Veradigm Inc (MDRX) 2005 Q4 法說會逐字稿

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

Thank you. I want to welcome everyone to the Allscripts fourth quarter and 2005 year end conference call. This is Glen Tullman, Chairman and Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer, and Lee Shapiro, our President. 2005 was a great year for Allscripts, but before we get started, I'm going to ask Bill to review our 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 at may, will, expect, anticipate, 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 2006 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 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 said, I would like to turn the call back over to our CEO, Glen Tullman.

Thanks, Bill. Today, we are going to cover two important topics. Where we've been, which will focus on our results for 2005, and where we are going, which will address our plans for 2006, including our pending acquisition of A4. Bill will also provide detailed information on the fourth quarter, full year 2005 results, and guidance for 2006, including some preliminary information on A4.

So let's begin with 2005, which, by all measures, was a breakthrough year for Allscripts. We achieved record revenues of $120.6 million, record bookings driven by our clinical software group, and the strongest net income in EPS in Allscripts' history.

The reason our business is accelerating can be summed up in three words -- inform, connect, and transform. In 2005, physicians utilized Allscripts products at record levels, which allowed us to inform physicians with real-time information at the point of care, and positively impact an increasing number of patients. We were also able to connect physicians to all of the critical stakeholders in the healthcare system, enabling the continuous flow of information between physicians, pharmacies, patients, payors, and pharmaceutical companies. And lastly, we proved that we can, in partnership with our clients, transform healthcare, driving significant return on investments from both a quality and cost perspective.

Our primary focus at Allscripts is physicians, and when you take into consideration that the decisions physicians make drive 80% of healthcare spending, the impact of Allscripts on a national healthcare landscape will continue to accelerate every day, as we become more indispensable to physicians. While much of the attention related to Allscripts is on our Critical Solutions group, in 2005 we made solid progress across all of our business units. In our Physicians Interactive group, we generated record bookings of $4.6 million in the fourth quarter, while expanding our product portfolio to move beyond e-detailing into platform products that are integrated with our client's operations. In our Medications Services group, we delivered on our plan, adding quality recurring revenues, and this business continues to be a strong contributor to our bottom line.

In our Clinical Solutions group, Allscripts TouchWorks electronic health record, continued to lead the market, with a blue chip client base, a proven process for rapid implementation, leadership and national initiatives, and top ratings in every industry evaluation. But we didn't stop there. We integrated functionality which will allow our clients to participate in clinical trials, and and incorporated advanced analytical capabilities to enable our clients to qualify for and maximize pay for performance awards. The end result? TouchWorks is increasingly thought of as the EHR that pays you back, by more and more of our clients and our prospects.

At the beginning of 2005, we identified four market segments to compete in. Large physician practices, that is physicians 25 and more, physician groups 25 and larger, mid-size physician groups, including between 10 and 25 physicians, smaller independent groups, was between 1 and 9 physicians, and specialty groups. Our objective was to extend our leadership position in the large market, make strong inroads into the mid market space, and take a leadership position in the key specialty practice segments. Our view was that the smaller, independent groups were not yet ready, and that an integrated offering that included both an electronic health record and practice management would be required for groups with less than 10 physicians. I'm pleased to report that we made substantial progress on each of our objectives.

In the large market segment, which comprises practices with 25 or more physicians, Allscripts is the clear leader. Our sales team effectively leveraged the IDX practice management base where TouchWorks remains the safe choice. The good news is that our presence here continues to grow, even after the GE acquisition of IDX was announced. Purchase decisions in the large market are based on strong reference sites. We now have over 140 sites in the IDX space, an accomplishment that would take years for someone else to duplicate. In addition, we operate in the same web framework to give clients the same look and feel across systems, another important buying consideration. So, we have a strong degree of confidence in our on going sales into this space, and this has been re-confirmed by our clients' own decisions and the results we are reporting today.

In the fourth quarter, we delivered record bookings of $29.2 million in our Clinical Solutions group, with 76% of our TouchWorks sales going to IDX clients, including a number of agreements we have recently announced. For example, last week, we announced that the University of Alabama, at Birmingham, a group cast account, will implement TouchWorks at their Huntsville Regional Medical Campus in an agreement valued at $750,000. Today, we announced that the University of South Florida will deploy TouchWorks. This is a $2.4 million contract that is part of a $15 million initiative to create a national center of excellence. U.S.F. is a very large flow cast user, and our successful track record with installs at large sites was an important aspect of their decision.

With that said, to be a leader, we realize that we would also have to sell outside the IDX space. I'm pleased to report that almost a quarter of our business now falls into that category. A few of our recent wins demonstrate our progress. For example, Cooper Clinic, based in Dallas with 20 physicians, which we announced last Thursday, will interface TouchWorks with their GE Centricity practice management system. Cooper is a good example of our ability to sell into the mid market. And yesterday, we announced that Mercy Health Services in Maryland selected TouchWorks to connect and automate 100 physicians, in an agreement valued at $1.7 million. We will interface with their existing licensed practice management system in that case.

During 2006, we expect this segment of our business to continue to accelerate.

We are also seeing growing demand in the specialty markets where, over the past year, we became the solution of choice for many of the nation's leading specialty groups. In orthopaedics, we signed Resurgeons, one of the nation's largest orthopaedics group, as well as West End Orthopaedic Clinic, one of Virginia's largest physician groups. In cardiology, we are now working with leaders like the New Mexico Heart Institute, the largest cardiology practice in New Mexico. In ophthalmology, we signed Cincinnati Eye Institute and Dean McGee Eye Institute, two of the largest and most respected ophthalmology practices in the country. And in oncology, we recently signed Tennessee Oncology, one of the nation's largest physicianed owned oncology groups and a leader in their field. In each of these specialties we are partnering with key clients to develop content, best practices, and solid deployment strategies that will allow us to be the premiere player in each of the specialty markets we compete in.

