Veradigm Inc (MDRX) 2006 Q3 法說會逐字稿

Good afternoon. My name is Jean and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts third quarter 2006 conference call.

[OPERATOR INSTRUCTIONS]

At this time, I would like to turn the call over to Mr. Glen Tullman, Chief Executive Officer of Allscripts. Thank you, sir. You may begin your conference.

Thank you, Jean. Good afternoon. I want to welcome everyone to the Allscripts third quarter 2006 conference call. My name is Glen Tullman, and I'm Chairman and Chief Executive Officer of Allscripts.

Joining me on the call today is Bill Davis, our Chief Financial Officer; and Lee Shapiro our President. The third quarter was another excellent quarter for Allscripts, but before we get started, I'm going to ask Bill Davis to review our Safe Harbor statement. Bill?

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts' management as well 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 SEC, 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 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. Let me begin by telling you how pleased I am with another quarter of strong sales in each of our businesses, solid operating performance and record results. Allscripts is experiencing strong momentum heading into the final quarter of the year, which, as you all know, is traditionally the most active sales quarter in this industry. And we are highly confident and well positioned to get more than our fair share of the activity. That confidence is based in part on the flurry of activity in every part of the market, from virtually every healthcare stakeholder. Government, both on a federal and state level, is taking positive steps to accelerate the market by changing regulations and promoting standards.

Managed care and payers are stepping up with significant new programs, including incentives to accelerate both adoption and utilization. Innovative care delivery models are being introduced to reduce cost and the press is playing an important role in reporting all of this, creating a strong feeling among physicians and provider groups that the time is now and not acting may leave them behind.

To give you a sense of the momentum, I'm going to provide a few examples of Allscripts activity over the last 30 days. During that time I was in 16 different cities and met with more than 20 clients and prospects. That doesn't include our most recent executive summit on October 4th and 5th. We hosted a record 129 CEOs, CIOs, CMOs and physicians from 89 healthcare organizations, every one of them a prospect for electronic health record.

Taken together, that amounts to well over $65 million worth of potential business for the company. Most importantly, we have a great track record of closing accounts that attend our summit. We followed that event up last week with our annual Investor Day in New York. Dr. David Brailer, President Bush's first National Healthcare IT coordinator and clearly one of the most influential thinkers in the market, addressed the analyst and the investment community.

The day also included presentations from three of our premiere clients. And an overview from our management team, including guidance for 2007. The feedback that we received on the presentations was overwhelmingly positive. Earlier this week, 16 of our clients presented at the medical group management association's annual conference in Las Vegas, the largest medical group conference of the year.

Steven Badger, who is Chief Executive Officer of George Washington University, Medical Faculty Associates and a key TouchWorks reference site was recognized as MGMA's executive of the year, in part for GW's successful documented results from their deployment of TouchWorks. George Hill an analyst at Leerink Swann issued an excellent summary of the MGMA this morning. His MGMA report card and he gave Allscripts his highest marks, an A plus for execution and overall performance. Thanks, George.

And the momentum is not slowing down. In early November, a record 750 healthcare professionals from hundreds of organizations will meet in Carrie, North Carolina at our Annual HealthMatics Users conference. Meanwhile, public concern about finding solutions to the very visible quality problems in healthcare and the rising cost continues to build, as evidenced by yesterday's news that about 6 in 10 Americans say the cost of their healthcare coverage has gone up in the last year. Similarly, the Wall Street Journal recently reported that the healthcare premiums of employers and their workers have climbed twice as fast as wages and inflation in 2006, to nearly double their costs in 2000. That is a clearly non-sustainable trend, and all stakeholders agree that our solutions are an important part of the answer.

Other market trends are also having an impact. As many of you know, on October 10th, the Department of Health and Human Services put in place a Safe Harbor for hospitals, health plans, medical groups and other third-parties, which will allow these groups to provide funding to physicians for both e-prescribing and Electronic Health Records which was previously illegal to do.

Hospitals and other third-parties are now looking at this change as an opportunity to connect to affiliated and community physicians, which is critically important to their business. Our job at Allscripts is to educate these new groups that what's most important is providing a system that physicians will actually use. Otherwise, they will be throwing their money away.

