Veradigm Inc (MDRX) 2006 Q1 法說會逐字稿

Good afternoon. My name is Holly and I will be your conference operator. At this time, I would like to welcome everyone to the Allscripts Healthcare Solutions first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you. I will now turn the call over to Glen Tullman, Chief Executive Officer. Mr. Tullman, you may begin your conference.

Thank you. Welcome to the Allscripts first quarter 2006 conference call. This is Glen Tullman, Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer, and Lee Shapiro, our President. Our first quarter of 2006 included solid progress across the board and some excellent results. But before we get started, I'm going to ask Bill Davis to read 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 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 2006 and beyond to differ materially from those expressed in or implied by these statements. Except as required by the federal securities laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, feature events, changed circumstances or any other reason after the date of this release. With that, I will turn the call back over to our CEO, Glen Tullman.

Thanks, Bill. Let's begin. The first quarter was one of the most exciting quarters in our history. e delivered record Q1 sales of $27.1 million in our clinical software businesses, over 82% above first quarter 2005 sales, and we announced the largest TouchWorks contract in our history. At the same time, we made solid progress in our other business groups.

However, the headline for the quarter was clearly our acquisition of A4 Health Systems, which we announced and completed in six weeks. Bringing together our two companies adds substantially to our market position, supplements our sales, accelerates earnings and doubled the size of our sales force. The acquisition also broadens our product portfolio and opens up new markets for our products. To fully understand the significance of A4, it's important to realize that in the small and mid-size physician practice market, prospects are typically searching for a solution that includes an electronic health record with an integrated practice management system, or in some cases, prospects want a stand-alone practice management system that can be easily upgraded in the future to include an electronic health record. In the past, we didn't offer a solution for most of that market. Today, with A4, we have the leading solution.

In addition, we now provide software to emergency departments and care management and discharge departments. These two points of connectivity to the hospital are important to our strategy for connecting ambulatory physicians with the information they need. So, products represent just one reason why our acquisition of A4 last quarter was the right move at the right time. During the first quarter, our A4 unit delivered a significant number of new sales in the ambulatory and acute care areas, as well as the first joint TouchWorks electronic health record in practice management sale.

And I couldn't be more pleased with how successful the integration has been. John McConnell, founder and former CEO of A4 and now an Allscripts board member, has been very supportive, even using his contacts to assist on the sales side. David Bond, who is now President of our A4 group, has delivered on the top and bottom lines and our cultures seem to have meshed from day one. We believe this is a perfect acquisition for us. The bottom line, Allscripts is better-positioned than ever before, across all three segments of the physician practice management market. Large physician groups, including academics and IDNs, mid-size practices with 10 to 25 physicians, and independent groups and specialties.

And our results tell the story. As I've said before, I believe that sales is one of the most important metrics investors can follow, which is why I will spend most of my time today talking about sales traction across our business. And the two fastest-growing units, TouchWorks, our electronic health record offering for larger groups, and HealthMatics, the A4 offering for mid-size and smaller groups, is where I will begin. Overall, sales of clinical software at $27.1 million for the quarter were up over $12 million or 82% from Q1 last year, and demonstrate both the market demand and the strength of our offering. Our TouchWorks offering has become the solution of choice for leading medical groups and this is providing us with significant leverage across the market. Our strategic partnership and track record of success with IDX practice management system users continues to be a strong selling point for existing IDX users and for new agreements on which we work together with IDX.

But to be clear, our success isn't driven primarily by IDX. Rather, it's driven by what we have accomplished. Remember, larger groups buy based on four factors: No. 1, [inaudible], No. 2, measurable results, No. 3, our proven ability to rapidly deploy the software, and No. 4, our ability to get physicians to use it. That's a competitive advantage that is not easy to duplicate.

Allscripts remains the safe choice for large IDX groups and our results tell the story. For example, this quarter we announced our largest agreement ever when Jefferson University Physicians, an IDX float cast client, selected Allscripts in an agreement valued at more than $5.5 million. Jefferson University Physicians, affiliated with Thomas Jefferson University, has 75 practice locations throughout the Philadelphia region, 480 physicians, and over 700 residents. With the outstanding reputation and a level of commitment to this project, we expect that they will become a premiere east coast reference site.

Another example is the University of South Florida Physicians Group which selected TouchWorks for their 200 physicians in a $2.5 million agreement. USF is investing millions in new facilities and Allscripts is a key part of their strategy, highlighted by the ad they are running in Tampa, which focuses on electronic healthcare and their Allscripts electronic health record. The USF agreement also demonstrates our continuing strength as the EHR of choice for large academic medical centers. And this morning, we announced another new TouchWorks contract in Florida, with Orlando Regional Healthcare. Valued at nearly $2 million, the agreement covers their 135 staff physicians spread across 20 different practice locations and includes integration with IDX.

One more example, which I like because I was personally involved in it, is the Iowa Clinic in Des Moines, which purchased TouchWorks in the first quarter for its 199 physicians in an agreement valued at $1.2 million. Iowa is an IDX practice management user and a great group that we're looking forward to working with.

It's important to note, however, that we are having increasing success selling outside our traditional strength of IDX clients. As an example, in January, we announced a TouchWorks agreement valued at $1.5 million with Mercy Health Services in Baltimore, Maryland, which uses the Micis Vision practice management system. Mercy is just one example of our ability to successfully interface TouchWorks with virtually any practice management system.

