Veradigm Inc (MDRX) 2005 Q3 法說會逐字稿

Good afternoon. My name is [Taneta] and I will be your conference facilitator today. I would like to welcome everyone to the Allscripts Healthcare Solutions Q3 earnings conference call.

[OPERATOR INSTRUCTIONS]. Thank you, Mr. Tullman, you may begin your conference.

Thank you, welcome to the Allscripts Healthcare Solutions third-quarter 2005 call. This is Glen Tullman, Allscripts's Chief Executive Officer. Joining me on call today is Bill Davis, our Chief Financial Officer and Lee Shapiro, our President. Let's start by reading a copy of the Safe Harbor statement. Bill?

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on 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 security laws, Allscripts undertakes no obligations 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 said, I would like to turn the call back over to our CEO, Glen Tullman.

Thanks, Bill. Let's begin. The third quarter was one of the strongest quarters in the Company's history, both from a bottom-line standpoint with a record $0.07 per share and also from a sales perspective. As I've said before, I believe that sales traction is the most important metric investors can follow, which is why I will focus most of my comments today on our clinical software group, which is our growth engine.

Sales of clinical software at $16.5 million for the quarter were up over $3 million from last quarter, and demonstrate both the market demand and the strength of our offering. We have become the solution of choice for leading medical groups, and this is providing us with significant leverage across the market.

And if you look at where we are selling, you will see progress in each of the segments we've targeted, including groups of 25 physicians and above, groups with 10 to 24 physicians, and specialty practices. For example, our agreement with Mercy Medical Group which we announced this morning, for 150 positions with a contract value in excess of $2 million, is an exciting example of another California group using technology to improve patient care, efficiency, and their position in the competitive Sacramento market. They needed to connect multiple locations and make it easy for patients to be seen by any affiliated physician.

It's worth noting that Mercy is an IDX client and also a part of Catholic Health Care West. You also saw a press release on Parkview Health in Fort Wayne, Indiana recognized as one of the 100 most wired organizations in the country. Parkview chose Allscripts because of our underlying architecture and web based design, our work flow, and our integration into IDX practice management system. What is exciting is that their newest facility will be totally paperless from day one using our technology. Parkview is one the largest health systems in northeast Indiana servicing over 180,000 patients.

St. Vincent Health System in Erie, Pennsylvania is a high-profile group of 50 physicians who were recently recognized as one of the top three groups in Pennsylvania based on performance improvement metrics. St. Vincent also selected TouchWorks as their Electronic Health Record and they join a growing list of prominent Pennsylvania clients.

We've also seen solid traction among mid-sized groups, the 10 to 24 range that I discussed. And I am pleased to report that we beat our rivals in a number of key deals outside our IDX base. You should expect to see some of these announced over the next few weeks.

Finally, the agreement we signed this past quarter with Neurological Associates of Tucson represent increasing uptick in specialty groups. We have a solid leadership position today, and we plan to extend our reach in the top five specialities over the next six months. We have significant content and product innovation being introduced in each key specialty, developed in close collaboration with our current clients, and we are excited about our progress and the potential of this segment.

Let me switch gears for a moment. There have been a lot of questions about the recently announced pending acquisition of IDX by GE. As I have said before, I believe this was a great deal for GE, for IDX, and for Allscripts. During the first call announcing the deal, Jim Crook, IDX's CEO, strongly reinforced that fact that IDX reaffirmed the continuing importance of our ten-year strategic agreement, and further, that GE would not sell into the IDX base. GE also reinforced this message in their own public statements.

The bottom line, our relationship is strong, and will continue to be because there are benefits for each of the parties involved; however, actions speak louder than words. Let me update you on some key developments in the Allscripts IDX relationship. First, on the day the transaction was announced, every existing client and joint IDX Allscripts prospect was called. Within 24 hours, the remaining IDX clients were contacted by Allscripts and or by IDX.

Second, a joint letter was issued from Jeff Kao, Senior Vice President and General Manager of IDX Flowcast and Laurie McGraw, the President of our clinical software group, reinforcing the strength of our relationship. That letter was sent to each of the IDX client base.

Most important, let me talk about what happened earlier this week at the Medical Group Management Association meeting, or MGMA, which took place in Nashville, Tennessee. MGMA is the largest medical group meeting of the year. We had a record show with over 900 leads, 100% increase from last year, but as important, we conducted the following joint marketing with IDX.

First, we released a new promotional campaign with IDX called "the power of two." We introduced a joint web site which I would encourage each of to you visit. It's www.AllscriptsIDX.com. We issued a joint mailing to 18,000 MGMA mailing -- members, and all attendees at the show. And we had booths next to each other and cross-staffed each of the booths with our employees. And finally, we had two joint events, one with over 300 attendees.

We also had joint presentations from clients like Affinity and a local site visit at Murphysboro with the CEO, [Joey P] actually conducting the investigation. Murphysboro is both the leading site and Joey is a very innovative CEO, and as you can expect these sites use Allscripts and IDX and use it well. Our relationship remains strong, and as GE injects new energy and expands sales of IDX products, we will continue to benefit.

Regarding market expansion, you will continue to see an increasing amount of attention outside our traditional strength in the IDX practice management client base, where we are both the leader and the acknowledged safe choice for IDX clients, and our efforts are showing early success as our percentage of non-IDX contracts exceeded 30% for the second quarter in a row. With IDX opportunity of more than $800 million and over five times that amount outside the IDX base, not including additional fees from SMA or transactions, we have plenty of room to grow.