Most physicians are unlikely to use many of the hospital-based systems which were designed for the acute care setting and do not accommodate the work flows of ambulatory physicians. So we see this change is creating interest, a funding vehicle, and a special opportunity for modular web-based systems to get physicians started on the electronic highway, with electronic prescribing, connectivity and then provide them a path to a full electronic health record.

And Allscripts is unique in being able to offer that combination. We are already selling into the hospital market and working with key partners who sell into hospitals to present our solutions. And we have already been contacted by a number of managed care and payer organizations who want to partner with us to deliver electronic health record and e-prescribing programs to their physicians.

As a start, you can expect to see us announcing major new initiatives around electronic prescribing and a series of new partnerships to sell our solutions into the hospital market prior to year-end. Overall, as the regulatory changes indicate, the direction that healthcare and our nation is moving is perfectly aligned with the vision we developed years ago and that we are executing on right now.

Let me mention one final example of the movement in the market and of Allscripts being well positioned. This month Hawaii's largest health insurer, the Hawaii Medical Service Association or HMSA, announced that it will provide $20 million in grants to physicians who acquire electronic health records. This huge initiative means that 1,000 Hawaiiian physicians will each be eligible to receive up to $20,000 towards a new electronic health records.

We know HMSA well because we've been working together over the last few years to provide electronic prescribing to over 700 of their physicians who have now written millions of electronic prescriptions using our software. The success of that program led in part to their confidence in expanding to a full electronic health record.

One more example of how electronic prescribing is an on-ramp to the electronic highway. It's no accident that Allscripts was the only vendor invited to HMSA's press conference. So we feel that we are well positioned to pick up a large number of the 1,000 fully funded electronic health record opportunities in that market.

So it's pretty clear that all of the trends are pointing toward electronic healthcare. That said the market measures success by performance. And in the third quarter Allscripts once again delivered. Earlier today, our Clinical Solutions Group announced two agreements that demonstrate our progress.

The first was a multi-million dollar sale of our TouchWorks electronic health record to the more than 400 physicians at University Physician Associates, the medical faculty group for the University of Louisville School of Medicine. I personally met with the leadership team there, and I couldn't be more excited about the quality of physician and executive leadership, both key attributes in the successful roll out of an electronic health record, and we expect to partner with U of L on content development as well.

This morning we also announced a million-dollar plus sale of TouchWorks to North Medical Associates in Syracuse, New York. The North Med sale is noteworthy not only for its size, but because it's the largest sale to-date of our combined TouchWorks Electronic Health Record and Practice Management solution.

The contract is an indication of the competitive advantage that our combined solutions can deliver, and another sign that we are succeeding in up scaling our TouchWorks Practice Management system to accommodate even the largest healthcare systems. I should also mention that the physician and IT leadership of North Med attended our most recent executive summit.

But as you know, the quarter is about a lot more than two new agreements, because we announce agreements almost weekly during a typical quarter. Two additional sales that I want to highlight include the Corvallis Clinic, where our electronic health record beat NextGen, even after NextGen had already sold Corvallis their practice management solution, and Hamot Medical Center, an acute care provider that purchased TouchWorks for their 50 physicians in 16 practices. The Hamot sale reinforces our belief that the stark changes will only accelerate hospital purchases of physician-focused ambulatory software for their own affiliated and also for their nonaffiliated physicians.

Our HealthMatics group, which we formerly referenced as the EMR and Practice Management Solutions from A4, also turned in a very strong third quarter. With small practices it comes down to results and HealthMatics continues to deliver.

In a sign of the impact that HealthMatics is having on the small group market, and its importance with over 50% of all physicians in that space, early next month former Speaker of the House, Newt Gingrich, will pay a visit to North Fulton Family Medical -- Family Medicine, I should say, near Atlanta.

Former Speaker Gingrich will hold a news conference to recognize the work of Dr. Jim Morrow and his team of HealthMatics users at North Fulton who are really proving the skeptics wrong and showing that small physician groups not only can afford to adopt electronic health records, but that the results are so impressive, they can't afford not to adopt them.

Some of you also saw Dr. Morrow speak at our Investor Day. He called himself a small country doc, but if that's true a better description is a smart country doc who has figured out that automation pays in both quality and cost.