And while the ability to integrate with other systems is important, having a practice management system that we own, that is integrated with TouchWorks, courtesy of our A4 acquisition, is important going forward for selling to new clients. Our first sale of our newly christened TouchWorks practice management system occurred recently and you can expect to see us gaining traction with more in the pipeline.

Now the first quarter also saw significant traction in sales of our HealthMatics electronic health record and practice management systems, especially in groups with 10 or less positions. These are tough sales but are just the reason the acquisition made sense. Over the first quarter, our A4 group logged well over 50 sales in 25 different states and David Bond is hiring more salespeople and increasing our marketing to continue to build on our success.

In addition, our A4 group is also laying the ground work for future sales, driving initiatives like our recent quality improvement organization summit, wherein QIOs from 17 different states traveled to our Kerry, North Carolina facility to be educated on how to install our solutions.

I'm also pleased to report that we were notified today by Lumetra, one of the docket organizations in California, that our HealthMatics EHR was the first to demonstrate the ability to report on the 35 docket ambulatory quality measures and route that information to their data warehouse. Great news.

Another great part of our story is with A4 in the hospital market. As I mentioned, our care management and emergency department information system solutions offer a natural connection to our ambulatory applications, facilitating the continuity of care between the acute and ambulatory healthcare settings. The market for hospital EDIS is estimated at nearly $0.5 billion and is largely untapped. Allscripts is now positioned as the leader in this growing market with A4's HealthMatics ED product. We recently announced an important agreement in this area with Danbury Medical Center in Connecticut. Danbury will implement HealthMatics ED in an agreement valued at $500,000.

Just as exciting, A4's Canopy care management solution generated record sales in the first quarter by penetrating the growing market for hospital care management systems. We expect that Canopy sales should accelerate as we cross-sell their solution into our client base. One great example is Washoe Health System in Reno, Nevada. Washoe signed a three-year agreement for Canopy products, worth over $500,000. Washoe is the largest health system in northern Nevada.

Switching gears, I want to mention some exciting things going on in our Physicians Interactive Group, especially one agreement that highlights an opportunity to leverage our electronic health record market success to sell new services to pharmaceutical companies. The agreement, with Shire Pharmaceuticals, a leading global specialty pharmaceutical company, calls for Physicians Interactive to deliver our enterprise e-marketing solution to supplement Shire's own online marketing programs to U.S. physicians. This high impact set of online services, highlighted in a recent cover story for a top pharmaceutical journal, begins to integrate physician practice patterns with information delivered when physicians want and need it. We expect agreements like this one to drive much of our future growth in Physicians Interactive. Bill will have additional comments on the progress we are making in both Physicians Interactive and in our Medication Services Group. Leading to a simple conclusion, we are seeing very strong demand for our products in each of the markets we serve. That's translating into bottom line results.

Before I conclude my comments, I want to mention a few recent events. Last week, I attended the World Healthcare Conference where I had the opportunity to meet Al Hubbard, the President's new adviser on healthcare and to introduce him to the attendees. It is very clear that this administration is supportive of the important role that clinical systems will play in moving the country to broad penetration of electronic health records. This will require solutions that inform physicians of critical patient needs real-time, with high quality information, that connect patients to their physicians and allow for inner operability, where Allscripts continues to play an important leadership role, and that transform healthcare into a more efficient and effective system of quality care. We have those solutions today.

I also participated on a panel at the Milton Global Conference. The attendees confirmed what will be the next key element of the move to a electronic health records: content. Today, smart people already understand that it's not about the software. It's about getting the software used by physicians and having a measurable impact on quality and cost. The way to accomplish those two objectives is by ensuring that content is world class. Our strategic relationship with Wolters Kluwer Health, where they will focus resources on developing templates, best practices and care plans, in key areas like diabetes, will not only make our software easier to use, but will make it more valuable to physicians and to their patients. This is the next competitive battleground and once again, Allscripts is leading the way.

It's appropriate to close my comments today with what I think is the most important and one of the best indicators of our progress of our progress for investors. Our annual users conference, the Allscripts Client Experience, took place last week in Chicago with 500 of our clients paying to participate. We enjoyed a 50% increase in attendance over last year. For me, this is one of the most exciting three days of the year as it's all about energy, results and learning. Newt Gingrich joined us and sent a very clear message to our clients. A transformation needs to happen in healthcare. The good news? The transformation is happening right now with our solutions, with our clients, with Allscripts. That's translating into very promising bottom line results for the Company. Here to talk about those financial results is Bill Davis, our Chief Financial Officer. Bill?

Thanks, Glen. As Glen indicated, the first quarter of 2006 was a significant milestone in Allscripts history, due to the consummation of our A4 Health Systems acquisition on March 2nd and the continued strong performance from all of our businesses. This afternoon, I will review some of our accomplishments in the quarter and then provide perspective on what you can expect for the balance of 2006.

Turning first to some key highlights in the quarter. As previously indicated, we consummated our purchase of A4 Health Systems on March 2nd for a total consideration of approximately $300 million. Our total revenue of $42.2 million represents a 61% increase over Q1 of last year and a 23% increase over the fourth quarter of last year. Please note that A4 contributed approximately $8 million to our Q1 revenue, given effect to the March close.

Cash earnings, which I will define for you in a moment, were $6.4 million or $0.13 per share in the first quarter. This compares to $0.07 per share in the Q1 of last year and $0.13 per share in the fourth quarter. GAAP net income was $1.3 million or $0.03 per share.

Clinical software bookings were $27.1 million and represents an 82% increase over the first quarter of 2005. A4 contributed $5 million of those bookings in the month of March.

