Veradigm Inc (MDRX) 2006 Q2 法說會逐字稿

Good afternoon. My name is Loquisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts second quarter 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 would now like to turn the call over to Mr. Glen Tullman, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you, Loquisha. I want to welcome everyone to the Allscripts second quarter 2006 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. I'm excited to share with you our results for the second quarter, but before we get started I will ask Bill to read our Safe Harbor statement. Bill?

The statements made by Allscripts or representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts' management as well 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, future events, changed circumstances, or any other reason after the date of this release.

With that said, I'd like to turn the call back over to our CEO, Glen Tullman.

Thanks, Bill.

The second quarter was one of the strongest quarters in Allscripts's history, not just because of our solid financial results but also because of the operational and strategic objectives we accomplished. Our challenge each quarter, no different than other fast-growing companies, is to deliver on our financial objectives while at the same time investing in our business to prepare for the future. This quarter demonstrated that we are hitting on all cylinders, and I want to thank our people for really coming through.

During my comments today, I will highlight our financial results, update you on the status of the integration of our A4 acquisition, and discuss where we are today. What I think of as being in the right place at the right time with the right products.

So let me begin with the financial results. I'm pleased to report another quarter of strong sales growth, solid operating performance, and the resulting bottom line EPS of $0.05 with a cash EPS of $0.18. Total revenues were a record 60 million, including $46.7 million from software and related services, coming principally from sales of our TouchWorks Electronic Health Record and our HealthMatics Electronic Health Record and Practice Management systems. This represents growth of approximately 190% over the second quarter of 2005.

While Bill will provide more detail, the business is performing at a level that provides us with solid visibility heading into the second half of the year. Given that we draw much, but not all, of our revenue from our backlog, our level of confidence in delivering increases each quarter. A second discussion topic is our progress with our A4 Health Systems acquisition.

When we announced the purchase of A4, I characterized it as a perfect acquisition for us, not only from the perspective of broadening our product offering, but also because our cultures were similar and A4 had great people. This was the first full quarter of our businesses coming together, and under the leadership of David Bond, his team has made solid progress and met the objectives we set out together. I couldn't be more pleased with our progress. The most important message I can deliver to our investors is that the transition is now complete. And our focus as an organization is exactly where it should be, on the opportunity in the market.

And I'm pleased to report that the demand for our entire portfolio of software solutions has never been stronger. As I said, I characterize our position today as being in the right place at the right time with the right products. It's clear that the right place to be in health care today is in the ambulatory sector, which is where the physicians are and where most health care gets delivered.

You've heard me say it before-- decisions made by physicians account for approximately 80% of the $2.2 trillion that CMS estimates -- estimates will be spent on health care in 2006. And physicians spend about 90% of their time in the clinic or at their offices, so if you want to become indispensable to physicians, you need to focus on delivering easy-to-use software and information services in physician offices. That's what we do.

This is also the right time. The market for electronic health records has tipped and physician practices are buying. The urgency is fueled by a realization that our solutions are an absolute necessity in the practice of medicine today. And this message is being reinforced everywhere you look.

For example, on July 20th, medication errors, once again, became front-page news when the Institute of Medicine issued a new report that concluded more than 1.5 million people are injured each year by medication errors. The IOM said that a big part of the solution is electronic prescribing, and called for universal adoption of electronic prescribing by 2010.

In Illinois, where Allscripts is headquartered, Governor Rod Blagojevich last month signed an executive order calling for 100% electronic prescriptions in the state by 2011. In California, Governor Schwarzenegger signed an executive order directing state agency leaders to develop plans for spending at least $240 million to expand medical record technology. And just today, as you may have seen, Health and Human Services Secretary Michael Leavitt announced final regulations that will support physician adoption of electronic prescribing and electronic health records technology. We expect these developments, other state initiatives, as well as similar efforts at the federal level, to continue to increase demand across the market for all of our products.

And it is not only the government taking a stand, but health plans as well. One tangible example is the impact that managed care is having on the adoption of our e-prescribing solutions, either stand-alone or as part of our Electronic Health Records. In fact, Southwest Medical Associates of Las Vegas, a subsidiary of publicly traded Sierra Health, Nevada's largest managed care organization, and also one of the state's largest providers, has not only improved patient safety with our e-prescribing solutions, but is also realizing substantial and measurable financial gains. Sierra is saving close to $5 million a year using our TouchWorks Electronic Health Record to drive greater physician utilization of appropriate medications.

That's nearly 8% of Southwest Medical's annual drug spend, a huge number by any standard, and one that we think will get the attention of other managed care groups across the nation. Sierra is also funding a state-wide e-prescribing initiative, and Sierra is just one of many examples. In fact, physicians using our software accounted for one-third of the 30 winners of the prestigious [Sure-x] award, from the National Association of Chain Drug Stores, the National Community Pharmacist Association, and SureScripts. So it's clear that we're in the right place at the right time, but we also have the right products.

In fact, the truth of that statement was certified just two weeks ago in Washington, D.C., when we participated in what Secretary Leavitt called the most important event in Health Care IT. The announcement by Secretary Leavitt of the first federally-sponsored certification of electronic health records took place at one of our leading clients, George Washington University Medical Faculty Associates. The Certification Commission for Healthcare Information Technology, or CCHIT, gave its seal of approval to 18 electronic health record products. Allscripts was the only vendor to receive certification for two electronic health records with both our TouchWorks EHR and our HealthMatics EHR being certified.