While we are gaining traction with physician groups, we are also seeing a growing interest from the payor side of healthcare, driven by their desire to manage costs. During 2005, we announced agreements with independents Blue Cross, Horizon, Sierra, HMSA, and most recently, Highmark. Payor agreements tend to start with electronic prescribing on a stand alone basis, highlighting the importance of having a modular product, which allows for separate installation of electronic prescribing. However, payors are also interested in personal health records, like the iHealth record from our partner Medem, and electronic health records, making Allscripts the only company in the industry that can deliver a portfolio of solutions to payors, and allow our clients to start in a number of different points and end up moving to a full electronic health record.

With that said, let me turn to the future, which, as many of you are well aware, has become even more exciting for the Company over the last few weeks. GE's acquisition of IDX provided us with a unique opportunity to modify our strategic alliance agreement, preserving what was most important while, at the same time, being able to enter the practice management market, and focus on serving small to mid-size physician groups, where the majority of physicians practice. This was one area where we had not make significant inroads during 2005. Our recent announcement of the A4 acquisition positions us perfectly to take the lead in this segment.

In the mid market, groups of 10 to 25 physicians, A4 will allow us to take their leading practice management system and integrate it with our industry leading TouchWorks Electronic Health Record, strengthening our offerings and expanding the market. In the smaller independent physician market, typically 1 to 10 physicians in a practice, A4 already has the leading integrated electronic health record practice management offering today, and we will continue to sell it, and aggressively expand our efforts in that segment. This is especially important because as we've grown and expanded, we've seen some of our key competitors move down market, and to date, they have had little competition. That will change the day the A4 transaction closes.

And for those of you who are unfamiliar with A4, a few facts -- John McConnell, their CEO, who built Medic prior to joining A4, and who will join our Board once the transaction closes, built a great company. Having spent time in Raleigh and Nashua, I can tell you that A4 is filled with really high quality people who are ready to grow with us. A4 brings a solid customer base of approximately 1,600 physician practices or about 7,000 physicians and valuable experience in selling in the independent smaller physician practice market, which is a tough competitive space. The combined company will have a sales force twice as large as we do today. And with the inclusion of A4's acute care solutions, we will be able to connect physician customers with the relevant information from a patient's inpatient stay or emergency department visit. And let me make it clear. The care management in emergency department applications are a key part of the value of A4, and we plan to support and invest in growing both businesses. They represent a solid fit with what we do, and our commitment to connect our ambulatory physicians to all of the key healthcare stakeholders. We plan to move aggressively on all aspects of A4.

So, as you can tell, these are exciting times at Allscripts. I'm now going to turn this call over to Bill, to cover our financials and provide a look at our guidance for 2006. Additionally, Bill will provide some added detail around A4. Bill.

Thanks, Glen. As Glen indicated, 2005 was an exceptional year for Allscripts, as evidenced by our strong bookings momentum and overall financial performance. So I will first provide some details on our fourth quarter and fiscal year results. After that, I will provide some perspective on what we expect in 2006, and then finally I will comment on our pending A4 transaction.

Turning first to some key highlights for the quarter. Our net income of 3.9 million or $0.09 per share represents the most profitable quarter performance in our Company's history. It also represents a 2.5 million improvement, or $0.06 per share over the fourth quarter of last year. Such amounts exclude our onetime $0.5 million stock based compensation charge recorded in this fourth quarter.

Clinical software bookings of 29.2 million, represents a 45% increase over the fourth quarter of 2004, on a pro forma basis, which I will define for you in a moment, bringing our yearly total to 73.9 million, or 39% increase over 2004. Our total revenue of 34.2 million represents a 30% increase over Q4 of 2004, and a 12% increase over the third quarter of this year.

We also generated approximately $10 million in cash flows from operations during the fourth quarter. This too is a record performance for Allscripts. Again, following our year end, we announced an agreement to acquire A4 Health Systems for approximately 272 million.

So turning now to more detailed outlook on Q4 and full year performance. Total bookings during the quarter were approximately 33.8 million. Consistent with prior quarters, bookings do not take into consideration the 12.8 million of sales in medications. Our 33.8 million of bookings compares to 29.5 million of bookings in Q4 of last year. Our 24.5 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. It also compares to $19.6 million bookings in the third quarter of this year. Bookings for the Company for the year were 89.5 million which compares to 65.9 million for the same period last year. This represents a 36% year over year increase.

Our Clinical Software, or Electronic Health Record business contributed again, 29.2 million in bookings during the quarter and this excludes ongoing support. This compares to 25 million in the fourth quarter of last year, or, again, compares to 20 million if you were to pro forma out the $5 million adjustment I mentioned earlier. Bookings for the year of our Clinical Software business were 73.9 million versus 53.3 million in 2004, again, a 39% increase. Our Physicians Interactive business had bookings during the quarter of 4.6 million, bookings for the year for PI were a record 15.7 million, versus 12.7 million for the previous year. This represents a 24% increase.

Turning now to backlog. We ended the four quarter with 91.2 million in sold backlog. This represents a 36% increase over our backlog at the end of 2004, and compares to a backlog of 78.9 million at the end of the third quarter. The backlog break-out is as follows. License and service fees related to our Clinical Software business is 55.1 million. Software subscriptions which will be recognized over the next 3 to 5 years is 8.5 million. Support and maintenance fees related to our software business which are expected to be recognized over the next 12 months are 14.8 million. And then Physicians Interactive contributes the balance of 12.8 million for a total of 91.2.