We successfully raised $141 million in net proceeds through the public offering of our common stock. Such net proceeds were used to fund our acquisition of A4 and our buyback of certain shares from GE. We also generated approximately $8.7 million in cash flows from operations during the first quarter.

Turning now to a more detailed look at our Q1 performance. Total bookings during the quarter were approximately $31.2 million, consistent with prior quarters. Bookings do not take into consideration the $11.5 million of sales and medications. Our $31.2 million in bookings compared to $19 million in bookings in Q1 of last year and $33.8 million in bookings in the seasonally high fourth quarter of last year. Our clinical software businesses contributed $27.1 million in bookings, excluding ongoing support. This compares to $14.9 million in the first quarter of last year. As previously indicated, Q1 of '06 bookings included $5 million from A4 for the month of March. Taking that into consideration, our organic growth was approximately 48% when you compare Q1 bookings to the same period last year. Our Physicians Interactive business had bookings during the quarter of $4.1 million.

Turning now to backlog, we ended the first quarter with $158.4 million in sold backlog. This represents a 74% increase over our backlog at the end of '05. Please note that approximately $58 million of the backlog has been added related to A4. The backlog breakout is as follows: license and service fees related to our clinical software businesses contributed $79.4 million; software subscriptions, which will be recognized over a three to five-year period and include our Canopy business contributed $27.1 million; support and maintenance fees, which are expected to be recognized over the next year contributed $38.2 million; and then finally, Physicians Interactive contributed the balance of $13.7 million for a total of 158.4. As I've indicated before, our reported backlog does not include anything related to our medication distribution business, even though we view such revenue as re-occurring in nature. We continue to be encouraged by the momentum in our backlog and the unique visibility it provides as we look toward the balance of 2006. You also can expect that the take down of our backlog will accelerate, given the addition of A4 backlog and their ambulatory product installations, typically requiring less time than our TouchWorks solutions.

Turning now to revenue. Our first quarter revenue of $42.2 million increased by $16 million or 61% over the first quarter of last year. Our clinical software business contributed $14 million of that increase, representing nearly 100% year-over-year growth. A4 contributed approximately $8 million of that $14 million increase. The remaining $6 million increase represents 42% organic growth for our clinical software businesses. Physicians Interactive revenues of $2.4 million in the first quarter compares to $2.1 million in the first quarter of last year, representing a 16% increase. We expect such growth rate to accelerate over the course of the year and are still comfortable with the 25 to 30% annual growth expectation we set earlier this year.

Moving to our meds business. We saw another solid quarter with revenues of $11.5 million. This compares to $9.8 million a year ago and $12.8 million last quarter. Please remember that the Q4 revenue included approximately $800,000 of flu vaccine sales that occur in the latter part of each year. The remaining decrease is due to a concerted effort to reduce wholesaler revenue, which had a positive effect on the gross margin percentages in this business.

In terms of revenue mix, our Software and Related Services segment represented approximately 67% of total revenue in the first quarter. We expect this percentage to approach close to 75% by the end of this year, due to the addition of A4. First quarter revenue by segment is as follows: medications, again, delivered $11.5 million, or 27% of our revenues; clinical software delivered 28.3%, or -- I'm sorry, $28.3 million or 67%; and information services delivered the balance of $2.4 million, for a total of 42.2.

Looking now to gross margins. Overall our gross margin was 48% in the first quarter versus 46% in the fourth quarter of 2005 and 46% in the first quarter of 2005. The sequential improvement came as a result of the Software and Related Services revenue representing a larger percentage of total revenue, as well as a 4 percentage point increase in our meds business, which is reflective of the previously mentioned reduction from wholesale revenue in the quarter. Margins by segment are as follows: medications delivered 19% margins, which compared to 15% in the fourth quarter; clinical software represented 59%; and information services delivered 47%, again for a total of 48%.

I want to reiterate what I've said in the past regarding gross margins. For PI, we expect gross margins to remain in the mid to high [40s]. For our meds business, we anticipate margins in the mid to high teens. For meds, we will continue to lessen our reliance on wholesalers in future periods and replace such low margin revenue with higher margin sales. And with regard to our Software and Related Services businesses, we expect gross margins to be in the high 50s, due to the contribution of A4 and Allscripts clinical software results. Going forward, you can expect that our overall gross margins should improve as our clinical software businesses become a larger percentage of our total revenue.

Turning now to expenses. Operating expenses, excluding amortization and stock-based compensation for the first quarter, was $16.4 million. Our operating expenses included approximately $2.6 million from A4 and approximately $1 million of one-time acquisition-related costs. We anticipate a quarterly run rate in the range of 21 to 23 million for the balance of 2006.

Also during Q1, we began to expense stock-based compensation, effective January 1st. Stock-based compensation was approximately $400,000 for the quarter. We still expect total stock-based compensation to be in the range of 2 to $2.5 million for the full year.

Total capitalized software in the quarter was $1.4 million. This amount compared to $800,000 we capitalized in the fourth quarter and is reflective of the progress we have made on the TouchWorks Version 11, which is scheduled to be released later this year. As we've indicated in the past, this amount will fluctuate from quarter-to-quarter, depending on our product development cycles. R&D expenditures as a percentage of software revenue were a little less than 15% in the first quarter.