I want to close my comments highlighting key trends in the market and some of the important agreements and events that took place during the third quarter, because they demonstrate our positioning, the depth and breadth of our offerings, and our sales efforts as we enter what is traditionally the strongest sales quarter in the industry. The Federal Government continues to be strongly supportive and active in accelerating this market.

As an example of how well Allscripts is positioned in the market, the Secretary of Health and Human Services, Michael Leavitt, and Dr. David Brailer, the National Coordinator of Health Information Technology, recently visited one of our client sites, George Washington Medical Faculty Associates, to announce another new Federal initiative; however, the Federal Government is not the only stakeholder taking action. Managed care organizations continue to step forward to provide funding to accelerate adoption.

Many of you read about the Sierra Health Services Clark County Medical Society electronic prescribing agreement. This is the first agreement in the country that will allow every physician in a state to acquire electronic prescribing software at no direct software cost to them. It is being underwritten by Sierra.

It demonstrates visionary leadership from Dr. Tony Marlon, Sierra's CEO, and excellent cooperation between Sierra, which is both a provider and the largest managed care payer in the state, and the Clark County Medical Society, the largest medical society in Nevada. Don Havens, the Executive Director of this society called me the day before yesterday to say that his members are impatient and eager to get started.

And, of course, we believe electronic prescribing is an important on ramp to the electronic healthcare highway. So this is -- so this should seed our future growth in the smaller physician groups. And Allscripts is the only provider of EHRs to offer this stand-alone module, a clear competitive advantage.

Our newly announced agreement with Independence Blue Cross, Philadelphia's largest insurer follows on the heels of agreement with Horizon, the Blue Cross provider in New Jersey and will promote physician adoption of electronic prescribing as well. Both agreements offer funding for hundreds of positions which will accelerate adoption, and, of course, sales for us.

We also held another successful executive summit during the quarter with a record 100 attendees representing 60 prospects. Executive summits allow us to spend a day and a half with prospects as they learn about our products from our clients, learn about our sales and service approach, and discuss the industry. The summit was oversubscribed, and so successful that we have another scheduled in early December. As many of you know, these summits have been a key driver in closing contracts for our team.

So I've spent my time today on my clinical software group, but Bill will also comment on the other progress we are making across the business, for example, 41% quarterly revenue growth in PI, which leads to a simple conclusion, we are seeing very strong demand for our products in each of the markets we serve. And that's translating into bottom-line results.

At this point, I will ask Bill Davis, our Chief Financial Officer to take you through the financials for the quarter. Bill?

Thanks, Glen.

As Glen indicated, our third quarter was marked by a number of accomplishments and other exciting events. So I would like to first highlight some of those accomplishments and then provide more details on our third-quarter performance. I also will provide a few quick updates regarding our expected Q4 performance. Turning first to some key highlights of the quarter, our net income of $2.9 million or $0.07 per share represents the most profitable quarterly performance in our Company's history. It also represents a $2.2 million or $0.05 per share improvement over the third quarter of last year.

Our clinical software bookings for the quarter were $16.5 million. And that represents a 44% increase over the third quarter of 2004 on a pro forma basis, which I will define for you in a moment. Bringing our year-to-date total to $44.7 million, a 35% increase over the first nine months of 2004.

Our revenue of $30.6 million represents a 19% increase over Q3 of 2004. Led by a 50% increase in our Software and Related Services revenue. And finally, we held our first investor day in New York City on September 8, with over 65 people in attendance and another 25 who participated via our audio conference. It was a great event and reflective of the strong interest in the Allscripts story.

Turning now to a more detailed look at our Q3 performance. Total bookings during the quarter were approximately $19.6 million, consistent with prior quarters, bookings do not take into consideration the $11.5 million of sales and medications. Our 19.6 million in bookings compares to $9 million of bookings in Q3 of 2004, or $14 million on a pro forma basis, if you were to take into account the $5 million of Q3 '04 bookings that fell into Q4 of last year.

Year-to-date bookings for the Company were $55.8 million, which compares to $41.4 million for the same period a year ago on a pro forma basis. This represents a 35% increase. Our clinical software, or Electronic Health Record business contributed the $16.5 million in bookings during the quarter, excluding ongoing support.

Approximately 60% of our bookings this quarter were with IDX customers. We also continued to be very encouraged by the strong average selling price to our new customers. Year-to-date bookings for our clinical software business were $44.7 million, versus $33.2 million, again adjusted for that $5 million differential last year. This represents a 35% increase.

Our Physicians Interactive business had bookings during the quarter of $3 million. Year-to-date bookings for PI were $11.1 million, versus $8.2 million for the same period a year ago. This represents a 35% increase, which is above the expectation we set previously at 30-plus percent.

Turning now to back backlog, we ended the quarter with $78.9 million in sold backlog. This represents a 52% increase over our backlog amount at the end of the third quarter last year. The backlog breakout is as follows: License and service fees related to our clinical software business represents $44 million of our backlog. Software and subscription amounts contributed $8.7 million. Support and maintenance fees that are expected to be recognized over the next 12 months make up another $13.4 million. And then Physicians Interactive contribute $12.7 million, again for a total of $78.9 million.

Consistent with how we reported backlog in the past, our backlog does not include additional SMA fees that extend out beyond the next 12 months, which we estimate to be in excess of $60 million as of the end of the quarter. Also, as I have indicated before, our reported backlog does not include anything related to our med distribution business, which we view as reoccurring in nature. And we continue to be encouraged overall by the level of visibility that our backlog provides us in all of our businesses.