Consistent with what I've mentioned in previous calls, it's important to note that our backlog does not include approximately another $65 million of contracted support and maintenance fees that extend out beyond that first year. Also, as I've indicated before, our reported backlog does not include anything related to our Meds business which we view as reoccurring in nature. So all told, we continue to be very encouraged by the momentum in our backlog, and the unique visibility that it provides us as we look towards 2006.

Turning to revenue, annual revenue was 120.6 million, compared to 100.8 million in 2004, a 20% increase. Our Clinical Software revenue increased by more than $21 million, or 48% for all of 2005, when compared to 2004. Our actual growth of 48% is well in excess of the 40% growth expectation that we established at the beginning of 2005.

Turning now to our quarterly revenue. Our fourth quarter revenue of 34.2 million increased by nearly 8 million, or 30% over the fourth quarter of last year. Our clinical software business contributed 3.9 million of that increase, representing a 28% year over year growth. Clinical Software revenue was up approximately 1.8 million when compared to the third quarter of 2005. This too was driven by our increased adoption of our Electronic Health Record technology. Physicians Interactive revenues of 3.2 million in the fourth quarter gained 19% over the prior year period and we're up as much sequentially from Q3. I want to point out that PI's revenue have come back nicely since the first half of the year, reflective of the momentum we have gained in PI bookings.

Moving now to our Meds business, where we continue to see progress is evidenced by another solid quarter with revenues of 12.8 million. The year ago comparison is significant, due to the inclusion of approximately $800,000 of flu vaccine sales in Q4 of 2005, that were not available to us in Q4 of last year. The balance of the increase was driven by incremental sales to wholesalers.

In terms of revenue mix, our Software and Information Services segments represented close to 62% of total revenue for the full year. Contrast this with our revenue mix for the full year of '04, in which Software and Information Services comprised 56% of the total. Fourth quarter revenue by segment is as follows. Medications again delivered 12.8 million, our Clinical Software business delivered 18.2 million, and PI, or Information Services segment delivered the balance of 3.2 million for a total of 34.2. Looking now to gross margins. Overall, our gross margin was 46% in the fourth quarter, versus 43% in the third quarter of 2005. The sequential improvement came as a result of an increase in Physicians Interactive gross margins due to the closeout of certain e-detailing projects at higher than expected gross margins. In the future, we continue to expect gross margins in this business to remain in the mid to high 40's.

Margins by segments, was as follows. Our Meds business delivered 15%, which is consistent with prior quarter, Software and Related Services delivered comparable margins at 62%, and Information Services or PI delivered 73%, for a total of 46%. I want to reiterate what I said in the past regarding gross margins. For Software and Services, we are targeting the mid 60's. For PI, we expect gross margins to be in the mid to high 40's, and for our Meds business, we anticipate margins to be in the mid to high teens. With regard to Meds, we intend to lessen our reliance on wholesalers in the future periods, and replace such low margin revenue with higher margin sales in areas such as oncology and HIV clinics. Going forward, overall margins should improve, as they did in 2005, as our growth businesses continued to become a larger percentage of our total revenue.

Turning now to expenses. We continue to maintain tight control over our costs. Operating expenses, excluding amortization and stock based compensation for the fourth quarter, were 11.5 million, compared to 10.3 million last year, and 10 million in the third quarter of this year. The increase over third quarter expenses reflects a number of factors, including the anticipated higher commissions associated with higher revenue, performance bonuses, as well as additional consulting costs related to our investment in our operating systems, and a lower amount of capitalized software in the quarter. We would anticipate a quarterly run rate in the range of 12 to 13 million, as we go into 2006.

Total capitalized software in the quarter was 800,000. This amount compares to 1 million we capitalized in the third 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 15% in the fourth quarter, and for the year, reflective of the increase in revenue that we are experiencing in that segment. Amortization expense remained consistent at approximately $400,000 for the quarter.

Net interest income was 350 in the quarter. This increase in interest income was a result of higher short term interest rates, as well as higher cash balances. Net income for the quarter was a record 3.4 million, or $0.08 per diluted share on a GAAP basis. This compares to $0.07 per diluted share in the third quarter of this year, and $0.03 per diluted share in the fourth quarter of last year. Net income for the year was 9.7 million, or $0.23 per diluted share on a GAAP basis. This compares to 3.1 million, or $.07 per diluted share for all 2004.

As we previously announced, we elected to accelerate the vesting of certain options that were expected to vest in 2006, and in the early part of 2007. Our Q4 results include a non-cash, non-reoccurring compensation charge of approximately $500,000 related to such accelerated vesting. This amounted to a $0.01 per share reduction in both our fourth quarter and full year earnings per share amounts. Basic shares outstanding for the quarter were 40.8 million, and diluted shares were 43.9 million. 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 diluted computation.

With regard to overall headcount, we ended the quarter with 386 employees, which compares to 367 we reported in the third quarter. As previously indicated, such increase is primarily focused on our Clinical Software business.

Turning now to our balance sheet. We ended the quarter with 146.1 million in cash and marketable securities, up about 10 million over the third quarter, a record level for Allscripts. Accounts receivables increased to 29.2 million which resulted in days sales outstanding of 77 days. It's important to note that this increase in AR was due to the timing of certain client billings that occurred in late December, as evidenced by our increase in deferred revenue. As I've indicated previously, we expect our DSO to continue to move closer to 70 days, over the coming quarters. With that said, beginning in the first quarter of 2006, we did transition our annual maintenance billings to a single annual billing cycle. This move will help near term cash flow, but you will see a commensurate rise in deferred revenue and potentially in AR this first quarter.