With regards to amortization expense, we did engage a third party, valuation firm, to assist us with the allocation of purchase price related to A4. Preliminary results suggest that approximately $79 million of the purchase price should be allocated to identifiable and tangible assets, such as developed technology, customer relationships and trade names. The residual amount has been recorded to goodwill. Monthly amortization of depreciable intangibles is estimated to be approximately $1.1 million for April through August of this year, and approximately $850,000 per month thereafter. It's important to note that such amounts include amortization related to acquisitions prior to A4's. Our Q1 results include amortization expense of $1.4 million, which reflects the closing of A4 in March and, again, amortization related to our prior acquisitions.

Net interest income was $186,000 in the quarter. The decrease in interest income was a result of cash and marketable securities used to fund the A4 acquisition and the realization of a $118,000 loss associated with liquidating certain investments to fund the A4 transaction. Both reductions were mitigated by the higher short-term interest rates in the quarter.

Regarding income taxes, management has made the decision in the first quarter to reverse substantially all of our valuation reserve related to our net operating loss carry forwards and related deferred tax assets. Such adjustment was taken to goodwill as part of our purchase accounting. As such, we booked the tax provision for book purposes starting in the first quarter. We still estimate an effective tax rate of 38%. But more importantly, we do not expect to start paying taxes until the latter part of 2008, or later.

Net income for the quarter was $1.3 million or $0.03 per diluted share. This compares to $0.03 per diluted share in the first quarter of 2005. But given our recent acquisition of A4, we believe another important performance metric is cash earnings -- or cash earnings per share. We define cash earnings as operating income, giving effect to the add back of depreciation and amortization, stock-based compensation, our one-time A4 integration cost and net interest income or expense. Taking that into consideration, our cash earnings in Q1 were $6.4 million or $0.13 per diluted share. This compares to $2.9 million or $0.07 per diluted share in Q1 of 2005.

Basic shares outstanding for the quarter were 44.9 million and diluted shares were 48 million. Please note that such share counts take into account the fact that we consummated our equity offering, the A4 transaction and associated share buyback in early March. As such, those shares were not outstanding for the entire quarter. We expect total diluted shares to be closer to 55.5 million shares, starting in -- starting in Q2. The 7.3 million shares issuable under our convertible debt offering continue to be anti-dilutive to our earnings per share and, therefore, are excluded from our dilutive computation. Given that we are now booking a tax provision, our convertible shares could become dilutive as early as when we generate quarterly earnings of approximately $0.07 per diluted share.

With regard to overall head count, we ended the quarter with approximately 825 employees, which compares to 386 we reported in the fourth quarter. The significant increase is principally due to the consummation of A4.

Turning now to our balance sheet, we ended the quarter with $66.8 million in cash and marketable securities, which is reflective of us generating approximately $8.7 million in cash from operations in the quarter and consummation of the A4 transaction and associated financing activities. Accounts receivable increased to $43.4 million with the addition of $15.1 million from A4, which resulted in day sales outstanding of approximately 69 days. As indicated previously, Q1 AR also was impacted by our decision to transition our annual maintenance billings to a single annual billing cycle in Q1 of this year.

With regards to our 2006 outlook, we offer the following general guidance for the full year. Allscripts' target is to exceed $220 million in total revenue. This takes into account the fact that we reduced A4 deferred revenue by approximately $3.1 million as part of purchase accounting, which will impact A4 revenue over the coming three to four quarters. Based on this guidance, as well as guidance that we have previously given, we expect clinical software revenue of at least $165 million, meds revenue of at least $43 million, and Physicians Interactive revenue of at least $12 million for a total of $220 million. As suggested previously, we expect overall gross margin percentage to increase into the low 50s over the balance of the year, reflective of the revenue mix change.

We anticipate that GAAP earnings per share will be in the range of $0.20 to $0.22 per diluted share. Please note that such GAAP guidance includes our estimate for stock-based compensation, a full book tax provision of 38% and the higher share count. We anticipate cash earnings per share to be in the range of $0.70 to $0.72 per diluted share. Items to consider are approximately 16.5 to 17 million of total depreciation and amortization, 2 to 2.5 million of stock-based compensation, net interest expense of approximately 1 to 1.5 million and the $1 million of transaction-related costs that were recognized in Q1, as well as book taxes at a rate of 38%.

With regards to bookings, we expect Physicians Interactive bookings to grow 25 to 30% in 2006. Clinical software bookings are expected to grow in excess of 100% in 2006, given the addition of A4.

In summary, we are very encouraged by our accomplishments in the first quarter. We are even more excited about the prospect of sustained profitable growth into the future. We are well positioned, in part due to our exemplary product offerings, a strong financial position and the addition of A4, to capitalize on the substantial opportunity that exists in all of our markets. With that, I will turn it back over to Glen for some closing remarks.

Thanks, Bill. Let me close with just a few comments. Healthcare transformation is under way right now and Allscripts is better positioned than we've ever been, given our acquisition of A4, which has transformed the Company. We move forward now with more energy and promise than ever before, having doubled our size, doubled our revenues and expanded into new markets for our products. I'm excited for the Company and our great team of committed employees, for Allscripts' clients, and excited for our shareholders as well. Thank you for your time today and for your continued support. At this point, Bill, Lee and I would be happy to take your questions. Thank you.

[ OPERATOR INSTRUCTIONS ] Your first question today comes from Sandy Draper with JMP Securities.

Thanks very much and appreciate all the detail and I think it will take me a while to get through all of this stuff tonight, but that's great breaking out all of the numbers for us. The first thing is -- you blacked out there for a second, Bill, when you gave your cash EPS number.