I should note that CCHIT certified two additional systems after the initial announcement. In fact, Secretary Leavitt stated that CMS will consider CCHIT certification a prerequisite for participation in federal contracts, such as potential pay for performance or pay for quality initiatives. And while 20 seems like a lot, remember that many people claim there were hundreds of EHRs, and this narrows the playing field and makes it easier for medical groups who are in the market for an EHR to choose one. In fact, some well-known systems haven't been certified, which provides immediate competitive advantage for our sales force.

Now, being at the right place at the right time with the right products sets the stage, but you still have to perform. I want to highlight three client sales from this quarter to demonstrate just how we're delivering on the promise. Beginning with our Clinical Solutions Group, earlier today we announced the largest TouchWorks agreement in Allscripts history. A $6 million contract with Novant Health, the North Carolina integrated health care system for their nearly 600 physicians.

The Novant deal also includes a separate commitment for the IDX GE Practice Management system, and we work closely with IDX to make it happen. Winning against Epic demonstrates the continued strength of the combined Allscripts-IDX GE offering at the largest healthcare systems. Our TouchWorks team, under the capable leadership of Laurie McGraw, is not only selling but performing across the board. Thanks, Laurie.

Another record setting win and one that, again, demonstrates the value of our merger last quarter with A4 comes from the integration and upsizing of A4's Practice Management System into TouchWorks, allowing us to directly offer an integrated TouchWorks Electronic Health Record and Practice Management Solution. Today we announced the largest sale ever of TouchWorks Practice Management to Healthcare Partners Medical Group, a 400-physician multi-specialty group in the Los Angeles area. You have heard me talk about Healthcare Partners on two other occasions. First, when they signed an agreement to buy our TouchWorks Electronic Health Record for all of their employed physicians, and more recently upon their successful implementation of TouchWorks across their enterprise.

It was one of our largest and fastest deployments ever, and it demonstrates what an organization with visionary leadership, great administration, and world-class physicians can do if they put their mind to it. Healthcare Partners also has an independent practice association of more than 2,000 physicians. This second quarter sale, valued at more than $1 million, is a working partnership, wherein Healthcare Partners will host TouchWorks Practice Management for their affiliated physicians, using it to connect with their community physicians to drive coordinated care.

What Healthcare Partners is doing is essentially creating a virtual [reel] and they will provide connectivity and two-way access to information across their physicians, both employed and independent, and across their community as they connect to other industry stakeholders and even other electronic health records. We have agreed, working with Healthcare Partners, to full interoperability. This is really a ground breaking development and one we're looking forward on working together.

Today, we also announced another significant contract for our HealthMatics ED Emergency Department Information System. This sale to Eastern Connecticut Health Network of Manchester, for $1.5 million, tops the list of several other major sales of HealthMatics ED during the quarter, and will help the two-hospital Connecticut system better manage their 65,000 annual emergency department visits, and connect with local physician groups, exchanging information in a way never before possible. We see our ability to connect key stakeholders as a key strategic advantage.

Now, while much of the attention related to Allscripts is on our Clinical Solutions Group, in the second quarter we made solid progress across all of our business units. Bill will provide greater detail, but I am encouraged by the positive response that our Canopy Care Management Solution is receiving, having posted a record quarter; and the new products they are introducing which allow hospitals to electronically communicate clinical reviews to payers and discharges to physicians.

I'm also pleased with the strong interest our Physicians Interactive Group is receiving on its new enterprise platform. The platform extends beyond e-detailing and is integrated into how our clients do business. We expect to announce platform agreements in the next 60 days.

Finally, our Medications Services Group delivered on our plan in the second quarter, adding quality recurring revenues; and this business continues to be a strong contributor to our bottom line. As you can tell, these are exciting times at Allscripts.

I am now going to turn this call over to Bill to cover our financials and provide a look at our guidance for the remainder of 2006. Bill?

Thanks, Glen.

As Glen indicated, our second quarter was marked with several significant accomplishments including our integration of A4 Health Systems and strong financial performance from all of our businesses. So this afternoon, I will review some of our accomplishments in the quarter and then provide a quick update on the balance of 2006.

Turning first to some key highlights of the quarter. Our total revenue of $60 million represents 103% increase over Q2 of 2005, and a 42% increase over the first quarter of this year. This sequential growth was led by 65% growth in our clinical software businesses. Our gross margin percentage increased to 52% from 48% in the first quarter of this year, and 47% in the second quarter of last year. Such improvement is indicative of the significant contribution from our clinical software businesses. In part, due to the second quarter representing the first full quarter of A4 Health Systems being included in our consolidated results. Cash earnings were 9.8 million, or $0.18 per diluted share in the second quarter.

This compares to $0.08 per share in Q2 of last year, and $0.13 per share in the first quarter of this year. GAAP net income for the quarter was 2.8 million or $0.05 per share, compared to $0.05 per share in the second quarter of last year, and $0.03 per share in the first quarter. Clinical software bookings were 40.2 million, representing a 202% increase over the second quarter of 2005. A4 contributed approximately 17.8 million of those bookings in the quarter. We also generated approximately $3 million in cash flows from operations during the second quarter.

Turning now to a more detailed look at our Q2 performance. Total bookings during the quarter were approximately 42.9 million. Consistent with prior quarters, bookings do not take into consideration the 10.5 million of sales in medications. Our 42.9 million in bookings compares to 17.2 million of bookings in Q2 of 2005 and 31.2 million in bookings in the first quarter of this year. Our clinical software businesses, again, contributed 40.2 million in the bookings during the quarter and this excludes ongoing support. This compares to 13.3 million in the second quarter of last year. As previously indicated, our second quarter bookings included approximately 17.8 million from A4.