With regards to our 2006 outlook, I wanted to provide this following guidance. Please note that this guidance is excluding the proposed acquisition of A4 Health Systems. Allscripts' target is to exceed 145 million in total revenues in 2006. We anticipate that earnings per share will be in the range of $0.45 to $0.47 per share, which excludes the added stock based compensation expense. We expect such stock based compensation to be in the range of 2 to $2.5 million for the year, when you give effect to the 2006 actual and anticipated restricted stock grants.

Our assumptions behind this guidance are as follows. First, we expect our Software and Related Service revenue will continue to grow in excess of 40% for the year. Second, Physicians Interactive revenue growth is expected to be 20 to 25, I'm sorry, 25 to 30%. And finally, our Meds business will be flat to slightly down, as we become less reliant on wholesaler revenue, which should improve our margins in that business. I want to remind investors that our quarterly bookings are somewhat seasonal, with the fourth quarter being our strongest. It was nearly 40% of our total bookings in 2005. Therefore, you should expect to see sequential decline in this year's first quarter.

Turning now to A4. As you know, we announced our agreement to acquire A4 Health Systems for approximately 272 million. A4 generated revenue in excess of 75 million, EBITDA of approximately 15.5 million, and net income of about 8.3 million in 2005. As you know, we are in the process of preparing regulatory filings related to the acquisition. We can, however, offer some additional information about A4. Acute Care revenues are approximately 25% of the total, with Ambulatory revenues making up the balance. As it relates to the Ambulatory revenues, Practice Management revenue represents about 40% of such total. EMR revenue makes up about 50% of that Ambulatory revenue with EDI Transaction revenue making up the remaining 10% of Ambulatory revenue total.

Approximately 40% of A4's total revenues are reoccurring in nature, either from maintenance annuities, or the EDI Transaction fees. As we look into 2006, our expectation is that A4 is capable of organic revenue growth of at least 20%.

Another consideration that I would like to highlight pertains to income taxes. It is our expectation that we will reverse our valuation reserve related to deferred tax asset as part of purchase accounting for A4. As such, I expect Allscripts to begin to provision for income taxes for book purposes starting after the consummation of the transaction. With that said, we do not expect the combined entity to pay income taxes prior to 2008.

I also anticipate Allscripts taking a relative small restructuring charge in conjunction with this transaction. My current estimate is in the range of 2 million to $3 million, for 2006. Such charge will be recorded in the period in which the liability arises.

As we previously said, the acquisition will double our Clinical Software revenues and the size of our sales force. We also anticipate that the gross margin of the combined companies will be higher than Allscripts on a stand alone basis due to a higher mix of software revenue. Most importantly, we expect this acquisition to be accretive from a cash EPS perspective in 2006, and accretive on a GAAP basis starting in 2007.

In summary, we are very encouraged by our accomplishments in this past year. We finished the fourth quarter with record operating results, strong bookings, and positive cash flows. We are focused on continuing that momentum into 2006, and believe we are well positioned in part due to our exemplary product offerings, a strong financial position, and our planned addition of A4 to capitalize on the substantial opportunity that exists in all of our markets.

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

Thanks, Bill. Let me close with just a few comments. Our financial success, just highlighted by Bill, is very exciting. Record sales, record revenues, record earnings, record cash flow from operations. It's also clear that the level of acceptance of and the market demand for our solutions continues to accelerate. Clearly, as many have commented, we have the right products at the right time. With that said, our new agreements open the door for substantial new opportunities. We have effectively doubled our addressable market size from 5 billion to $10 billion because of our markets now include practice management. We can now also offer an integrated practice management and electronic health records solution in those segments where we are not working with GE and IDX. Whether it is in the A4 integrated solution, or combination of A4 practice management, with our TouchWorks Electronic Health Record. Finally, and importantly, effective with the closing of A4, we will become a leader in the independent small physician practice space.

In closing, 2005 was a great year on every measure for Allscripts. What's even more important is that the future has never been more promising than it is right now, and we intend to take full advantage of the opportunity. Thank you for your time today, and for your continued support.

I'd now like to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from George Hill with Leerink Swann.

Good afternoon, thank you. A couple of quick questions, I'll probably hop back into the queue. First one is on guidance, by my model, I have the warrants becoming anti-dilutive excluding A-4 in the back half of 2006 I'm sorry, becoming dilutive in the back half. I'm assuming that's included in the guidance?

Yeah, George, what I've said consistently is that we anticipate those shares to become dilutive at such time we generate $0.12 of EPS in a particular quarter, so I don't think you are far off in terms of timing and when that might be, might be reality.

Okay. And my second question is regarding A-4. You've guided two revenue growth in the core business ex-A04 in the software business, in excess of 40%, and I would think the acquisition of A-4 would expose you to faster growing segments of the market moving down market. I recognize you said revenue growth should be in excess of 20%, but could you provide more color there?

Yeah, I will, I'll say a couple of remarks. As we've talked about in the past, we view the market based on the 3 segments that Glenn defined, the large, the mid and the small, and clearly, the large market has led the adoption of EMR's in the past, we've seen a significant gain of momentum over the last 9-12 months in the mid, and we expect over time you'll see similar momentum gain in the small, but based on where that market is today, and based on our desire to be conservative as we go into this acquisition, felt that was the right place to start at this point.

I would agree with Bill, and his comments. The potential for the smaller independent market is probably as great as any, if not more, because of the number of physicians. That said, we want to be conservative, we are just getting to know our now partners, and so we will watch the market develop as we go forward, but you know, we've remained enthusiastic about it.

My last question before I hop back in the queue, you've mentioned before you didn't expect a lot of synergies from the A-4 deal, but you'll taking a 2 to 3 million-dollar restructuring charge. Can you give us color on where that 2 to $3 million will be going?