For the actual for the quarter or for the guidance?

For the guidance for the year, the -- the -- you -- at least on my side, you dropped off.

I apologize, Glen kicked the box on purpose!

That's a tough time to drop off!

It wasn't on purpose, was it?

No, it wasn't! The cash earnings guidance that I'd given is a range of $0.70 to $0.72 per diluted share.

Okay. And just to be clear, you are -- if it's interest expense, you are deducting that from the cash -- or that is included in the cash EPS number, correct?

That's right. And if it's expense, it's being deducted as you suggested.

Okay, great, and then maybe just a bigger picture update for Glen. Obviously you guys are having some great success. One, if you could maybe give us a comment on what percentage of the bookings in the quarter came from IDX? Obviously that's becoming less meaningful with A4, but is there any any updated commentary you can give us on what the impact of the GE acquisition is having and how customers are reacting to the A4 product? Thanks.

Sure. Well, let me give you two different numbers in terms of percentages because we had one very large deal, as I mentioned, Jefferson University Physicians of $5.5 million. So with Thomas Jefferson University, with that, it's 82% of the deal -- of the contracts were IDX-related, which means 18% were not. If you take away the one large -- large agreement, it then drops to 76%, which is more in line with what we've been running. About three-quarters are IDX, about a quarter are not. I think that's closer to steady state.

In terms of overall, I think customer reaction has been, there've been questions all along, but at the end of the day, as I mentioned, what our clients -- the large clients, the academic medical centers, the integrated delivery networks, what they want to know, is can you show me multiple record sites where the product is working? Can you show me your ability to deploy large sites? I think I've talked before about two of our largest deployments in the country, Sharp Healthcare in San Diego and Healthcare Partners in L.A., and both of those took their first steps on time, on schedule, and we're talking about hundreds and hundreds of physicians. So they want to look for the ability to show them reference sites, to do large scale deployments, to get the product used by physicians and that is very unique. And so clearly IDX clients are still buying Allscripts, and I think that's happening in two respects. That's the existing base and we're also working together on new large forecast sites, cooperatively, like we've always done. So we remain very strongly focused on the IDX part of the market and then on the remainder of the market, which again is three times as large and we're very excited about it.

This is Bill. If I could just clarify something -- the percentages that Glen shared pertain to our TouchWorks bookings in the quarter, so those percentages would obviously be lower if you included the $5 million of A4-related sales.

Okay, great.

Those percentages don't take the $5 million in account.

Yes, that actually lessens on an overall basis. That's right, thanks, Bill. That actually lessens kind of our -- our dependence, so to speak, on that piece of the business.

Okay. Thanks. And maybe just two quick clarifications and I will stop hogging the Q&A. Bill, you said in the quarter, $2.6 million from A4. Does that include the charge or is that just operating expense?

That's just operating expense.

Okay. And then the 21 to $23 million of total operating expense going forward, does that include stock comp or not?

The 21 to 23 does not include stock-based compensation. I take that back, it does, in fact, include stock-based compensation.

Okay, great. Congratulations and I will jump off. Thanks.

Thank you.

Your next question is from Richard Close with Jefferies & Company.

Yes, congratulations, guys. Bill, I was wondering if you could just sort of break out what the amortization was in the quarter, A4 versus the -- your Allscripts business?

Sure, and before I answer that, I apologize for going back and forth. Just to clarify, my guidance on operating expenses does not include stock-based compensation so that 2 to 2.5 would be incremental. I apologize for that confusion.

Relative to the $1.4 million of deal-related amortization in the quarter, a little less than $1 million of that pertained to the A4 transaction and then the remaining $400,000 or so is an amount consistent with what you saw prior quarters, which pertains to prior transactions that we had done.

Okay, and then when you look at your guidance with respect to bookings, the -- the clinical software, 100%. What would it be just with TouchWorks? Are you still at your 40% level or a little bit higher?

No, we -- that contemplates the 40% guidance that we had previously given, kind of on the Allscripts stand alone basis.

Okay, so in the first quarter, you exceeded that sort of 40% target, just to be correct, right?

That is correct. Organic -- organic growth, bookings in the quarter, was actually just below 50% at 48.

Terrific. And then, Glen, one for you is I've heard you in the past talk about an 18-month window with respect to IDX deals that have been in some fashion in the pipeline. And you just now mentioned that you are working on new stuff. Are you seeing new IDX deals come into the pipeline?

Absolutely. What's happening again is large, large academic medical centers and the like look to see what people are using and what they're buying, and so every time we announce new agreements with academic medical centers, large IDMs and the like, that generates new interest. And from that perspective, we have a very good and very close working relationship with -- with our partners at IDX.

Okay. Thank you. I will jump back in.

Your next question is from Larry Marsh with Lehman Brothers.

Good afternoon, Glen and Bill. I will echo what Sandy said, thanks for all the details. I just want to make sure I understand, specifically on the guidance, Bill, first. Your cash earnings guidance is equivalent of EBITDA per share, I guess excluding any sort of one-time costs. Is that a way to look at it?

Yes, the two reconciling items to EBITDA would be one-time items as well as we are taking the cost of expected interest expense, as well.

Right, which would be -- I'm sorry, so the difference between that and EBITDA, you're saying you're actually taking -- you're including the cost of interest expense?

That is correct.

Okay. And then just to reiterate on the reconciliation in the quarter, you went through it, I missed it, I'm sorry. You're adding back 186 of other expense into your cash earnings number. The 186 is -- is broken down into what, exactly?