Taking that into consideration, our organic, or non-A4, growth was approximately 68% when you compare Q2 bookings to the same period last year. Our physicians interactive business had bookings during the quarter of 2.8 million. Such amount was below our expectations, but is reflective of certain sales slipping into the third quarter. Bookings for the first six months of 2006 totaled 74.1 million. Our clinical software businesses contributed approximately 67.3 million of such year to date amount, representing 139% year-over-year growth. Our organic clinical software bookings growth was approximately 58% when compared to the first six months of last year.

Turning now to backlog. We ended the second quarter with 167.9 million in sold backlog. The backlog break out is as follows-- license and service fees related to our clinical software businesses constitutes 87.9 million of the balance; software subscriptions, which we would expect to recognize over the next three to five years, makes up 27 million of the balance; support and maintenance fees for the next 12 months represents 39.7 million; and then physicians interactive makes up the balance at 13.3 million, again for a total of 167.9 million.

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 reoccurring in nature. We continue to be encouraged by our momentum in backlog and unique visibility in part due to our revenue recognition practices it provides us as we look forward to the balance of 2006.

Turning now to revenue. Our second quarter revenue of 60 million increased by 30.5 million or 103% over the second quarter of last year. Our clinical software businesses contributed 30.6 million to that increase, representing approximately 190% year-over-year growth. A4 contributed approximately 23.4 million of that 30.6 million increase. The remaining 7.2 million increase represents 45% organic growth for our clinical software businesses.

Please note that as we continue to integrate these two businesses, and we have more opportunities to cross-sell into the two respective customer bases, breaking out the respective results for A4 and the rest of the clinical software businesses will become less meaningful. The previously mentioned practice management sale to Healthcare Partners is a good example of such cross-selling opportunities.

As such, we will evaluate such separate disclosure on a go-forward basis, but for modelling purposes I do encourage you to start thinking about our clinical software businesses on a combined basis. Physicians interactive revenue of 2.8 million in the second quarter compares to 1.9 million in the second quarter of last year, representing a 45% increase. We expect continued growth in PI over the balance of the year, and as such, we 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 of revenue of 10.5 million. This compares to 11.5 million in both the second quarter of last year and the first quarter of this year. Please note that Q1 revenue included approximately $500,000 of Tamiflu sales that did not reoccur in the second quarter. In terms of revenue mix, our software and related services segment represented approximately 78% of our total revenue in the second quarter. This is up from approximately 67% in the first quarter. The increase in revenue mix also reflects the fact that Q2 represents the first full quarter of financial results for A4 being included in our consolidated results.

Second quarter revenue by segment is as follows-- our meds distribution business delivered 10.5 million, or 17% of our revenue; clinical software delivered 46.7 or 78% of the revenue; and then finally information services delivered the balance at 2.8 million for 60 million in total. Total revenue for the first half of the year was 102 million -- 102.2 million. This compares to 55.7 million for the same period in 2005 and represents an 83% increase. Our clinical software businesses have increased from 30.5 million for the first six months of 2005 to 75.1 million in 2006, a 146% increase and 43% organic growth.

Looking now to gross margins. Overall our gross margin was 52% in the second quarter versus 48% in the first quarter of this year and 47% in the second quarter of 2005. The sequential improvement came primarily as a result of software and related services revenue representing a larger percentage of our total revenue. Margins by segment were as follows-- our medication business delivered margins of 17%; our clinical software business delivered margins of 60%; and physicians interactive, our information services segment, delivered 45%; again for a total of 52.

I want to reiterate what I have 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 to continue to be in the mid to high teens. Both will fluctuate a bit based on the mix of revenue in any particular quarter. With regard to our software and related services business, we continue to expect gross margins to be in the high 50s, due to the combination of A4 and Allscripts clinical software results.

Turning now to expenses. Operating expenses, excluding amortization and stock-based compensation for the quarter, were 22.7 million, reflective of A4 being part of our operating results for the full quarter. To update guidance I gave on last quarter's call, operating expenses are running slightly ahead of plan due to the better-than-expected revenue which has resulted in incremental variable cost in areas like commissions and incentive compensation.

My expectation is that operating expenses, excluding stock-based compensation and deal-related amortization, will track closer to 23 to 24 million per quarter for the balance of the year. With regards to stock-based compensation, we recorded approximately 400,000 for the quarter. And deal-related amortization was approximately 3.3 million, both of which are consistent with what we indicated they would be on last quarter's call.

Total capitalize software in the quarter was 2.1 million. This amount compares to 1.4 million we capitalized in the first quarter and is reflective of the progress we have made on 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 the product development cycle. Net interest expense was approximately $300,000 in the quarter. The anticipated change to a net interest expense position is reflective of the reduction in cash and marketable securities used to fund our A4 transaction in March.

Net income for the quarter was 2.8 million or $0.05 per diluted share. This compares to 1.3 million or $0.03 per share in the first quarter of this year and 2 million or $0.05 per share in the second quarter of last year. Please note, the net income for Q1 and Q2 of this year reflects stock-based compensation resulting from the adoption of the new accounting rules that went into effect on January 1st, and a full tax provision at 38%, even though we do not anticipate paying taxes prior to 2008.

As highlighted last quarter, we believe another important performance metric is cash earnings or cash earnings per share. We define cash earnings as net income giving effect to the add back of depreciation and amortization, stock-based compensation, provision for income taxes, as well as A4-related transactional expenses that we encountered in the first quarter of this year. It's important to note that that definition is consistent with what we outlined to the market last quarter. Our cash earnings in Q2 were 9.8 million or $0.18 per diluted share. This compares to 6.4 million or $0.13 per share in Q1 and 3.6 million or $0.08 per share in Q2 of last year. Please note that our cash earnings per share computation relies on the same diluted share count used for GAAP purposes.

