that I missed?

I think all of them are very important. Clearly, when most people talk about interoperability, they’re really talking about exchanging the basic patient data. I think that comes in two areas. One, patients want portability of their data. It’s one of the reasons why we believe the Medem initiative with the iHealthRecord is so critical, and having that is a key competitive advantage for us. The interconnectivity there because of the broad base support for the iHealthRecord. But, people want to know that physicians can move information around and have the best information in front of them when they’re treating a patient. That helps them with quality and from a cost standpoint.

Great. Thanks.

Our next question comes from Corey Tobin.

A couple of quick items. Bill, let me start with a housekeeping item. What was the average selling price on the quarter?

Average selling price in the quarter was just over $400,000 for new customers and is reflective of the fact that we did see some meaningful movement on average or on mid-market type sized deals in the quarter. So, overall number of deals were up and drove that number to about 400.

On the bookings, a related question. Typically, we’ve seen sort of an acceleration off of Q1 coming into Q2. I know you had a very strong Q1. Was there anything this quarter with respect to the bookings that perhaps delayed any type of deals closing or anything along those lines? I guess asked another way is would you expect to see acceleration off of where we’re at here in Q2 as we look through the remainder of the year?

Yes. In my comments, one of the things I said is we’re coming into what we believe is two very strong quarters relative to the buying patterns in healthcare IP. Second, relative to specific things that slip, I think every quarter you’re going to have some slippage. What I would tell you is that coming into the third quarter, and I think I mentioned this in my comments, not only is the pipeline bigger but the identified deals are larger than we’ve seen. We did see some slippage, but nothing that we’d want to call out separately.

Again, Corey, I would reiterate the guidance that I’ve given in the past. I always try to caution people because we are not kind of managing those sales from one quarter to the next. I do look at kind of the relative distribution of our sales over the first three quarters in comparison to the fourth quarter. We still feel comfortable with the prospect that we’ll see 35 plus percent of our sales in Q4, which makes up the need for about 65% of our sales in the first three quarters. So, from that standpoint, we’re still comfortable with the guidance that we’ve given in that regard.

Okay. Great. On the guidance side, Bill, can you just remind us again; I think that the number that you used for the clinical software business was 35% or so year-over-year growth. Is that still the right number? Do I have that correct, and is that still the right number to look for?

Clinical software in the guidance I’ve given is closer to 40%.

40% for the year. Okay. Shifting gears for just a second. On the deferred revenue, can you remind us quickly again what’s in the deferred revenue account specifically, and just comment on its direction this quarter?

Deferred revenue’s composition is principally related to both our clinical software business and our Physicians Interactive business. In situations where we’ve billed our customers in advance of the revenue recognition. It’s reflective of the fact, as I was describing before, we’re taking revenue in the clinical software side on a percentage of completion basis, and on the PI side over the program periods. So, we are in a situation -- a lot of our customer client contract situations have the ability to get ahead of them in terms of the billing. It’s reflective of that. It’s really nothing more than that.

One last item, if I could. On the e-prescribing side, I think if memory serves, the numbers you’ve used in ’04 were something along the lines of $1 million to $1.5 million in e-prescribing fees. If I remember correctly, I think some of the commentary pointed toward a potential doubling of that number here as we look at ’05. Can you just confirm if that’s the case, if my memory is correct there, and also how are we tracking in terms of the ’05 number?

What you’re speaking to is transaction revenue. Again, we have commented that in ’04 we had $1 million to $1.5 million of transaction revenue. The guidance that we have given relative to ’05 pertains to a more than doubling of the number of transactions that we’ll be processing in the year. And, yes, we are tracking well within those expectations in terms of year-to-date performance.

Is that a number as we look out into ’06 and ’07 – I mean is there any reason why that number can’t continue to double for the next couple of years?

There’s really no reason why it won’t. As we talked about in the past, we view it to be a very critical part of what we’re building here longer term in terms of the transaction revenue model as a result of physicians using our technology.

Thank you.

[OPERATOR INSTRUCTIONS]

Why don’t we take one more question.

Jack Spear.

Bill, could you give us – I have two quick questions. One, could you give us some update on the convert, where that stands? It’s been trading well above the call price. What’s happening there?

Sure. As everybody is aware, we did a convertible debt offering a year ago. Now, it has a conversion price of $11.26 per share. It converts into 7.3 million shares. It has a CoCo provision associated with it in which if we trade over a specified level, and that level is $14.63 – I might be off by a few pennies. If we traded over that for 20 of the last 30 days in any quarter, such debentures would become convertible. So, we satisfied that requirement at the end of the quarter. I have received some questions as to what the prospects of the people actually converting those debentures into shares, and as a practical matter we do not believe any debenture holders will, principally for the reason you stated. That is, the fair market value of those debentures in the market are worth more than the underlying shares. That’s because the option price to convert is baked in, as well as the future annuity of coupon rates that they’re afforded up through the fifth anniversary date. So, you’re going to have the dynamics and kind of convertibility and attractiveness of the option feature that’s really driving what’s going on there. So, simply put, we do not expect any holders to be converting those shares prior to the fifth anniversary date.

Glen, you talked in the beginning of the call a little bit about pay-for-performance. Could you talk a little bit about the marketing effort you’re putting together to go after managed care, because I would think they’re going to drive that business. Where do we stand in the curve of penetrating that market?

I think we’re early on the curve of penetrating the market. There is substantial interest from managed care. You’re seeing that come out in a number of different programs. Without going into detail and kind of telegraphing our strategy, what I’d tell you is that we are focusing a fair amount of attention on that as a potential way to both reduce the cost of physician adoption of the technology and obviously benefit in terms of strong financial return on investment for our managed care clients.

Thanks, Glen.

Again, I want to thank everyone for joining us on the call today. As Bill said and I reiterated, we believe it’s a very strong quarter, both from a sales perspective, from a bottom line perspective, and from a business operations perspective. We continue to drive forward on all of our business objectives and appreciate all of your support. Thanks very much.