The 186 is -- there are actually two pieces there, one of which I explained. The 186 and then adding back to that, $118,000, we did record a realized loss in the quarter related to some liquidation of some marketable securities to be able to finance the -- or fund the A4 transaction. So if you take the 186 plus the 118, we're adding back that full 304 to our -- to our earnings to get to our cash earnings number.

Right. So -- oh, I see, interest income net of 304?

Yes.

Okay. All right. Secondly, then, the reduction in A4 deferred revenues, you mentioned $3.4 million, which would get you to total revenues in that segment of 165. You said there would be a -- a one-time reduction in deferred revenues in the second quarter? Or exactly how would that impact A4 revenues for this year?

The deferred revenue adjustment was actually 3.1 million. And what I indicated was is that we actually expected to impact each of the next three to four quarters in kind of varying amounts. It really will be a function as to when that deferred revenue is actually recognized into revenue. Just to give you a sense of that, the impact in -- in Q1, for the March performance, was about a $0.5 million. So we recognized 0.5 million of that 3.1 just in the month of March.

Okay. So, so -- right. Okay. So a couple million perhaps every quarter from A4 -- off of A4 revenues versus what you would otherwise see?

Yes, I don't think it will be -- I don't think it will be a couple of million. Again, it will be -- if you think about it -- if you think about the 3.1 million, less 0.5 million that we've already taken in the first, we have 2.6 million left over three to four quarters, would suggest something closer to three-quarters of a million to 1 million in any one particular quarter, but it could be slightly higher just depending on what's being recognized when.

Got it. Okay. I understand. Glen, maybe could you elaborate a little bit, you've made some comments about the A4 team early on in the presentation. I guess I wanted to elaborate a little bit about the -- I think one of the things you had said is you really wanted to beef up the sales force and some of the opportunities that they had in the marketplace. Could you elaborate on the number of salespeople that came on with A4? How you're planning on growing it? And then also just a little bit of elaboration on the tone of that smaller group market. I think one of your views is that the smaller group market was really accelerated over the next year or so. Just any sort of feedback you're getting from the marketplace since the transaction was completed in March and any change in tone of that -- of that segment of the market?

Sure. Well, first what I would tell you is that that is a segment of the market that we see starting to heat up in a very real sense, and it was part of the justification for moving forward and we've seen very strong acceptance of the A4 products. We're focused on two areas, one, increasing marketing. So for example, the QIO summit that I talked about is typical of the kinds of events we're going to do for the A4 base and we've already accelerated telemarketing. In fact, I was on the phone with David Bond, the president of that business unit this morning, and we were talking about how the number of leads is substantially up based on some of the new programs we have in place. We also have a hiring boot camp under way to bring on a combination of experienced and newer sales reps. We will grow that number from what was a base of about 35 to over 40 in the next, probably, 90 days and then we will continue to evaluate and grow -- grow it as necessary from there. So we expect to continue to invest in part because it's good investment. There is a lot of business out there and our marketing efforts will continue to generate it. So strong market for the products. It's a very strong well-received product. Marketing efforts will help and we will continue to hire. We've also got some very strong hails management there in our two Vice Presidents who run the sales efforts.

Okay. And one final question, I guess for Bill. When you announced and closed A4, you talked about their recognition of revenues being a little bit different than yours. You're communicating today a reduction -- setting up a deferred revenue item that will impact revenues of about $3.1 million for the remainder of this year. Any resolution in terms of how revenues will be booked in that business? Will it stay similar to what you saw when you first, when you first acquired it? Or will there be any changes going forward?

The short answer is that we intend to follow their established revenue recognition policies, which are much more traditional software revenue recognition and the conclusion was reached, principally due to the fact that their delivery and installation model is appreciably quicker than our TouchWorks solution. And so we feel that it's appropriate and couple that with the fact that they are addressing a different market than Allscripts historically has, that we feel that the two different revenue recognition policies for the various products are appropriate.

Okay. All right. I will stop there. Thanks.

Thank you.

Your next question is from Sean Wieland with Piper Jaffray.

Hey, guys. I'll echo my congratulations on the quarter. Fantastic job. Can you talk, Glen, about the impact that you see -- maybe CCHIT having on the market, both in front of that and when they publish the certifications and then after?

Yes. Sean, there's some feedback -- maybe -- thanks. In terms of CCHIT and the whole certification process, we're intimately involved in that. David Brailer has said that he'd like to get some of these -- some of these standards done prior to his departure so we continue to participate and watch. Overall, I think these will be helpful to Allscripts because they're going to essentially raise the minimum bar for being active in the space. I think they're going to be helpful.

Are customers looking at this and paying attention to this and will they base their selection criteria on what comes out of CCHIT?

We haven't seen that yet. We haven't seen much customer interest. My sense is that once people are either meeting the standards or not, then that will be a check off in the RFP process, but I continue to -- to kind of harp on the fact that the most important aspect is successful site visits. That's how customers make their decision and frankly it's even more important than price because when physicians get out, see it working and like it, they make the decision, then they tell someone else, typically, to negotiate. So having successful reference sites is the most important aspect. The standards will be kind of table stakes, but we're probably talking about at least a year -- a year off. We were some of the beta sites on those standards and we're continuing to help work on them.

Okay, great, thank you very much.

Thank you.

Your next question is from Corey Tobin of William Blair & Company.

Hi, Lee, Glen, Bill. Good afternoon.

Hey, Corey.

Hi, Corey.