To that end, basic shares outstanding for the quarter were 52.2 million, and diluted shares were 55.3 million shares. The 7.3 million shares issuable under our convertible debt offering continued to be anti-dilutive to our GAAP earnings per share, and therefore have been excluded from our diluted computations. Net income for the six months of 2006 was 4.2 million or $0.08 per diluted share. Year-to-date cash earnings were 16.2 million or $0.31 per diluted share, representing a 9.7 million or 149% increase over the same six-month period last year. With regard to overall headcount, we ended the quarter with approximately 864 employees which compares to the 825 we reported in the first quarter.

Turning now to our balance sheet. We ended the quarter with 65.8 million in cash and marketable securities. This is reflective of us generating approximately 3 million in cash from operations in the quarter and 1.3 million of cash from option proceeds and other investing activities. Such inflows of cash were offset by approximately 1.8 million in final payments related to our A4 acquisition and 3.5 million of capital expenditures and capitalized software. Accounts receivable at June 30th remained fairly consistent at 44.6 million, which resulted in days sales outstanding of approximately 67 days, a 2 day improvement over the first quarter.

Finally, as it relates to our outlook for the balance of 2006, we continue to execute against the plan we laid out for you earlier this year. As such, we are still comfortable with the GAAP earnings per share guidance of $0.20 to $0.22 per diluted share and 70 to 72 per share on cash earnings per share basis.

In summary, we are very encouraged by our accomplishments in the second quarter, and we are even more excited about the prospect of sustained profitable growth in the future. We are well-positioned, in part due to our exemplary product offerings, our team and a strong financial position to capitalize on the substantial opportunity that exists in all of our markets.

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

Thanks, Bill. Let me close with just a few comments. Our financial success, which you just highlighted. is very exciting. I believe that we're in the right place at the right time with the right products. Now it's all about execution, which is what we're good at; that is, working directly with physicians.

We're proving that every day as we deploy systems. So as you might imagine, our people are at the core of our success, and I want to thank them for their continued efforts, thank our clients, and our investors for your continued confidence in us. So with that, I want to thank you all for joining us today for your time, your continued support, and we'd now like to take your questions.

[OPERATOR INSTRUCTIONS]. George Hill, Leerink Swann.

I'd like to delve into A4 a little bit more. Can you maybe talk about the percentage of new bookings that came from the emergency department products versus the physician practice product and can you talk about the progress you guys have made on profitability in that segment?

Sure, George, this is Bill. I provided bookings break-out of 17.8 million of our total clinical software bookings of 40.2 million that were attributable to the combined A4 businesses. Consistent with prior quarter, I've not taken that breakdown any further, and so I would just refer you back to that 17.8 million.

Relative to the profitability of the A4 business, if you recall, we talked about last year, it's a business that's operating around -- little over 20% EBITDA kind of levels and they continued to operate at that level, if not slightly better than that.

Okay. And just one more, with -- with you guys maintaining the guidance, I'm just wondering were there any deals in Q2 that were pulled forward that you might have expected to close later in the year, which is why guidance isn't changing given the strength of the quarter?

No. It's -- again, recognizing that our revenue recognition is what it is, and so our ability to pull that through from revenue, is a function -- it's going to take some time. And it's for that reason that at this point we're comfortable staying with the guidance we provided previously.

Okay. I'll hop back into the queue. Thanks.

Alex Alvarez, Goldman Sachs.

Good evening. Bill, I was hoping you could dig a little deeper into the clinical software margin, which is relatively strong, especially if you consider that there's a new mix there of lower margin revenue from the A4 Solutions. Were there any other factors besides the higher-than-expected revenue that benefited the margin?

Yes. The only -- the only other consideration that I'd point to is that hardware represented a slightly lower percentage of our total revenue in the quarter and hardware tends to be kind of lower gross margin then certainly our software and related services, so I'd point you to a slight mix variance there from a hardware perspective, but other than that, it really is a function of the strong revenue.

All right. Thank you. And, Glen, you referenced the IOM report from last month along with some of the government efforts to increase the use of IT, based on your conversations with customers, how important are these types of announcements in terms of influencing their purchasing decision?

I think that, as I mentioned in my comments, everywhere that our clients look they're getting pushed, whether it's managed care providers, whether it's employers, whether it's the government, and all that does have an impact on pushing them along to buy.

What's unique about some of the recently announced -- some of the statements made by Secretary Leavitt today, for example, is that it now opens up some potential funding for some of our clients and, again, when you look at the hurdles, one of the hurdles has always been financial. So we do believe that all of the -- all of the statements, all of the excitement, all of the push around this is going to translate into sales.

All right. Thank you.

Corey Tobin, William Blair & Company.

Hi, good afternoon. Very nice quarter. I wanted to just ask a couple of quick questions regarding visibility. Can you comment at all -- it seems like the visibility levels, just based on how strong the backlog was this quarter, should be at a very high degree. I just want to get your thoughts on if that is the case, and how you feel regarding visibility, particularly in the A4 division?

Yes, we would echo your sentiments that we do have unique positive visibility by virtue of the amount of backlog that we're carrying from one quarter to the next. And as I've talked about in prior quarters, why we think we're uniquely positioned in terms of the level of confidence we have in the guidance that we've provided. That does -- that does change a bit when you think about A4 in the sense that, their revenue recognition model is much more traditional software revenue recognition, and so movement from bookings to revenue much quicker than what we've experienced historically on the TouchWorks side.

But with that said, have a very strong pipeline in that business; and the demand is very strong for the product offerings in that business, so we expect strong things or good things for them for the balance of the year.