What I'm highlighting there, we will be doing some integration work, specifically bringing the businesses together so I wanted to just highlight the fact that we do anticipate some incremental costs associated with cost integration efforts. Just from a traditional restructuring standpoint, there's not a lot that's coming forward there. As I suggested before, we don't see any cost, or headcount reductions and the like, so it's diminimous in that regard.

I'm hop back in, thanks.

Your next question comes from Larry Marsh with Lehman Brothers.

Thanks. Just a little elaboration on the guidance and also discussion of U.S. F. First, could you talk a little bit about the pre-packaged meds business you are talking about, I guess mid to high teens in terms of gross margin is on a little lower revenues because of the change in strategy. Just elaborate on that. And does that mean sort 15 to 18% remodeling?

This is Bill. Our expectation as we plan for 2006 is that the amount of wholesaler revenue that we generated in '05 is a level that quite frankly we would like to see go down in '06, and and I quantified that in the couple million dollar range. Also, as we've talked about, we are seeing increased interest in areas like oncology, HIV and the like, which tend to be higher margin, and so very encouraged by the pipeline opportunity that we have in our meds business, and expect that as we migrate from the wholesaler, which is lower margin, you know, we will be able to replace that with higher margin, so that mix shift will cause movement towards the mid to high teens as I suggest.

So do we think of that gross margin kicking up throughout the year, and would there be any disproportionate effect on revenues in the first half of the year?

The answer is no or the disproportionate impact, because it is something that we have an ability to effectively manage, throughout the year, but I think the margin movement would be appropriate to think about logical migration across the year.

Just a brief discussion elaboration, when you say in PI, close out of certain detailing projects, which boosted your gross margin a quarter.

It's a, you know, with the relatively small revenue base we are dealing with in PI, fortunately, we had this phenomenon, if you will, in Q2 as well, where we are conservative in cost recognition in the programs, and if a program closes and we've taken the cost in prior quarters, you have an effect in the current quarter in terms of higher gross margins. So we had that situation with a couple meaningful projects in the fourth quarter that closed more successful, I.E., less cost than what we originally anticipated, and therefore, you saw the margin pop. Again, as the business grows, my expectation is that margins will stabilize in that business, and you'll see them more consistent, mid to high 40's as I commented in the guidance section.

I think it also speaks to our conservatism about how we approach these. We very careful to make sure we've taken account of the costs before recognizing the revenues.

And then your stock base compensation expense, rose 2 to 2 at a half million, that sounds like it's just a little bit above where you were thinking with the third quarter. Any particular reasons?

I'm not sure it's below what I communicated previously, just to break that down, for everybody, about a half a million dollars or so of that pertains to amounts that had been issued prior to the first of this year, so this is really the tail to what was not accelerated in the fourth quarter, so you could take about half a million of that being kind of historical options. On provisioning in that 2 to 2.5, the fact that we have talked to the market about the fact that we do intend to use restricted stock as an incentive for our employees, we've pegged it at around 1%, slightly less than 1% of our outstanding shares, and so if you were to do that, you would come up with about 400,000 restricted shares at today's market price. Vesting on those shares would be about 4 years on average, so with all that said, I think it is consistent with what, what we've talked about in the past, and more than willing to walk you through how I get to that number more specifically after the call, if you'd like.

Finally, the U.S. F. announcement that you were talking about here this morning, a 415 physician group, 2.4 million in revenues, I guess the question is over what period of time would you recognize those revenues. And to put this in context, how does this compare to some of your other larger clients. It seems like this is certain a substantial relationship, they talk in the press release about a year long process. Is this one of your bigger ones?

Larry, this is Glen. First, we are excited to be a part of the broader effort at U.S. F because they are talking about creating the future of healthcare. And it's also exciting not just the number of physicians, but you'll notice in the press release, it talks about not only 12 locations, but we will become a part of this $88 million center for advanced healthcare, which was the vision of their Dean, Steve Klasko. And part of that, what's exciting about that for us is that's going to push the implementation to be more rapid, so we expect that this is really, in the next 9-12 months, that this revenue will be recognized which is, which is a very solid, doable, but aggressive time frame, we are more comfortable with. So it will be a very key reference site for us, and we think they will become one of the national leaders in terms of the future of healthcare.

And just put that in context, we've seen a slew of new relationship announcements just this week alone, just coincidence in terms of timing. Is this leading up to some of the shows this spring? And what is this signaling, besides obvious success in the market?

I think it's the latter, signaling the consist success in the market in terms of closing different kinds of deals, whether they be agreements in the large space, whether this be mid market, whether they be in the specialty, or and it also speaks to not only our strong relationship with IDX, but also outside the IDX base in terms of our ability to integrate with other systems, new world of interoperability, our system works very well, and we think that's a real advantage. I think the other piece I would mention is as A-4, as this transaction closes, it positions us very well to accelerate the growth in the mid market and in the smaller market.

Uh-huh. Okay. Very good. Thanks.

Your next question comes from Corey Tobin with William Blair.

Congratulations on a nice quarter and U.S.F. agreement.

Thank you.

Wanted to hit on a couple of quick points, most of them are housekeeping. Bill, did you say what the cap ex was in the quarter?

I did not. It was about .5 million, 600,000?

Okay. And what is the full year share count that you are using in your guidance?

For 2006, you say?

That's right.

For modeling purposes I add about .5 million or so shares a quarter, and average them out, quarterly, so you can add 1 to 2 million off of where we ended '05.

Great. And two last things on A-4. what's the backlog at A-4 currently?