Turning now to revenue. Revenue for the quarter was $30.6 million. Year-to-date revenue was $86.4 million compared to $74.5 million in 2004, representing a 16% increase. Our clinical software revenue was -- has increased by $17.1 million or 57% for the first nine months of 2005 when compared to that same period in 2004. This growth, too, is well above the 40-plus-percent growth we committed to earlier this year.

Turning now to our quarterly revenue. As I indicated previously, our quarterly revenue was $30.6 million, representing a $4.9 million increase over the third quarter of last year. Our clinical software business contributed incremental revenue of $5.5 million when you compare third quarter of this year to that of last year. This increase represents a 50% year-over-year growth.

Clinical software revenue was up approximately $300,000 when compared to the second quarter of this year. That sequential increase was impacted by the timing of certain add-on sales to existing customers and value-added reseller transactions related to our stand-alone document imaging solution.

Physicians Interactive experienced better-than-expected increase in revenue, growing 41% sequentially from $1.9 million in Q2 to $2.7 million this quarter. This increase in revenue is due to the timing of certain key client programs, launching of -- ahead of their schedule, faster completion of certain programs that had launched, revenue recorded for our new E-marketing platform hosting services which I commented on last quarter, and a benefit of a strong backlog at the beginning of this quarter.

As it relates to our meds business, we continue to see progress in that business as well, as evidenced by another solid revenue-producing quarter at 11.5 million. We continue to remain comfortable with our guidance that the meds business will deliver consistent revenue when compared to 2004. In terms of revenue mix, our Software and Information Services segment represented 62% of total revenue for the quarter.

Third-quarter revenue by segment is as follows: Our meds business delivered $11.5 million or 38% of our revenue. Again, clinical software delivered $16.5 million, up -- up over $11 million the same quarter last year. And Information Services delivered $2.7 million, growing from $1.9 million last quarter for a total of $30.6.

Looking now to gross margins. Overall, our gross margin was 43.3% in the third quarter versus 43.1% in the third quarter of 2004 and 47% in the second quarter of 2005. The anticipated sequential decline was primarily due to Physicians Interactive delivering margins more consistent with our ongoing expectations, as well as our clinical business experiencing a slight decline due to the relative contribution of hardware sales and the previously mentioned timing of certain add-on license deals to existing customers in the quarter. To reiterate something I said last quarter regarding the PI business, we expect gross margins in this business to remain in the mid-40s.

Margins by segment are as follows: Our Meds business delivered margins at 15%. Software and Related Services at 63%. Information Services at 44%. Again for a total of 43.3%. Consistent with what I said previously, I expect overall margins to improve as we move 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 costs. Operating expenses for the quarter were $10.5 million and compares to 11.9 million in the second quarter of this year. The $1.4 million decrease is -- is explained by a reduction in certain marketing expenses that did not reoccur due to the timing of such events, like our annual Users Conference and large trade shows that occurred in the second quarter. We also benefited from an increase in capitalized software and the lower amount of bad debt expense, as well as incentive-based compensation in the quarter.

Total capitalized software in the quarter was $1 million. This amount compares to $800,000 we capitalized in the second 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 third quarter. Amortization expense remained consistent at approximately $400,000 for the quarter.

Net interest income was $184,000 for the quarter, and as I indicated previously, we expect net interest it income to continue to improve in future quarters as we continue to generate positive cash flow and we benefit from higher short-term interest rates. Net income for the quarter was a record $2.9 million or $0.07 per share, this compares to $0.05 in the second quarter of this year and $0.02 per share in the third quarter of last year.

Year to date net income was $6.3 million, or $0.15 per diluted share. This compares to 1.7 million or $0.04 per share for the same period last year. Basic shares outstanding for the quarter were $40.9 million and diluted shares were 44.2 million. Again, consistent with prior quarters, the 7.3 million shares issuable under our convertible debt offering continue to be anti-dilutive from our earnings per share and are therefore excluded from our dilutive computation.

With regard to overall headcount, we ended the quarter with 367 employees. This compares to 360 we reported in the second 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 $136.1 million in cash and marketable securities, up $1.2 million over the prior quarter. Such increase is reflective of the $2 million in cash generated from operations, offset by our $1.4 million semi annual interest payment on our convertible debt, and $1 million payment related to our annual insurance premiums. In addition, we received $3.4 million in stock option exercise proceeds, offset by an additional $200,000 previously committed investment in our Medem relationship.

The $1 million in capitalized software and approximately $0.5 million of capital expenditures also reduce cash. Accounts receivables increased $26.8 million which result in day sales outstanding of 79 days. The increase in AR was due to timing of certain client payments that occurred in the early part of Q4. And as such, we expect our DSOs to return to the low 70s in the fourth quarter.

Finally, as 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. Two things I did want to update you on was one related to stock-based compensation and the second pertaining to Physicians Interactive revenue expectations for Q4.

First, as it relates to stock-based compensation, we are in the process of evaluating the possibility of accelerating the vesting of certain options that are expected to vest in 2006 and in the early part of 2007. Assuming we decide to proceed, our Q4 results would include a noncash, nonreoccurring compensation charge in the range of $750,000 to $900,000, related to such accelerated vesting.

From a financial statement perspective, the benefit to doing so is that our previous guidance regarding stock-based compensation expense for 2006 would be reduced from approximately $5 million to approximately $1 million to $1.5 million. A reduction of as much as $4 million or $0.09 per share.