I would say overall our level of confidence is very high in being able to deliver.

Excellent. Great to hear. And then, on the delivery point, do you feel there's any capacity constraints with respect to being able to implement all of these systems that you sold, or have you been able to ramp your organization fast enough to keep up with the demand?

As you heard Bill mentioned, the number of people that we're hiring, we think -- we tend to be pretty conservative about that, so we are trying to stay ahead of the curve as we've done in the past. I think some of the investments that we've made in the past are now giving us more capability. Second, to the extent we need to, we have some third-party partners who can assist in the implementation process. And so from that standpoint that can be helpful.

And last, but not least, we have a -- an internal focus, kind of a Six Sigma process for delivering and implementing the software; and that has substantially cut the amount of time it takes us to deliver and to some extent the cost of delivering, which gets translated to our clients. So all those factors lead us to believe that we're in good shape and we can deliver on the installs that we need to deliver on.

Great. And then just one last housekeeping question if I could. Bill, any change to the outlook with respect to either stock compensation expense going forward or amortization expense going forward from last quarter's guidance?

No. We're still comfortable with that guidance. And just to reiterate it, stock-based compensation for the full year we expect to be in the 2 to $2.5 million range, and the $1.1 million of monthly amortization will taper in the latter part of Q3 as the amount ascribed to the backlog value will have been completely amortized. So I believe that 1.1 drops down to something closer to $900,000 on a monthly basis towards the tail end of Q3.

Just while we're on -- while we're on the topic, I'm assuming there's no change in the bookings outlook either for the full year. I think it was 40% in the TouchWorks business and is that --

Yes. I mean, candidly, what we'd like to see where Q3 comes out before we were to move off the guidance we provided there.

Great. Thanks. Congratulations again.

Thank you.

Thank you.

Atif Rahim, J.P. Morgan.

Thanks, guys. Quick question, if you could comment on what percentage of your clinical software bookings for TouchWorks came from IDX, that would be great. And then secondly, how do you feel the stock [lay] exemption affects you competitively? Do you feel you are better positioned than some of our other vendors who perhaps participate in both the inpatient and outpatient market and claim that they have a better offering to hospitals?

I'll -- this is Bill. I'll answer the first question. IDX as it relates to the TouchWorks bookings in the quarter, they represented something close to 75% of the quarter's bookings, which is relatively consistent with what we've seen over the last couple of quarters.

And relative to the second question, when Secretary Leavitt described the final regulations today, he talked about supporting physician adoption of electronic prescribe and electronic health records. And if you think that through, we think overall it's going to be very beneficial to our overall business. From an electronic prescribing standpoint, that can now be fully funded and provided by hospitals, plans and the like, and virtually all the hospital-based systems don't have the ability to separately provide that. So that's a great on-ramp to the electronic highway.

The second piece, the electronic health record piece, again, we've seen this consistently that operating in an ambulatory environment in smaller, mid-size, even larger practices outside of the hospital, is fundamentally different than providing software inside the four walls of the hospital. And so we don't believe that that will be a disadvantage. In fact, again, we see this as very favorable to our continued expansion and growth of the system. Last, but not least, if you look at someone like Healthcare Partners, that's a perfect example of a large provider or even Sierra is a better example.

Both of these -- Sierra has hospitals, they're a managed-care plan, and yet they've already rolled out and funded e-prescribing for the entire state of Nevada. Every doc in the state of Nevada can get our software at no charge, and that's Sierra in cooperation with the Clark County Medical Society. So we get paid for it, but the doctors get it at no cost.

Okay. Thanks. Could you perhaps provide any clarity on that. What percentage of your new bookings came from third party payers, Sierra, for example. Is that a growing percentage directionally or how do you see that going out?

Well, what we -- we have said generally is that we expect to continue to announce agreements with managed-care providers and payers for helping to fund our software, and one example of that is the press release we did on June 16th with Blue Cross/Blue Shield in North Carolina where they agreed to fund 500 physicians throughout the state of North Carolina. There they're giving physicians not only our software, but also PDAs and funding the wireless network, so they can encourage rapid adoption of the technology.

So you're going to see those on what's increasing -- increasingly a regular basis. I don't think we've given any separate guidance, and I wouldn't expect we would because so much of this is co-mingled. I don't think we got it separately other than to say that this is yet another factor that makes us more and more confident in our numbers and in where this business is headed.

That's great. Thank you.

Richard Close, Jefferies & Co.

Yes, congratulations. I'm going to hit you with some quick ones here. Sales cycle, is it shorter, longer today, any comment there?

Yes. I think as Bill mentioned, first of all, we have to talk about multiple sales cycles because in TouchWorks, my -- my view is that it's coming down just slightly. In the -- what used to be the A4 business, what we now call our HealthMatics group, in that area, what we've seen is a pretty rapid sales cycle, and that is sales get made and in many cases implemented in the same quarter. So from that perspective, as you move to smaller physician groups, it's a much more rapid sales cycle, but across the board, the sales cycle is starting to speed up.

Certification, I think, may also help to speed that cycle, because there's going to be less vendors to assess. It's very difficult to imagine someone selecting a software system that's not certified today.

Okay. How about any commentary on your win rate in competitive situations? Do you think that's -- your win rate's increased, flat?

We haven't seen -- we see a very high win rate. When we compete in the -- in the 25 and above sector, and I think it's been pretty consistent below that, we expect that to change. You will recall that up until our acquisition of A4, we were kind of competing with one hand tied behind our back in the small and mid-market, because we did not have an integrated offering.