Congrats on a great bookings quarter. On the bookings front, can you just comment on the other end of the -- of the funnel? Specifically, is the pipeline filling as fast as -- as the -- as the deals are closing at this point?

Corey, this is Glen. The answer to that is yes, we feel very confident in the pipeline and in our business development capabilities. Part of that is how good we are and frankly, part of that is the fact that the market is heating up at a very rapid rate. If you asked me 12 months ago, I probably wouldn't have said the less than 10 market would be moving as quickly as it is, but I think what you're seeing is all of the stakeholders in healthcare have come together to really start to push this very rapidly. We're seeing it across the board. We're seeing it in electronic prescribing, agreements that are getting signed, strong interest from managed care, strong interest from employers, and strong interest from the providers themselves. So we see it across the board. The pipeline is out there and again, my biggest concern is making sure we're in front of everybody, so we're in every kind of competition there is for new business.

And on the large deal size, Glen -- or on the large practice physician groups, rather, I've heard some rumblings that piece is getting more and more penetrated and at the same time, I guess more competitive as the hospital guys start reaching out, out of the hospital into the ambulatory space. Can you just comment on what kind of dynamics you're seeing, specifically in the large physician group space?

We see -- we've always segmented the market in three groups. Larger groups, 25 and above, we think that's about 30% penetrated and then anywhere from 10 to 25, about 15% penetrated, and less than 10, probably 3 to 5% penetrated. That said, in the larger groups, there's two dynamics going on. There is a tremendous amount of interest and my guess is that there's very few groups that aren't in some kind of process, either considering in a selection process, in the implementation process or the like. That said, there's a number of first-generation systems that are also looking to be replaced. So in some cases, we're talking with people who we wouldn't have assumed were candidates to buy a system because we thought they had one, but there was very little utilization and of the kind of first generation systems. And now what people are looking for and what we're guiding them to is how have you taken your costs down with these systems? There's also a number of systems out there that aren't web-based, which means they can't do the patient connectivity, they can't connect to Medem, and to personal health records. They can't do online scheduling and really have no place to go in the future. So we continue to see a lot of upside in that market and no signs of slowing.

Two other areas, if I could, real quick. On the integration front, can you give us a feeling for how far along the integration activities are versus your end goal, specifically with respect to all areas, but really with the focus on sales force and product line.

Well, in terms of product lines, today we are fully integrated so from that perspective, the products work together. TouchWorks, as I mentioned, we've sold, TouchWorks Practice Management, which is really the A4 product that has been stepped up and integrated, working with our TouchWorks suite of products. That said, integration is an ongoing process, so the basic integration is done, but we will continue to enhance those and make those work more and more closely together.

In terms of sales force integration, our sales forces are working very well together, keeping in mind that the focus is different, but we've already encountered cases where both our TouchWorks sales force and our HealthMatics sales force are in the same competition for business and in those cases, we work very cooperatively. So we are very, very comfortable with the level of integration there.

In terms of overall business integration, I think we've done a very nice job. I think we are continuing to work that, but day one, the basic stuff, e-mail, phones and all the basic operating stuff, was -- was again all done and completed and what was really pretty miraculous, given that this was a six-week process from start to finish.

Great. And then finally, on the sales force, what -- I didn't quite get this early, but can you just remind me, in total, how many salespeople do you have today and how many did you add with the A4 acquisition?

In terms of sales force today, we have about 70, and we expect that's going to grow on both sides of the equation. It will grow faster on the A4, the traditional A4 side, but we're also looking to add on the TouchWorks side of the business, as well.

How many people did you pick up from A4?

About half. They were about the same size as we were. So, about 35 -- 32, 33, on each side and we're continuing to hire. So figure 35 A4, 35 TouchWorks and we're both adding.

Okay, thank you.

Thank you.

Your next question comes from Atif Rahim with JP Morgan.

Hi, guys, thanks for the detail. Bill, could you comment on the contribution margin from A4's clinical software sales? And then secondly, the -- the convertible shares that will be coming into the diluted share count, just do a quick back of envelope compilation, that looks like sometime around 3Q now. Would that impact the 3Q calculation for the share count or would it be pushed to the third quarter, would it come into the fourth quarter calculation? Thanks.

Relative to the contribution margin, again, absent the deferred revenue adjustment, that I described before and absent some of the integration costs, we still think about the EBITDA level, anyway, being kind of in that 20% range that I talked about on prior calls. So I'm not -- I'm not going to move off of that, but I would highlight those two considerations as you think about '06 performance. Again, the deferred revenue and then the integration cost of the $1 million that I outlined. The -- relative to the diluted shares or the convertible debt shares, I haven't provided quarterly guidance for -- for this year, so, I -- I'd like to not respond to kind of the Q3 versus Q4 consideration, but to say, again, based on our calculations, in such time that you see about $0.07 per share on a quarterly basis then they would, in fact, work their way into our diluted number of share count. And again, I'd prefer not to comment on whether that's Q3 or Q4.

Okay, but it would be the quarter following the $0.07 EPS?

It would be -- it would be the quarter in which you actually had $0.07 of EPS.

Okay. And then on the contribution margin, I was looking more toward the gross margin impact, if that would be possible?

Okay, gross margins, there too, what I've talked about in the past, again, we have not changed our perspective on that. It's kind of low to mid-50s. And so as I gave -- as I gave kind of overall clinical software businesses, gross margins of high 50s, it's taking that into consideration with what we've experienced in the TouchWorks, our clinical solutions side of the business.