On the acute care side of our business, our Emergency Department Information Systems generated strong sales in the third quarter. For example, among numerous third quarter sales of HealthMatics ED, we signed two tenant hospitals for almost $1 Spalding Regional Medical Center in Griffin, Georgia and Brookwood Medical Center in Birmingham, Alabama. Brookwood is a 586-bed hospital that is among the largest in the tenant network.

Also on the acute care side, our Canopy Care Management Solution had a strong quarter, including new sales to Northwest Hospital and Medical Center in Seattle, Washington, Capital Health System in Trenton, New Jersey, Lincoln Health System in Lincolnton, North Carolina and North Broward Hospital District in Fort Lauderdale, Florida, which renewed its canopy license and added two new hospitals.

Additionally, our new canopy connect product, which facilitates patient transfer to long-term care or other alternate care settings after leaving the hospital, is developing traction in the market with several new sales in a strong pipeline. We intend to expand on this great relationship that our ED and canopy teams have with hospitals as we explore their interests in electronic prescribing and electronic health records.

All of these sales translated into a strong bottomline, while at the same time we are aggressively investing in people and software, something Bill will talk about in just a few moments. Now while much of the attention related to Allscripts is on our clinical software businesses, in the third quarter we made solid progress across all of our business groups.

In our Physicians Interactive Group, we delivered one of the strongest sales quarters in our history, with sales of $4.7 million. Our physician relationship management platform fills a void in the market and we have no competitors to speak of at this time. We expect to sign another major platform contract in the fourth quarter in excess of $5 million,, which will provide a strong positive impact to our PI sales results.

Finally, in our Medication Services Group, we continued to deliver on our plan in the third quarter, adding quality recurring revenues, and this business continues to be a strong contributor to our bottomline. We see increasing interest in point-of-care dispensing as traditional doctors' offices increasingly compete with retail, our pharmacy-based clinics that offer full medication services. As you can tell, these are exciting times at Allscripts.

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

Thanks, Glen. As Glen indicated, our third quarter was marked with several significant accomplishments, including our ongoing successful integration of A4 Health Systems and strong financial performance from all of our businesses. So this afternoon, I will review some of those accomplishments in the quarter, provide a quick update on the balance of 2006 and reiterate some of the perspective I provided last week regarding 2007.

Turning first to some key highlights of the quarter. Our total revenue of $62.2 million represents a 103% increase over Q3 of 2005, bringing our year-to-date revenue to $164.4 million or a 90% increase over the same nine-month period last year. Cash earnings were $10.4 million or $0.19 per diluted share in the third quarter. This compares to $0.10 per share in Q3 of last year and $0.18 per share in the second quarter of this year.

GAAP net income for the quarter was $3.3 million or $0.06 per share compared to $0.05 per share in the second quarter of this year and $0.07 per share in the third quarter of last year. As many of you know, net income for the first three quarters of 2006 reflects stock-based compensation resulting from the adoption of new accounting rules in January, as well as intangible amortization related to our A4 acquisition and a full tax provision at 38%.

Clinical software bookings were $35.7 million and represent 116% increase over the third quarter of 2005. A4 contributed approximately $13.9 million of those bookings in the quarter. We also generated approximately $4.2 million in cash flows from operations during the quarter. Finally, we would like to thank those of you who did attend our second Annual Investor Day held last week in New York. We really appreciate the strong interest in Allscripts, and we hope that those who attended or were able to listen in found it to be informative.

So turning now to a more detailed look at Q3 performance. Total bookings during the quarter were approximately $40.5 million. Consistent with prior quarters, bookings do not take into consideration the $10.4 million of sales in medications. Our $40.5 million in bookings compares to $19.6 million of bookings in Q3 of 2005. Our clinical software businesses again contributed $35.7 million in bookings during the quarter, excluding ongoing support. This compares to 16.5 million in the third quarter of last year.

As previously mentioned, our third quarter bookings included approximately $13.9 million from A4. Taking that into consideration, our non-A4 organic growth was approximately 33% when you compare Q3 bookings to the same period last year. As I will highlight in a moment, we continue to track well ahead of our 40% growth commitment for the entire year.