Now, in the mid-market, we have TouchWorks EHR and TouchWorks PM, which is the electronic health record and practice management, and we also have a very strong offering in our HealthMatics offering. So in mid-market and smaller market pretty much across the board we have offerings that are highly competitive.

Do you have a percentage on the win rate, or have you guys ever released that?

No. No, the only win rate percentage we've had -- we've released and we've talked about is in the IDX base where we've said that we're winning 85 to 90% of the time, and I don't think that's changed. And again, I think if you look at what happened this quarter, again, very large deals have us continuing to work closely with IDX to win those deals.

And I was wondering, you mentioned the practice management software deal, I guess with Partners out there, you had mentioned subscription. How does that come to you guys in terms of revenue, if you could walk us through that contract?

Yes. If I said subscription -- I don't think I did, but if I did, that was probably in error there. This is a license agreement. What they will be doing is providing it to their IPA docs and they may provide it in a variety of different ways. They will provide a hosted model. So they will be hosting it for those physicians. But that, frankly, is one step away from us. We're -- our client in this case is Healthcare Partners. And just to be clear, it's not Partners, it's Healthcare Partners out in L.A..

Okay. And then final question, you mentioned I guess a competitive win with -- against Epic. Are you seeing -- are you going head-to-head against Epic more often, and maybe any commentary on Cerner and McKesson's presence?

Did I -- did I mention Epic? Oh, maybe I did. In terms of Epic, I would say they are -- and this is consistent, in the high-end space, Epic is our primary competition and wherever we run into Epic it's always -- it's always tough competition. So that's where we see them. We haven't seen much from Cerner or much from McKesson or, frankly, anyone else in that space.

When you're in the very large space a few hundred docs, people want safety. They want to see a lot of reference sites and they want to know it's going to work. And we've been able to deliver that. Again, you're talking about millions of transactions and prescriptions written and lots of very large sites as reference sites. So our customers want a safe choice and typically they find that. So we haven't seen the other two players in the market.

All right. Thanks, congrats.

Thank you.

Sandy Draper, JMP Securities.

Thanks. And first let me say, Glen, congratulations on being one of the few public companies who seems to be able to beat Epic these days. My question is for Bill on two points. One, just going back on the gross margin questions, is there anything -- you didn't change the guidance there. You obviously said you had a good software mix, you're selling a lot of software.

Is there anything that would lead you to believe that you're going to start selling more hardware that should drive the margin down, or if A4 starts selling more that it would bring the margins down? Or is this really just taking a conservative stance? We need another quarter or two before you really want to change anything about guidance?

Yes. I would say it's the latter. I mean, I just -- I don't want to bank on the fact that the mix that we saw in Q2 is indicative of what we expect going forward and so we're holding true to what we've modeled for the year which again suggests kind of high 50s. And I just -- I didn't want the market to come back a quarter later saying what happened. And I'm just -- I'm not declaring it an aberration yet, but at the same time I think it's prudent to keep guidance where we set it.

Okay. And then one follow-up. On the software side, if there's any place -- trying to find a place where there may be -- the trim wasn't as strong on the software subscription line your backlog was flat. Can you just sort of walk me through that? And also, I'm just trying to recall what caused the software subscription line to jump up so much 1Q from 4Q? And if it's something from A4, what were they bringing more on the software subscription line?

So it was -- the jump from Q4 to Q1 was absolutely was all -- almost all attributed to the A4. Their canopy business is principally all subscription-based. And so they were the key driver there. And so it's really reflective of -- of those dynamics. So there's nothing really more than that going on, on the subscription backlog line.

Okay. And then in terms of -- were there just not as many sales or enough sales to grow that backlog sequentially or just you took down more revenue?

Well, I think it's -- I think it's the sales consideration, recognizing that the canopy business works off of several large deals in the course of the year. And so I would point more to in items of number of bookings that occurred in the quarter relative to the -- the revenue that was taken down in that particular business as the reason why it was flat.

Okay. Great. Thanks, and congratulations on a great quarter.

Thank you.

Thank you.

Greg Haddad, First Analysis.

Thank you. With respect to cash flow from operations, any perspective you could provide on outlook there, or thoughts you have on the remainder of the year?

I've not given -- I've not given separate cash flow guidance for the year, so I'm not prepared to do that today. I would just comment kind of -- the movement from Q1 to Q2 was hopefully anticipated by the marketplace in the sense that I did highlight in Q1 that we had changed our billing cycle for maintenance contracts and brought everybody to an anniversary date in the month of January. So Q1 did benefit from that.

The overall cash flow in the quarter was -- was partially a function of timing of billing on certain of our key milestones, and so, again, I think -- I think cash earnings is the best barometer of what our cash flow expectations are for the year. Obviously less what we would be doing from a CapEx standpoint as well as capital -- capitalized software. So I'd point you back to cash earnings as really an indication of what we think our cash generating capability would be subject to those two adjustments.

Good. Thank you. And then just one more. Any perspective that you can provide on pricing and systems costs, particularly in the smaller physician practice segment of the marketplace, what trends you see there, things you think may be developing there?

What I would say is that it really depends on how -- what size of physicians you want to go to. I think one of the very positive aspects of the CCHIT certification is the fact that if you're not certified -- there were a lot of smaller systems that were not certified. And consequently, I think that's going to push people to the higher quality systems that are certified and frankly help to maintain pricing. So we see that as a very positive sign from a pricing perspective.

When you talk about interoperability, when you talk about security, when you talk about pay for performance, all of the value of these systems which physicians are getting educated to, I think, is going to help preserve the pricing. So we haven't seen any pressure yet, other than the standard you're competing in a deal, but no kind of major pressure yet, and we continue to watch it.

Great. Thanks very much.