As it relates to Physicians Interactive revenue, I previously communicated that we expected 10% sequential growth in this business for Q3 and Q4 of this year. Such growth would have equated to total revenue of $4.4 million in the second half of 2005. In light of such a strong third quarter, I expect such $4.4 million of revenue to be closer to $5.2 to $5.4 million, or $2.5 million to $2.7 million for the fourth quarter.

In summary, we are very encouraged by our accomplishments for the third quarter. With are positive operating results, strong bookings and positive cash flows. We are very focused in delivering profitable growth in future quarters, and believe we are well positioned in part due to our strong financial position to capitalize on the substantial opportunity that exists in all our markets.

With that, I would like to turn it back over to Glen for some closing remarks.

Thanks, Bill.

A year ago on investor calls, there were questions about the market. Today, no one doubts that electronic healthcare, especially in the markets we serve has passed the tipping point. We are in every way rapidly moving from the paper-based system we've had to an electronic healthcare system of the future. That future, powered by software and systems that inform and connect physicians, patients and other key healthcare stakeholders will literally transform healthcare as we know it.

Companies that are well well-positioned and ready to take full advantage of the opportunity will be successful. We believe that the strength of our software, our people, our efforts in leading the charge in personal health records, interoperability and pay for performance to name just a few and our ability to execute, position Allscripts as a winner in this exciting market. I want to thank our employees for their continued commitment to our vision and our investors for your confidence in our ability to make that vision a reality. Thank you for joining us today. And we will take some questions.

[OPERATOR INSTRUCTIONS]. We will pause for just a moment to compile the Q & A roster. Your first question and comment comes from the line of Larry Marsh with Lehman Brothers.

Thanks. Good afternoon, Bill and Glen. Really strong progress. I wanted to follow with a couple of questions, if I could.

First, just, Bill, on the income statement, the gross profit margin of your three divisions, I understand the PI is more in line with what you would anticipate to be a go-forward rate and that is entirely consistent with what you said in the past. I guess a little bit of elaboration on both the Meds business which about 15% gross profit and the clinical software at about 63.

I know at the Analyst Day you said 18 to 20 on Meds and maybe mid-60s on clinical software. Is that your target and would you define this to be, you know, a little bit low on this quarter for both ends because of the aforementioned add-on -- well licensing deals?

Well, yeah. Relative to software business, I am still very comfortable with our expectations of margins in the mid-60s in that business. As I have commented on the past, we would expect to fluctuate a little bit from quarter to quarter dependent on the relative contribution of those add-on sales, which I highlighted. So from that standpoint remain very comfortable.

From the Meds business, Q3 was a quarter that we did have a certain amount of wholesale revenue which is lower margin revenue. As that continues to -- that business continues to progress in terms of new business, which tends to be at higher gross margin, we would expect that margin would gravitate back up towards the high teens as I communicated previously.

So that clearly is our expectation on a go-forward basis.

Okay. Right. Have you guided to an SG&A figure, say the percentage of sales, you anticipate seeing that coming down as you continue to get leverage in our business?

I have not -- I have not guided a specific percentage as of yet, but something we will consider as we prepare to provide guidance for '06 which we will intend to do next quarter.

Okay. Two other quick things. First at MGMA, Glen, it sounds like a big focus of the joint marketing with you and IDX. Was there any feedback from GE in that particular show as to what they are going to do with their Centricity line. Will they continue to sell that to other customers apart from IDX? And how are they positioned at MGMA and what was the message they were sending to their clients?

Well, at MGMA, as I mentioned, It was a very successful show for us. We didn't really see a lot of Logicians, they weren't a major presence in the market, and I will tell you with he don't see much of the Logician or Centricity product in the market at all. It is not really a competitive system today.

From the IDX perspective, our view is even if it was, we've invested years working with IDX to get the level of integration we have today and to work within the web framework. So we think that almost independent of that decision, we've got, a very solid opportunity in that IDX space.

In addition, those clients are buying because of reference sites, and we've got 100 -- over 140 IDX clients now and it continues to grow. So I don't know the plans for GE and what they are going to do in the ambulatory space. I think that wasn't really the focus of their acquisition here.

So we -- we continue to feel very confident and comfortable with the strength of the partnership, and I can tell you that we are working more closely with IDX than ever.

Okay. Glen, just -- and I will get off. You alluded to the fact that you have been successful in beating some of your rivals and suggested you will see more announcements going forward. Could you elaborate any more on that in terms of -- is this going to be a wide range of different-sized physician groups that you are referring to? Or just stay tuned?

Sure, I would be happy to. Initially. What we first consummated the IDX strategic agreement, there was question of how well we would sell into the IDX space, and I don't think anyone questions that anymore. We have great success.

We are the safe choice for IDX customers and the preferred choice, and we have, as I previously stated, a win rate in the high 80s and low 90s percentage when we go into the IDX space and compete. That base is primarily 25 and above. As we -- as we moved more into the middle market, which we define as 10 to 24, we ran into a different set of competitors, and frankly, outside the IDX space, we didn't spend a lot of time focusing on that market. What's happened, as we have mentioned, that we are now starting to focus some attention, some sales energy on the non-IDX part of of the base.

The good news is IDX is growing. We are signing deals in Flowcast and in Groupcast and in the non-IDX part of the base for the first time we are now focusing attention and we are having good success there. People are feeling comfortable given the success and the blue chip client base that we built in the IDX space, they look down the street and they look at these mid-sized practices, they see us being successful and we can now leverage that across the market.