As I indicated on the call couple weeks ago, you know, their backlog from my vantage point is as significant of a metric as it is for, for Allscripts because on the Ambulatory side, their install periods tend to be appreciably shorter than ours, so their conversion from backlog to revenue is much quicker. With that said, they exited the year with backlog in the Ambulatory side over 15 million, and on the Acute side, which is more akin to what we experience in terms of deployment or implementation being over 6 to 12 month period of time, they have got about a little over 20 million on the Acute side

That includes both --any sort of, I guess, 12 months of recurring maintenance and one time implementation fees?

They do not include any maintenance in their backlog numbers

So both the numbers are just the licensing and services fees?

That's correct.

And finally, organic growth, you mentioned in excess of 20% for next year, which is a great number, can you give us a feeling for what it's been the last couple of years?

Yeah, they had, and you and I have exchanged a quick e-mail on this, which I said I would cover on the call today, they had a contract term consideration, I'll characterize it as, in that they actually were limited in their ability to recognize revenues on certain of their contracts because of the existence of an element they could not kind of establish fair value for separately, so it caused a deferral of a significant amount of referral. They changed that provision in their contract going back into the start of 2005. And so as we looked at the growth potential of this business, we obviously looked at their, what their GAAP reported performance will be, but actually what their actual performance, taking that modification into consideration. So that's a long winded way of saying if you take that contract provision into consideration, they, their organic growth has been well in excess of 20%, and if you -- purely on a GAAP basis, it would be something less than that, going back into '04.

So I guess asked another way, the confidence level on the 20% organic growth rate sound likes it's high.

It is very high, and the production of the business is reflective of that over the last three plus years, and again, absent this contract provision consideration, you know, it's, which has been addressed in '05, and on a go forward basis and we're comfortable with it's ability to do so.

Corey, let me just add that one of the key assets of the company is the sales force, they have a very good, very competitive, very experienced sales force. I've met a number of them, and was very impressed with their knowledge of this market, their ability to sell into the market, and their success to date. So we're very high on that part of the company as well. This is a great culture that we are inheriting, John McConnell, a well known entrepreneur, has built successful companies before in this area, and the people are, have a very similar culture to ours, it's entrepreneurial, it's results driven, they execute, they deliver, and in this space, especially in the Ambulatory that Bill talked about, it's even more important, because every quarter, every day, you are closing deals and getting installed very rapidly. You don't have some long time frames we have with some of our largest deals, so it's a nice balance in terms of overall business.

Great, one last one, Bill, if I could. In terms of -- you mentioned regulator filings that you are preparing, can you give us a sense of timing when we can expect additional A-4 information?

Again, the regulatory files that we were making reference to starts first and for most with HSR approval. Second is that they do have a large shareholder base, so we have to go through approval process and shareholder vote in the state of North Carolina, which from a timing perspective is probably the most significant variable that we have. And then ultimately, as we evaluate the financing alternatives, you know, whether we access the equity markets, or go down the debt route, there will be filings associated with those alternatives as well.

Okay. So I guess in -- it could be, it's not an order of weeks, but months, just to gauge our expectations when we should expect additional --

We've not moved off the perspective, we feel comfortable that it will close the first half of this year. And there's a possibility that if all the stars align, it could accelerate significantly, but we will, we will make the market aware of those timing changes as they become known to us.

Great. Thank you.

Your next question come from Richard Close from Jeffries and Company.

Congratulations. I wanted to go over the revenue guidance one more time, I guess, to get a little bit of better understanding of what's in the 145 million. Are you looking at that as any, I guess, penetration into some of the segments that you have not been traditionally in before?

Absolutely, the 40% growth expectation on the software -- clinical software size is principally focussed on the large, mid markets, it's expecting continued success in the IDX basis, and expecting and consistent with recent announcements that we've had, the fact that we are going to have success outside the IDX base as well. There's no, there's no assumption, if you will, relative to moving into the below 10 market in that kind of stand alone expectation, or should say very minimal amount of contribution from that portion of the market.

Okay. So it would be almost fair to say that once this acquisition is completed, that the combined entity, you know, possibly your forecast here would be conservative, considering their presence in that marketplace?

Yeah, as we stated before, that's our perspective, and it is a question ultimately in my mind any way of the adoption rate within that market, relative to the other two market that we've defined. And over time, we absolutely believe that that velocity, if you will, will be equal to if not greater than the mid and large markets. so we are very bullish on the prospect in that low end, and speaks to the attractiveness of the A-4 acquisition.

And then Bill, you mentioned some details on taxes, saying I don't think you are going to actually pay cash taxes for a couple more years, but if you could just go into more detail there.

Sure. As we talked about on the stand alone basis, '06 was really going to be a year in which Allscripts had an obligation to evaluate the appropriateness of carrying the evaluation reserve on our NOL's, and everything else equal, my expectation was over the course of the year, probably towards the end of the year, more likely, we would be in a position that we would reverse that reserve out, and that would be an entry that would be to our P&L as kind of a one time event. The transaction of A-4 actually creates a scenario where the profitability of the combined entity is, is you know, of greater consideration and it's not uncommon in those circumstances for the acquirer, Allscripts in this case, to actually make a decision to reverse that valuation reserve in conjunction with purchase accounting. So instead of it going to our P&L as an one time event, it would go in effect against goodwill, and the purchase accounting effective reduction of goodwill, so that's my expectation. Subsequent to that determination being made, what it means in terms of our reported financial results is that we would begin to provision a tax line item on our P&L, but again it would be for book purposes, recognized that we do not expect to pay cash or taxes on the cash basis, you know, for another couple years as you suggested.

And then, maybe hitting quickly, excuse me, on the PI margins again. How do you expect those to trend over, you know, the quarterly progression in 2006, maybe some guidance there. Have you completed the programs that you mentioned that drove the margins up in the fourth quarter?