Larry Marsh, Lehman Brothers.

Thanks, Bill and Glen. Thanks for all the updates. Just a couple questions for Bill, just to be clear, you're saying of the total depreciation and amortization in the quarter about 3.3 million of the amortization of the intangibles was A4, is that right?

Yes. Total deal-related amortization, which is both A4 as well as our legacy acquisitions is 3.3 million. So 1.1 million a month. What I was responding to is that I'd given specific guidance last quarter that that 1.1 million will drop down something close to 850,000 or 900,000 starting in September, and that's what I expect to run out for an extended period of time.

Certainly through the end of this year. So you should see a slight drop and total amortization in the third quarter, and then it will drop, yet, again in the fourth quarter by virtue of that sequencing I just mentioned.

Okay. So then, was your depreciation, then, backing all that out, much different than it was in the first quarter?

Well, just recognize the fact that, again, we had -- we have A4 there for -- for the full quarter, whereas we only had them for one month in the -- in the first quarter. So that would be -- that would be the primary difference for the depreciation delta from Q1 to Q2.

Okay. Okay. So the -- on the bookings side, you guys were, I guess, above me both for your business and A4's, and your -- I missed some of the beginning. Are you still saying you hope your overall bookings will be up over 100% from last year with A4? You're saying you're not going to change that until the third quarter?

I haven't -- I haven't changed that guidance, and again, I just -- I'd like to see Q3 -- I'd like to see Q3 before we were to revise for the year. We're very encouraged by the positive progress that we've made year to date and very optimistic in terms of what the pipeline in both of our businesses look like today. But feel it's a bit premature in terms of upping the guidance at this point.

Right. Okay. And you've never really broken out how much in way of bookings you anticipate seeing from A4 for all of '06. Is that right?

I haven't, although one could infer it from the standalone guidance that I had given earlier in the year before the A4 acquisition.

Right. Okay. Second, then, and along with that, the three new relationships you announced today, all very constructive, just remind us do any of those show up in the second quarter or are these all 3Q events?

All those are second quarter events.

I'm sorry. All those are second quarter events. Okay.

Yes.

All right. The -- and I guess the second part of the question, Glen, part of, I guess, John's team at A4 you'd said you were going to beef up with additional sales. I think you've said the integration is complete. Remind us again about what your key priorities are for that organization in terms of geographic expansion, and I guess, how quickly you'd want to get there and how that's going?

Well, David Bond, who's president of our HealthMatics group, which is what we call the old A4, at least the practice management and electronic health record piece of it, has a kind of a boot camp going on. We've hired six sales people since last quarter. We expect to continue to expand. In terms of their priorities, they'll continue to grow their own business, they'll continue to be a supplier of practice management to TouchWorks for our TouchWorks Practice Management offering, and then we'll continue to expand in the other two divisions, in the Canopy division and the HealthMatics ED, our emergency department division.

So first priority, continue to grow. Second priority, expand into the areas you're not by adding sales. Third priority is continue to be a quote, unquote, software supplier to TouchWorks in the practice management, continue to up scale that offering.

Okay. And two other things. So the message that you communicated, both in the percentage of your bookings from IDX practice management customers and then your success in the market is that, I guess, you'd say you've seen no change in your ability to win business from the current IDX customer base. If anything -- well, I guess -- is that the message? That you really see no change in your success rate and you don't anticipate seeing any change?

Yes, I would say that's the case. I mean, again, as we talked about why do larger customers buy. First and foremost, show us reference sites where it's working, where you're being successful. Second, show us you can deploy this rapidly. And we've been very successful in rapid deployment. Last, but not least, show us there's a return on investment based on physician utilization. And we've been able to demonstrate each of those through measurable return on investment through the metrics we have, and through a focus on the implementation process. So our win rate, I don't believe, has changed at the larger IDX accounts.

As you move to the -- and there's a lot less of them, but if you move into the mid-market, it's too early to tell, but if we did see any change, we would likely see it there, where IDX, based on their GE relationship, does have an offering there that's actually competitive, and it's probably just too soon. We haven't seen any difference yet, but if we do see some in the future, it would be there.

That said, as we've said consistently, we don't look at this as whether one is gaining or one is losing. This entire market's growing. They can be successful. We can be successful. And now that we have an integrated offering with both EMR, EHR, and practice management, we're being more successful winning more deals in the mid-market than ever before.

Okay. And then just a final thing. You've mentioned a couple times about the importance of certification, especially with the two EHR products. I mean, I think you guys have talked about a real explosion in the number of vendors in the marketplace, probably over 300 or so.

Just in your own -- and I think you talked about how important it is now for the customers to think about having a certified product. How much consolidation in vendors do you think this will help precipitate here in your market in the next, say, year or two with the CCHIT certification coming out?

I think there's going to be continued consolidation. As you know, there's a number of properties that are up for sale right now, and on the practice management side of the equation, but both of those have fledgling electronic health records. There are a lot of -- I don't know if the number's 300, but there are a lot of health records and wannabe health records and wannabe practice management systems. So CCHIT is going to drive that.

Because again, if you're a salesperson and you walk in and say do you really want to buy a system that's not certified, so there's a lot of anxiety out there in the market today based on the properties that are for sale. People want a safe choice. They see Allscripts as a safe choice. We aren't going anywhere. We're continuing to expand.

We have a very solid product offering in the small to mid-market, and a very solid product offering for the larger integrated delivery networks and academic medical centers. So -- so I think consolidation is going to happen, it's going to accelerate. It is going to happen in the next 12 to 18 months, but some of it will happen in the next month, two months, three months, and there's going to be less choices, but higher quality choices.