So the announcements you will see in that 10 to 24 physician group market are both IDX and non-IDX successes.

Very good, thank you.

Thank you.

Your next question comes from the line of Jackson Spears with Capstone.

Glen, congratulations on the numbers. They were terrific. Bill can you walk me through -- you made a comment about accelerating stock-based compensation. Were you suggesting that the guidance would be at the low end for this year but could be a -- a possible upside next year?

Yeah, what -- Jack, we were contemplating a certain amount -- it's actually about a little over a million options that are scheduled to fully vest in the mid-part of 2006, and a little bit that falls to the very early part of 2007. These are options that are in the money, but as we evaluate our adoption of the expensing of stock-based compensation, we're considering the acceleration of divesting of those, being mindful of kind of the retention implications and the like, to the extent that we would decide to do that, it would result in a noncash nonreoccurring charge in the fourth quarter that would be in the range of about $750,000 to about $900,000. That, in return, would reduce the previous guidance that I had given where we expected a comp charge next year in the range of $5 million. It would reduce that down somewhere closer to $1 million to $1.5 million.

Makes a lot of sense to do that, doesn't it?

It is something that we are strongly considering.

Glen, could you talk about the Medem relationship? How far along in developing a product. I hear in the industry there is a lot of requests for information of what your doing there -- maybe from the Federal Government level, but I am not sure. Are you going to have a product out soon?

Yes. We -- the Medem relationship is one that is very important us to because as we talk about moving from an electronic medical record to an Electronic Health Record, that really speaks to this whole concept of connectivity that we've been pushing hard on. And one of the key aspects of the healthcare system that needs to be connected is the patient.

So Medem offers a personal health record that allows any patient in the United States free of charge to go online, it is IHealthRecord.org to set up their own personal health record. We have a product that works hand-in-hand with the Medem offering called TouchWorks iHelp, and that allows those patients to converse with their physician through a secure channel, and whether that be sending information eliminating the clipboard they would normally fill out when they arrive at the physician's offices. Actually having a visit -- an electronic visit, so to speak.

So all of those advantages come from TouchWorks iHelp. If you summarize it, we're the only company that can deploy a patient health record, electronic prescribing and the Electronic Health Record. And if you think about kind of onramps to the Electronic Health highway, think about electronic prescribing as one. Think about our scanning and document management as one. Think about the personal health record as one. All of those are ways that you can get people hooked into our product. And it is an integrated offering.

So we are very pleased. It is out there. Medem continues to make progress. It is a stand-alone group. It has great partners, the AMA and 46 other medical societies, and they will become the standard when the AMA and all those medical societies get behind an offering, that does become the standard. I surely wouldn't want to be competing with all of those medical societies and the AMA and we are integrated with it.

So we expect great things from it. We are getting solid interest in sales take-up.

And the last question. When we look at -- like think contracts like Independence Blue Cross. Doesn't that give you a fertile ground to sell your entire suite of TouchWorks suite of products, so it's a mistake just to look at on a transaction basis.

I think some people may think we might be seeding the market by putting out kind of if you think of the Microsoft office and think of this being Microsoft Word, the first application. All of those people that have our e-prescribing application can simply press a button and essentially upgrade to the rest of the application. So it fits hand in hand with our offerings.

And what we've seen over the years is people who start using one application. The physician says, well, I do more than electronically prescribe. I also dictate. I also capture charges. I also need information, and they quickly come back to us and say "can I add this?

So we expect that it is a great on ramp, a great way to seed the market. And we are pretty excited about it, and, again, we think it is a real competitive advantage.

Thanks, Glen.

Thank you.

Your next question or comment comes from the line of Corey Tobin with William Blair.

Hi, good afternoon, nice quarter.

Hi, Corey.

Thank you.

Wanted to just touch upon a couple of things. First on the sales side. Can you comment upon the pipeline outside of the IDX client base? I know it sounds like based on your comments that that piece is really ramping up. Is there any way to quantify that, or to quantify any of the traction you are having outside of the IDX base?

Well other than us commenting on it, I think we have already stated that you will start to see some press releases on it. These conferences, one of the reasons we are having a second executive summit is there is just tremendous demand. And if you saw MGMA -- I am not sure if you were there, but there is just very strong interest. And in the past, we saw that interest in the larger groups. It is clearly moved down into the mid-market. And so I believe you are going to see success both from our competitors and from us, because the market is expanding.

We have traditionally focused our sales force almost exclusively on the IDX opportunity. That opportunity continues to be very fertile ground; however, as we have stated previously, we are now hiring additional salespeople to focus outside the IDX market because we have people calling us and saying, I've seen practices adopting, and I would like you to come in and talk to us.

So, yeah, if you look at it. One out of every three attendees at MGMA came to our booth. I mean, that's unheard of. It's great interest and great traction. So I don't have a metric for you yet, but I think next quarter will talk more to -- to some of our traction there.

Glen, on the same line, do you track win rate in that area, and if so, can you share with us what the win rate is? I would expect lower than in the IDX piece but what sort of win rate are you seeing today in the early stages there?

Well, early stages, and I would say -- and this is painful for me to say are -- but between 40% and 50% win rate in that -- in that area and, again, it is not based on as large a sample, but, if we are winning 90-plus-percent in the IDX base and when we move outside of that base, it is much more competitive, no doubt about it. And for some of these smaller groups, we aren't willing to discount.