Okay, that's perfect. Thanks.

Your next question comes from Gene Mannheimer with Caris & Company.

Good afternoon, nice quarter. Can you tell me, on the -- on the Mercy deal, nice job on that in Baltimore. Can you talk a little bit about the competitive environment in which you won that piece of business?

Sure, this is -- this is Glen. Relative to Mercy, I think there we're generally looking at a few things. One, you're looking at a solution from the existing provider and in -- in Mercy's case, it was Micis. So there the primary competition was coming from the Micis EMR. They went out and they evaluated not only Micis, but a number of other players. You would have assumed that Micis, because they were already the practice management system, would have had an in there, but we were successful. I would add with Mercy, it's very interesting because after the A4 acquisition, we received a note from them saying hey, your timing was perfect because we're also in the market to look for both care management and emergency department. So that's where the leverage across products comes in, but in a group like that, it's 100 physicians and I think they're really looking for strong, strong capacity and again, looking for big reference sites. So they had attended our executive summits and, again, just had great competitive environment there, but we were fortunate to win it.

Good, thanks, Glen. And can you talk about what revenue, if any, was generated through e-prescribing during the quarter?

Yes, this is Bill. We typically have not broken that out in terms of quarterly performance. So I'd like to kind of defer on that and talk about it on a -- on more of an annual basis, which we typically do. With that said, we are very encouraged or continue to be very encouraged by the interest that has been expressed on the managed care side of the organization and I think we talked about it in prior quarters. We actually set up a separate business unit to focus on those initiatives at the beginning of this year and we're very pleased with both the pipeline, as well as some recent conversions that we've seen in that piece of the business.

I'd just add, Scott Leisher, who used to run our sales force and then moved over to set up our national accounts group has actually moved over to run the e-prescribing business units. I think it gives you a sense of how important we think that is. In addition, we've just brought on a second person from the managed care world in a full-time sales capability there -- or capacity there. So, again, I think those are important for us because not only do they put our software in the hands of a variety of people, physicians and others in a funded capacity, but increasingly that's also leading to agreements that are full electronic health record agreements and also that lead into our HealthMatics Practice Management offerings.

Okay, thank you again.

Why don't we take maybe two more questions and then we'll wrap it up. I know we're already over an hour and we could talk about this for a long time, but some of you, we promised we'd try to keep it to a reasonable timeframe.

Your next question comes from Greg Haddad with First Analysis.

Thanks for taking my question. With respect to the Physicians Interactive Information Services business, it looks like the revenue there was somewhat below your target growth rate for the year. Any additional perspective that you can provide on that?

I would simply say that it actually was in line with our own internal expectations. I did try to condition the market for the fact that I viewed Q4 as being a little bit of an anomaly both from a revenue and a gross margin percentage perspective. We are very encouraged by the fact that that business, we're seeing increasing interest in platform sales and that's where these large pharma companies are, in effect, buying the technology for a specified period of time to be able to run as many e-detailing sessions as they would like off of that. And those have longer term revenue recognition periods because we're going to take that revenue over the contracted period for the platform. So we, again, as I stated before, still very confident in the 25 to 30% overall growth rate and so you can expect you're going to see continued acceleration in that business over the course of the year.

Great. Thanks for the perspective.

And your final question comes from F.L. Kirby with Morgan Stanley.

Hi, guys, it's Peter DuBois.

Hi, Peter.

Question, could you guys comment on where the e-prescribing market is and what we should expect?

Yes, I think just to -- to kind of restate what I was saying before, we believe the e-prescribing market is going to be driven -- continue to be driven by managed care organizations and PBMs who increasingly understand that using technology is a very important way to get the right kind of prescribing from physicians and also to prevent a lot of the -- the errors and drug interactions that have happened. So we've seen, after trying all kinds of different techniques after the fact, we've seen real interest from managed care organizations across the country in promoting it and we believe we're now front and center in most of those agreements across the country, in terms of either competing for them or being right in the mix in that business. I mentioned before on these calls that we would be announcing deals. I would continue to say that I'm highly confident that you can expect to see additional announcements coming out where Allscripts has one funded deals from these different managed care organizations.

Is the government going to mandate certain percentages of their prescriptions to be delivered electronically?

Well, there are a number of different pieces of legislation out there that require Medicare and Medicaid kinds of programs, that have mandatory requirements in them, but again, what I would tell you is that well in advance of when any of those requirements would take place, we think the market is going to be driven by the economic and commercial interests of employers, payors and the like because they just can't -- no one can bear the healthcare burden that we have today and so consequently we're going to do what every other industry in the United States has done, and that is use technology to reduce costs and improve quality.

Excellent. Thank you very much and great job, guys.

Okay, well, thank you. Well, I know there's additional questions in the queue. I think there's a long list of them, but we are going to cut it off at this point. I want to reiterate what I said when I opened the call and tha is that we believe this was a very exciting and strong quarter for Allscripts, not only from our results, but from the strategic actions that we took with the acquisition of A4. It gave us a broader product line, it helped to expand our sales force and I think you're going to see a lot of cross-selling that goes on over the next 12 to 24 months. So it's an exciting time for the Company. We expect to continue to work hard and fulfill our objective of being indispensable to physicians. We appreciate all of your support. We appreciate the great support of our clients and last but not least, all of our employees who make it happen everyday. So thanks very much and we will talk to you next quarter.

Ladies and gentlemen, thank you for participating in today's first quarter 2006 earnings conference call. That does conclude today's conference. You may now disconnect.