We have, and again, you know, as I tried to suggest earlier, it's really a function of the relatively small base, and you know, the lumpiness coming from the conservative approach we take on the cost of those programs. So going forward, I'd like to say we are going to be absolved of any lumpiness, I don't think that's necessarily true. I think the lumpiness will be far less in '06 than it has been in the prior period. So I think again it's reasonable, you know, to anticipate margins in the mid to high 40's on a relatively consistent basis over the course of next year, and we're going to do our best to make sure we stay within those bounds.

Thank you.

Your next question comes from Sandy Draper with J&P Securities.

Thanks, and good afternoon. Two questions. I guess the first one is for Glen. Glen, when you are looking at the success that you have put up in the IDX customer base over the last couple of quarters, especially last quarter, with some noise, you've already cited some new ones. When you look further down the pipeline, do you have any concern that at some point, you've got the pipeline built up of IDX deals that have happened over 6-12 month period, and then all of the sudden the pine line that was going to be starting in the last 2 months when IDX was acquired, that there's a falling off later, or are you not seeing any change?

We aren't seeing a lot of change there. Keep in mind, the way large practices buy, they look at reference sites, they want to visit a number of sites to see where the software is actively working, and that takes years to get to that, that level, and that confidence level, so very, very critical in the decision making process is, one, a number of different reference sites that look like they work. Number 2, they want to see integration and we have that integration with the web framework today. Three, they want to make sure they are with a company that has a long term interest in driving innovation. We talked about Touch Works analytics, we talked about the clinical trials. We are doing a number of programs that are really turning this into a revenue generator for these large practices. And -- so none of those go away overnight, or frankly any time soon, so we remain very confident. I think in the mid market, it's going to be competitive, we are going to have a practice management system, we are going to work closely with IDX and GE in their base, but that will become more competitive. But for the larger sites, we remain very confident that we can give them the certainty that they look for, and the safety they look for, and I think that's what these agreements are indicative of. But clearly, terms of the pipeline, we haven't seen anything that would indicate that that's changed.

Okay. Great. That's very helpful. And then a question, Bill. Based on my calculations, you guys sort of pulled down a lot less revenue out of your bookings this quarter than you have in previous quarters. Is there anything changing there, or were you -- it is just timing? Anything more conservative? Obviously, the quality what was very strong here, just because of the high level of increase in backlog.

Yeah, it speaks to the mix of what we sold. We see more and more new customers come on, and as we talked about in prior quarters, less customers, less customers doing kind of a partial buy, they're doing a complete solution up front, and so we are seeing a slight decline in the add-on sales of existing customers because they have previously purchased the full solution so I would attribute it to that. It's more of a mix issue than anything else

So whenever you get larger, more complex buys, or net new buys from a new customer, it's going to be a more extended revenue recognition pattern.

That's right. And customers as a general trend are buying the complete solution. If you go back a year to two years ago, it, you know, they were buying up a subset of our total functionality, which we are seeing less and less of, they're committing to the full solution.

Okay. Great, and finally, one, on the impact of the convert, you said at $0.12, it starts to potentially come into play. Have you factored that in? Because based on your guidance, I would assume at some point in '06, you are going to be at least a $0.12 quarter, is that factored in or is that something that would change once you actually hit the numbers?

It's factored into our thinking, and again, I think an earlier question was, latter part of '06, and I think the second half of the year is appropriate thinking there.

Fantastic. Thanks again.

Your next questions come from Jay Hingorani with Thompson Davis and Company.

Great quarter.

Thank you.

I think I forgot my question, I had to wait so long. The, Mysonics deal, that was Mercy, right? Two days ago? Excuse me?

I'm sorry? Say it again?

The deal two days ago.

Misys deal?

Mysis, I'm sorry. That is not, that's not IDX.

That's correct

How big was that? How many physicians?

That was 100 physicians. The contract can size was about $1.5 million. That's a great group out of Baltimore, Maryland. A very competitive process that we went through, but we have great expectations about what they are going to do.

So can you characterize that in respect to some other non-IDX wins you've had in the large traditional space?

I think --

How many does that make it?

We, I don't have a number for you, but what I'd say is that we are starting to, this quarter roughly a quarter of our business was outside of the IDX space, that's been relatively consistent, very, varied 5%, 10% one way or the other, but generally consistent, and the goal was to expand outside the IDX space, but not slow the growth in the IDX space, I think we've been able to do that successfully. We expect, as I said in my comments, to continue to grow the business outside the traditional base, outside the traditional base at a rapid rate. What I would say, if you look at kind of the spread in terms of the $5 billion marketplace, 800 million is IDX, 4.2 billion is non-IDX, so that's part of why it's so important, so significant that we have solid offerings outside the base and we compete there. That doesn't include another 5 billion in the practice management space.

Right.

So part of what is so significant about our agreement with A-4, and our redefinition into the market is accessing both those markets, effectively doubling our addressable market overnight.

Okay. Going over the guidance, Bill, I think you mentioned software and services grossed 40%?

Correct.

And that includes A-4?

It does not.

Does not include a-4. And you said that if, with A-4, that would, that growth rate would be higher?

What we said, specific to A-4 is that we are comfortable with organic revenue growth expectations of at least 20% specific to A-4's contribution. What you may have been picking up on, overall gross margin of the combined business will be higher because of higher concentration of software revenue relative to overall mix.

And so that is what, what was that? Can you reiterate? Did you provide a number?

I did not. It's just recognizing that Allscripts overall did just over 45% gross margins in '05, our software business was close to mid 60's. A-4 is closer to our software business in the overall, so just their relative contribution will naturally cause that 45% to migrate upwards.