We are up against some larger competitors, and then we are up against some -- some newer start-ups, and they may be willing to buy some business that we are not willing to buy, because we have got to make it work after we sell them the software as part of our commitment. So we are not comfortable with that win rate yet, but I think that is still above the industry norm.

And 40% to 50% is still pretty robust given it is a new initiative for the Company?

Well, we think so. Again, our biggest challenge now is -- is one of our directors calls it our recruiting engine to get enough salespeople on board and productive.

Great. Looking at the pipeline on a software side one more time, it looks like it was a pretty healthy growth number needed in Q4 to hit the 40% for the full year, particularly if we -- if we shift the 5 million between Q4 and Q3 last year. Just sort of curious, as you look at the pipeline where it stands today, does it seem robust enough to support the type of bookings number that is needed here to meet the full-year goal?

I believe it is. As you know -- including executive management everybody here is happy to sell and this is a robust market. So I don't believe that's going to be a challenge for us in the fourth quarter. Bill has and we continue to confirm the guidance that we have given.

And then based again on the end market momentum that you are seeing out there, I would assume the confidence is going up as each quarter passes?

Confidence is absolutely going up.

Excellent. On the PI side, very quickly, if my math is right, I think -- was the backlog down sequentially, even though the bookings, I think, topped the revenue number. Is that correct? And can you give us a little commentary as to why that was?

Let me -- let me confirm that for you while -- while Bill is checking he is claiming he was actually the one that talked about the recruiting engine.

Okay.

I just want to make sure, you know, he's sensitive about that.

It was -- it looked like it was right around a $0.5 million dollar differential from Q2 to Q3. I don't have the specifics Corey what would have driven that and I will get that to you but essentially we essentially had a client not agree -- or -- decide not to proceed with the third wave that we pulled out of backlog.

Okay. We can check on that later.

Okay.

On the expense side quickly. I would have thought add-on software sales are generally pretty high margin, and a couple of the comments you made today focused on add-on sales as being a source of pressure on the margins. Can you clarify that a bit?

Your understanding is correct. My point was both in terms of what you saw in sequential revenue performance in our software business from Q2 to Q3, as well as the margin change from Q2 to Q3 was both due to a lower amount of add-on sales to customers in the third quarter.

In Q3.

In Q3.

I am sorry, I misunderstood. I thought you said Q2.

Finally on sales force ramp-up. I know you guys have talked about really adding to the sales side. Can you just remind us, again, where -- where you are with sales quota carrying sales person headcount today? What the goal is to -- to ramp that up throughout '05 and where you are toward meeting that goal?

Yeah, so what we have talked about in the past we have entered the year with 30. We exited this quarter with 34 quota carrying and we have committed or commented that we are desirous of adding -- getting us up to 40 to 45 over time. So that -- that's where what we said.

Just to reiterate in terms of the quota that each of those individuals have. We stated previously that each of them -- or vast majority of them are carrying a quota that is $3.75 million, which is pretty high relative to our competition.

And up substantially from last year if I remember correctly?

That's correct. Up almost a million from last year.

Okay. I will jump back in queue. Thank you.

Thank you.

Your next question comes from the line of George Hill from Leerink Swann.

Hi, George.

Couple of questions with housekeeping. Will you quantify what the impact was of the imaging contracts that came on late in the quarter?

Sure, a couple hundred thousand dollars. About 300,000.

And with reference to the hit rate outside of IDX, you said about 40% to 50%. Can you give us an update of what the penetration rate of that customer base looks like, it was about 16% at the Investor Day. Has that changed materially?

The -- so the penetration into the IDX base? I am sorry -- you confused me about the 40% to 50%.

40% to 50% was the hit rate outside of. What is the penetration into the IDX customer?

It crept up slightly in the quarter. It is -- in terms of number of practices, close to 17%, I believe.

Okay. Good information directionally. Interesting question regarding the St. Vincent's deal. Eclipse just announced a deal with St. Vincent well. They are going with Eclipsis on the inpatient side. Can you talk about about St. Vincent's plan to integrate the inpatient with the outpatient and what your involvement with that is?

I think -- and, again, I don't want to put words in St. Vincent's mouth, so to speak. Our Electronic Health Record will integrate -- they are an IDX customer, they're a Flowcast customer. Very very involved with IDX on whole Flowcast revenue cycle management system.

So this is a very solid deal from IDX/Allscripts's standpoint, and then those two systems will work with their hospital system, and that's something that we do, and I think it speaks to the strength outside the IDX base as well, and that is if we need to integrate to a third party or interface to a third party, we can do that.

You know these are sophisticated operations. They understand how to do that. So, their intention is we will share the appropriate information.

Okay. And my last question is, you see a lot of initiatives with you guys working with the payers on the e-prescribing part. How active are you and how interested in the payers on working together on the full EMR segment in deployment?

If I think that most of the payers -- first of all, there is substantial and growing interest from the payers. And I have previously announced I think before we announced the Blue Cross -- Independence Blue Cross deal and the Horizon deal, I mentioned on the call we would be announcing more. I will do that again.

We will be announcing more payer deals that are in the pipeline because they are substantial interests. You saw Sierra. You saw Independence Blue Cross and you saw Horizon and they are a strong interest.

With that said, most of that payer interest tends to start with the electronic prescribing and that's one of the reasons we think having a separate module that we can offer and deploy profitably is so important, because if you get started with physicians and if this is a funded initiative, then their next step, if they are happy with your software is to add modules to that.