And just -- so is your message then that you would want to continue over time to be a part of that consolidation, or is the message, look, you've got plenty to grow over the near term so that's not your first priority?

We don't need -- we've said this consistently, we don't need to acquire anything to continue to grow at the rates we're growing at. That said, we are opportunistic, and we're inquisitive and maybe acquisitive, depending upon whether it makes sense for our shareholders. So we continue to look at the market.

We want to do that because from a competitive standpoint you want to know what's going on, and you want to continue to look for opportunities. So from that standpoint we don't need to do anything, we aren't forced to do anything, and that allows us -- that puts us in the best position and that is to be opportunistic.

Okay. Very good. Thanks, Glen.

Thank you. Well, why don't we take two more questions. I know this is stretching on. So let's limit it to two more.

Len Podolsky, Piper Jaffray.

Hi, guys. Congratulations on a great quarter. I'm in for Sean today. Most of my questions have been answered. Just one question on the Stark law changes that were announced by HHS today. What kinds of hospital organizations do you think are most likely to start right off the bat purchasing your products for physicians and, two, what kinds of changes do you anticipate to your sales strategy, if any? Thanks.

Well, relative to Stark, I think that the hospital organizations that are interested in this, they want to build connectivity with their physicians, and I think that many of the hospitals right now are focussed on their internal systems and trying to get their internal systems straight. That said, we already have ongoing conversations with some of the hospital systems, some are already clients, and we'll continue to -- to work with them. I think the plans are likely to move first, and we already have some traction with a number of the big plans across the country, but this is a clear way for the plans to move. Keep in mind that for a hospital, there are some complications. One is that typically a physician doesn't practice in only one hospital.

So he or she, if they get one hospital system, that may not work in the hospital -- the other hospital, that they -- that they're in. So it's not as cut and dried as it may seem. Again, that said, overall, we think it's going to be very positive to have more funding sources in the market.

Okay. And in terms of your sales strategy, it looks like, given your comments just now, you're going to continue focusing on the payers -- on the managed care organizations?

We've set up a separate group to focus on payers and managed care and they're being successful. We also have a number of partners who already work with -- with hospitals, folks like Perot Systems that we work closely with, and so they're -- they're out there calling on hospitals. We've got other partners, Amerisource Bergen that are working with hospitals; and all of these strong partnerships gives us an entree into hospitals should a hospital want to do this with an independent third party.

I think at the end of the day, what it's really going to come down to is the hospital's going to say it doesn't make sense for us to provide a system that these physicians either don't want or don't use. And the industry is littered with free systems given to physicians from people who don't understand how physicians work or how these practices need to fit into their work flow or how to implement physicians. So I think hospitals are going to be very astute in how they spend their money, and that's a good thing for us.

Okay. Great. Thank you.

Okay. Why don't we take one more question.

Jackson Spears, Capstone Investment.

Hi, Glen. Congratulations on the quarter. Could you talk a little bit about your e-[inaudible] [ceiling and empire] solution, how that's affecting you're other e-detailing engagements and is that a change in strategy for you guys.

Sure, I'd be happy to. As Bill mentioned, we have in part redefined the way that we're approaching the physicians interactive segment of the market based in part on client feedback, and it's a little bit of a razor-razor blade. And that is, the client said in many cases they want control of the apparatus to do this. That said, they don't want the responsibility of maintaining the relationships with the physicians. So what we've done is created an enterprise strategy, which is software that allows them to not only do e-detailing, but to manage all of their interactions with physicians. And then based on that, we can also supply them with the e-detailing, with the CME, or with the variety of different services they may want.

I should also add that increasingly pharma's interested in electronic health records, and how they could communicate through electronic health records to physicians, and the like, all of that, of course, would be permission-based. But right now they're just in the exploration stage. So net-net, they're looking for larger platform deals and then we can feed them as they needed e-detailing. So ultimately, I think this is going to be very positive and cement their use of electronic technologies to do what I call creating an electronic dialog with the physician, and that's real the future of what has to happen.

Could you give us a little bit update on Medem, what your product strategy for that -- for introducing it? Are you working with any major strategic partners and when you think that might gain some market acceptance?

Well, Medem is a strong strategic partner for us. They have, of course, the personal health record which they call the Interactive Health Record and we consider Medem to be the leading provider of personal health records in the market. They are out there, they're making good progress. What we offer is the ability to allow their personal health record to interconnect with the physician's electronic health record and so essentially it allows you to create, again, this dialog that everyone's talking about between the patient and the physician.

So it's an important part of our product strategy, we connect with them, our new version 11 software will actually increase the ability to move information back and forth between a personal health record and the physician's electronic health record. So strong player in the market, a leader in personal health records, and someone who's important to our overall strategy.

Lastly, it that -- you just seemed to indicate that's the real significance of TouchWorks version 11?

Oh, no, no, that's one of the many, many enhancements. Version 11, we think, will really leap-frog the market in a variety of different ways. So that is just one aspect of functionality that we're adding to in version 11.

Okay. Thanks, Glen.

Sure. Thank you very much. Well, again, I want to thank everyone for joining us on the call today. As we've said, we think we have the right products at the right time. We think the market is ready to go, and now much of it is about an execution play. For years that's what we've been focussed on, working directly with physicians to deploy our systems, to get them to use our systems, and to continue to build and enhance our systems. So that's what we think the job is about.

We're doing it everyday, day-in and day-out, and what you can see is the vision is turning into reality and that's turning into bottom line results. So we appreciate your continued confidence in us and the continued interest, and we'll look forward to talking with you again next quarter. Thanks very much.

Thank you. And this concludes today's conference call. You may now disconnect.