Got it. And then the overall guidance, 145 plus, what did you say, $0.45 to $0.47?

That's correct.

That does not include the stock base compensation, does it include restructuring?

It does not.

Does not include restructuring either? And let's see, what else. And the amortization, if it's still at that same level.

It does not include anything, and I put that restructuring of the $2 to $3 million charge that I referenced in the context of A-4, so it does not, again, all the guidance I provided was on a stand alone basis for Allscripts.

Okay. Great. I will pick up with you off-line as well.

Thank you.

Your next question come from Atif Rahim with JP Morgan.

Thanks. Just a quick question on value added reseller strategy. Now with A-4 coming on board, how does that change in terms of what you had said before, gross margins decline [INAUDIBLE] to a certain extent as you extend the middle market and small physician group space. How is that relationship or dynamic changed now?

Well, my sense, this is Glen, I believe we are going to continue to find ways to work with the value added resellers in the market. A-4 has some value added resellers, we have a number of those, they have been primarily focused on our documents, management and imaging, although a number of those have expanded further, and we believe they have a valuable role to play. So we are going to work closely with them, and continue to find profitable ways to work with them that help their business and help our business, so we think that's important.

Okay. And in 4Q you signed, I guessed a significant deal [INAUDIBLE] and added them on as a reseller. Was any significant inventory uptake from them that could have contributed to your bookings in the quarter?

No, there really wasn't. Maybe a couple hundred thousand dollars in the quarter.

Okay. And lastly, just housekeeping question. I think your share count was down sequentially just slightly. Any explanation around that?

It would have just been a function of share price from one quarter to the next, number of worked into a diluted count.

Okay. Thank you.

Why don't we take two more questions, and then we will wrap it up.

Your next question come from Greg Haddad with First Analyst Securities.

Thank you. Could you provide any perspective on the transaction, Clinical Solutions transaction, volume or revenue for the year or quarter?

Yes. This is Bill. We, as we talked about at the beginning of the year, our expectation was that transactions would exceed 20 million compared to 8 million in the prior year which they did. The dollars attributed to that was commensurate with what we had last year, you know, in terms of a couple million dollars in total. What I've talked to the market about is that we really saw the course of 2005 a shift in terms of how managed care was trying to, or is intending to participate in that space. And we saw more and more managed care organizations desirous of subsidizing the technology in lieu of participating on the per click basis. And we're very accepting of that level of participation because it broadens our install base, and over time believe that with much strong gear install base we will anybody a better position to reevaluate the kind of per click model in the future.

Great, thank you. Following on to your managed care comment, in terms of payor opportunities, are you seeing any significant ones out there right now, and can you tell me if there was -- whether you were involved with the Blue Cross/Blue Shield North Carolina transaction?

Well, the first thing I'd say, I will say what I've said consistently the last few call, and we believe that you'll continue to see payor transactions and we are in the mix at a number of those. We don't comment on individual payors until we signed them and announce them, but I think you can assume that we are in the mix on most of these payor transactions and payors are stepping up. They want to be a part of this, they believe that point of care, electronic health records and, you know, personal health records and the like are very important part of the healthcare equation of the future. So we expect that they are going to continue to play and that are working closely with them.

Great. Thank you very much.

Your final question comes from David Jackson with CTI Capital

Hi. I was wondering, could you provide some additional color on the financing structure of the acquisition of A-4?

Sure, this is Bill Davis. We really are evaluating a variety of options at this juncture. I made reference to the fact we are considering an equity offering as one viable choice. We do have committed financing lined up if the equity markets were not made available to us. Again, we are focused on getting through the various regulatory approvals that I mentioned previously, and then in consultation with our financial advisors, we will assess which avenue is most advantageous for us at that point.

Any idea after the acquisition how much cash you would like to have on hand, post acquisition? Any idea for liquidity purposes?

I would suggest that somewhere, somewhere in the range of 25 to $40 million would be a comfortable range for us. I don't believe, quite frankly, that we need a lot for working capital purposes because the combined business will be a significant cash generating entity. But with that said, we continue to be very focused on the opportunities there in the marketplace and want to make certain we have a capitol structure, and necessary resources available to take advantage of those if they arise.

When you say combined entity of the significant cash flow generator, could you give us metrics, like EBITDA, or operating cash flow.

I would like to defer that until we have a better since of when the transaction will close. I'm comfortable restating that from a cash EPS perspective, we expect it to be accretive in '06, and from a GAAP, as well as a cash perspective to be accretive again in '07.

So any idea then when you will be able to, I guess, announce time frame, give more information on the financing?

Yes, again, it's really, dependent on the timing of the approval processes that I outlined before. We are doing everything that we can to accelerate those or move them along as expeditiously as we can. And in large part, because of the share holder dash approval process we have to go through is why we stay true to the kind of first half of this year time frame, and as that timing becomes clearer to us, we will be absolutely coming to market, making you aware of our updated plans

One final clarification. I know you mentioned an equity portion of the financing, are you also considering raising -- issuing more stock for the cash portion as well?

That's what I meant when I said we wer contemplating an equity offering. It would be to raise additional cash. The deal does contemplate 3.5 million shares of Allscripts stocks going to the A-4 shareholders, but the equity offering I was referring to was intended to raise additional capitol.

Thank you.

Thank you very much. I want to conclude the call and close out what is a record breaking 2005 by thanking our clients, by thanking our committed people, and by welcoming our soon to be new partners at A-4. We are very excited about the future and the opportunities 2006 will bring, and last but not least, we appreciate the support of all of our stockholders. So thank you very much for joining us. We look forward to talking with you in the future. Thank you.

That concludes today's Allscripts fourth quarter earnings conference call. You may now disconnect.