So it is an important part of the strategy, but there is real and strong interest from payers. They are seeing that this is the only way to try to manage these costs.

Okay. Thank you.

Your next question comes from the line of Jay Hingorani with Thompson & Co.

Gentlemen, congratulations, it was a great quarter

Thank you.

Thanks, Jay.

Most of the questions have been pretty much asked and answered. Just wanted to confirm one thing. 30-plus percent outside the IDX space. Is that number of deals, is that dollars?

Glen indicated that the 30-plus-percent is the fact that we've -- that mix has been the case over the last two quarters. The specifics to this quarter was actually closer to 60% of our bookings, but I believe that's -- I believe that is based on number -- based on dollars of deals rather -- I'm sorry, based on dollars of deals in the quarter.

So in other words, what I -- what I said was, we are trying to demonstrate -- there is some question, hey, are you able to -- we understand your success in the IDX base and why you will continue to win. Are you able to -- are you able to sell outside the IDX space?

And frankly, with the revenue -- overall revenue continuing to increase, each of the last few quarters, we have been pushing up sales outside the IDX space. That is evidence of our ability to do that and our success. I have said we have two quarters in excess of 30 bill points out, this quarter was actually posted at 40%, but I want to be careful because I am not sure that we want -- I am not sure what the exact right number is, but 40% -- I'd like to -- we have 800 million left to sell of IDX, and that is our strongest sales.

So, I want to make sure that we have very solid numbers. So anywhere in that 30 to 30% range I am very comfortable with.

On a quarterly basis measured in dollars. Okay. And --

Jay just to confirm, it looks like in terms of number of deals since you asked that, it is similar trend in terms of -- in terms of similar reduction from Q3 -- Q2 to Q3.

Okay. I am -- you said similar reduction?

Yeah, in terms of -- it looks like -- it looks like in terms of number of deals, it's -- it is right around 65%, where last quarter it was close to 75%.

Okay.

So 65% IDX last quarter was 75% IDX, which means the converse, 25% -- 35% are not.

But you also indicated that ASPs are going up or stronger anyways. Was that the comment?

I said we continue to be encouraged by our average selling price. We are around the $500,000 range.

How is that in the mid-market segment?

Again, what we are seeing what I talked to the market about on a per doc basis, average selling price is in the range of $10,000 up to as high as $15,000 and all of our deals that we talked about are well within that range.

Okay. Great. Go ahead -- and then --

I think just to close off on that subject, a key element of that is how much -- it is not just about software but it's about one, whether you're including any hardware in the deal, two, the amount of and level of implementation and follow-on services, and that is where the flexibility comes, so it is not just selling the exact same software to two different people at two different prices.

Some people want custom work. We talked earlier about an interface that we may build to a third party. Each of those have different cost elements, and that has a lot to do with it, so that's why you will see some fluctuation as well.

Okay. And then, Bill, as you raced through the backlog numbers, I think I missed a couple. -- I think I got the major numbers, does not include additional -- SMACs, you said about 60 million as of third quarter?

That's correct -- that $60 million will extend out beyond the next 12 months.

Okay, great. That's pretty much for now and I will pop back in the queue and probably follow-up as well with you guys. Congratulations again.

Thank you.

The next question comes from Sean Wieland with Piper Jaffray.

Hi, guys, commenting on the strategy outside of IDX, in keeping with that theme. What have some of the tools that you need to increase your success there? You have already shown a good degree of success there, but specifically around a practice management system. Do you need a practice management system, and if so, does the GE transaction facilitate that?

Sean, this is Glen. When you are selling in the IDX space to the largest clients, those clients very rarely change their practice management system, and that's why, when we first decided to enter into the strategic agreement with IDX, we were primarily focused on that.

As we move down market there is alo lot more fluidity in changing the project management. That said in today's environment, what you will find is people selecting an Electronic Health Record and Electronic Medical Record first and then worrying about the practice management system second.

As an example in the St. Vincent's deal, there was a client who was on GE, on Centricity upgrading to TouchWorks and that's a move in that direction. I think what is really driving the market today is the Electronic Health Record. You can't sell practice management without knowing what the Electronic Health Record is, and so I think everybody understands that.

Second, in terms of interoperability. The Federal Government -- I mean, I sat in a meeting with the Who's Who of the MR space and the practice management space and all the usual suspects including the largest hospital systems, and secretary Leavitt made it clear that everybody will be interoperable and you don't want to be on the wrong side of this issue. And that message went around the table and that message was pretty well received.

But I think -- a big benefit to us. So that's going to be a big benefit to us. But I think, as you see, we can interface on a one-on-one basis to any practice management system, and that turns out to be a pretty big advantage as opposed to being locked into any one system.

So i don't see -- we have interfaces today to Mill Brook. You may recall some time ago, maybe a few years ago, before the GE acquisition, we actually announced a relationship with Mill Brook. So we work with a whole variety of practice management systems, and I think you can actually turn that into a pretty large advantage.

Do you in your discussions with -- with GE, if you've had any, can you give any more detail on possibly their intention to integrate the old Medicalogic piece to Flowcast or Groupcast? Are they able to, from your perspective, or will they?

I don't want to comment on specific discussions, but I will say that the strategic agreement that we have with IDX clearly prohibits marketing integrated offerings, and GE has been very clear in their own announcements, as well as IDX. I don't think it is any accident that Jim Crook on the initial call not only reaffirmed the importance of our relationship, but made it very clear and in explicit statements saying that GE would not market into the IDX space. In fact, number of people have said this should be a real advantage, because we have eliminated a competitor into the IDX base, which is to say they will not be going in and marketing into the IDX base. So that's number one.

Number two, you have a shared interest here, and that is that if you went out as GE did, and as they planned to do, because it hasn't helped yet, but if you were going to spend $1.2 billion on an asset, the last thing you would want to do is upset that apple cart. And to the extent that they started to change what the IDX offering was, what you would you see is the IDX sales of practice management systems would stop. The revenue stream from Allscripts would stop, and frankly would you be giving competitors a pretty large advantage.

Last but not least, given that we have over 140 IDX clients, including some of the largest, you might imagine that some of those people who you know well might have already had conversations with GE about what they expect them to do, and GE not only sells these systems are but they sell expensive C.A.T. scanners and the like. And the last thing they want to do is to upset some of the largest clients they have in the country by -- by changing in mid stream.

So we are -- we are very comfortable with where we stand. We are comfortable with what the agreement says. It is very clear, and -- and as I've said before, We think that the new energy that GE injects into IDX is ultimately going to benefit us because every new IDX client we believe is going to be a great prospect for us.

Great, thank you very much.

Thank you. Why don't we take one or two more questions here, and then we'll let everyone go on their merry way?

Okay, your next question comes from the line of [Dain Vanheimer with Kerris & Company].

Yes, nice quarter. Can you characterize for us the replacement cycle for an EMR? In other words, if you were to install one today, how long would that system be in place before it was replaced, or before a major upgrade was needed?

Well, there's two different questions. One, our contract agreements are typically ten to twelve years. So that means, when we sign a new client, they are contracting to be our client for the next ten to twelve years, and again, especially for larger clients, given their investment in addition to the money they spend with Allscripts, they have a like investment on their side. That's a pretty stable base.

That said, part of what they pay us for is to continue to upgrade the software, and we'll do that in two ways: One, we'll continue to upgrade the basic software, and two, we'll continue to add new offerings. For example, this year, we have TouchWorks Analytics, which is an enhanced reporting package. We have, as I mentioned earlier, the iHelp offering, and we expect to have offerings in the clinical research arena as well that we're already piloting with some of these clients, so all of those will be add-on sales into that base, but it's a ten-year cycle, is what you're looking at. Maybe just a bit shorter in the mid-market, maybe it's seven years, but it's not -- when you train a physician to do something, you don't want to go back in and retrain them any time soon.

Thank you, Glen. And you mentioned the middle market, and you're certain, you think that's going to be opening up? Can you talk about how -- distinguish your sales effort at the low to mid-market versus the large-practice group, and how would you be able to sustain margins if we're taking about smaller price points?

Well I think that there's a few things I would say there: One, for the largest groups, they have developed, we have developed a very solid reputation, and when you look at the practice administrators, they tell us, in fact, I was on the phone with one today, he said "the only way I lose my job is if this doesn't work", and so they are looking for security and safety, that's what they see in the product offering.

As you move down market, overall size of the contracts may go down because there's less physicians, and/or they may buy less modules or require less interfaces, but as Bill said earlier, we don't see the price point moving down too much. Now I'd say one other thing, and I want to ask Bill to comment, and that is that this whole concept in the middle market of us not being tied as you move down market to a particular PMS per se, if somebody comes in and doesn't have an IDX practice management system, the good news is we can preserve their investment in their existing practice management system, whereas some of our competitors go in, and what they say is "you have to use our practice management system", so that's really an advantage for us. But Bill, maybe you want to comment on the margins.

The only thing I would add in terms of margin is a key component to margin preservation is around the installation services that we provide, and as we've talked about previously, have a lot of significant efforts underway around productization of our implementation services and driving further efficiencies in those services.

So we expect to yield benefit from those that will go a long way in that mid-market in terms of preserving and potentially exceeding the margins that we experience today.

Great. Thanks Bill, thanks Glen, and congratulations, again.

Thank you.

Thank you. Why don't we take one last question?

Your final question comes from the line of Larry Marsh with Lehman Brothers.

Hey guys, this is Doug for Larry. We saw the share count go a good amount this last quarter. I was wondering if you could give a little more color as to what was behind that, and as well as what the implications, especially with the accelerated vesting of the options, what that implication is for the sharecount to be in the fourth quarter and moving forward?

The increase in share count during the quarter really was driven by two things: One was, as our stock price improved over the course of the quarter, that worked its way into our diluted share computation. The second is, as I highlighted in our cash flow, we benefited to the tune of about $3.4 million in cash that resulted from the exercise of stock options in the quarter, so that was another contributing factor, it was really driven by those two things.

In terms of the number of shares that we are contemplating accelerating vesting, I commented before that that's about 1 million shares. To the extent we were to do that, I would expect that it would be done near the end of the quarter, and so I would not expect any meaningful change relative to those being exercised or what have you, because it will likely occur once our blackout period is in place.

So, I would, just in terms of modeling, I would look at what our average increase has been over the course of the year and expect that Q4 should not be materially different.

Thanks a lot, guys.

Well thank you, and thanks again for joining us on the call. I think you can sense from the answers to many of the questions and from the review that Bill and I gave you that this is an exciting market, it's happening now, we believe Allscripts is very well positioned to take advantage of it, and we continue to be confident in the numbers that we've guided the market to. Thanks very much.

This concludes today's teleconference. You may now disconnect.