Our Physicians Interactive business had bookings during the quarter of $4.7 million. Such amount represents a 55% increase over Q3 of last year and a 71% increase over the second quarter of this year. Bookings for the first nine months of 2006 totaled $114.6 million. Our clinical software businesses contributed approximately $103 million of such year-to-date amount, representing a 131% year over year growth. Our organic clinical software bookings growth was approximately 49% when compared to the first nine months of last year.

Turning now to backlog. We ended the third quarter with approximately $174 million in sold backlog. The backlog breakout is as follows. License and service fees related to our clinical software businesses represented $87.4 million of our total. Software subscriptions, which are expected to be recognized over the next three to five years, made up $26.6 million. Software and maintenance fees, which we anticipate to recognize over the next 12 months, made up $44.3 million of the balance. And then finally Physicians Interactive contributed $15.7 million for a total of 174.

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 recurring in nature. We continue to be encouraged by the momentum in our backlog and the unique visibility it provides us as we look toward the balance of 2006 and into 2007.

Turning now to revenue. Our third quarter revenue of $62.2 million increased by $31.6 million or 103% over the same three-month period last year. Our clinical software businesses contributed all of that increase, representing approximately 200% year-over-year growth. A4 contributed approximately $23.8 million to the quarter. The organic growth for our clinical software businesses was approximately 56% when compared to the third quarter last year.

As I indicated last quarter, we continue to successfully integrate A4. And we are encouraged by the increasing number of cross-selling opportunities amongst our clinical software businesses. As such, breaking out the respective results for A4 will become less meaningful. Consequently, it is our intention not to provide such breakout beyond the fourth quarter of this year. So we continue to encourage you to start thinking about our clinical software businesses on a combined basis.

Turning now to Physicians Interactive. PI revenue of $2.2 million in the third quarter compared to $2.7 million in the third quarter of last year. Such decrease is due to the timing associated with the anticipated close and launch of certain platform deals, which we do anticipate closing and launching in the fourth quarter.

Moving to our meds business. We saw another solid quarter with revenue of $10.4 million. This compares to $10.5 million in the second quarter of this year. In terms of revenue mix, our software and related services segment represented approximately 80% of our total revenue in the third quarter. This is up from approximately 54% in the third quarter of last year.

Third quarter revenue by segment is as follows. Again, our meds distributions delivered $10.4 million or 17% of our revenues. Clinical software delivered $49.5 million, up from $46.7 million last quarter. And information services delivered the balance of $2.2 million for a total of 62.2.

Total revenue for the first nine months of the year was $164.4 million. This compares to $86.4 million for the same period in 2005 and represents a 90% increase. Our clinical software businesses increased $124.6 million in 2006 compared to $46.9 million for the first nine months of 2005. This represents 166% increase and 48% organic growth.

Looking now to gross margins, overall, our gross margin was 49% in the third quarter versus 43% in the third quarter of last year and 52% in the second quarter. Margins by segment were as follows. Our meds distributions business delivered 16%, which compares to 17% last quarter. Clinical software delivered 56% gross margins compared to 60% last quarter. And information services delivered consistent margins of 46% for a total of 49%.

The 1% change in the medication business can be attributed to the mix of medications, i.e., the brand versus generic drugs we're selling that were sold in the quarter. The 4% change in clinical software business can be attributed to approximately $2 million of additional hardware revenue being recognized in the quarter. As such, we anticipate clinical software margins to migrate backup into the high 50s in the fourth quarter.

Turning now to expenses, operating expenses excluding amortization and stock-based compensation for the second quarter were $21.3 million. This compares to $22.7 million of expenses in the second quarter. A large percentage of such decrease is attributed to certain second quarter marketing or client related events not recurring in the third quarter.

Such events included our annual users' conference and executive summit for TouchWorks prospects and the temper trade show. We also benefited from slightly lower bad debt expense and higher capitalized software in the quarter. With regards to capitalized software we had $2.6 million in the quarter.

This amount compares to $2.1 million we capitalized in the second quarter. And it's reflective of the investment we continue to make in the development of TouchWorks version 11. As we've indicated in the past, this amount will fluctuate from quarter-to-quarter depending on the product development cycle.

Stock-based compensation was approximately $600,000 for the quarter. In deal-related amortization was approximately three million. Both of which are consistent with what we indicated they would be on last quarter's call. Net interest expense was approximately $300,000 in the quarter.

Bringing us to net income of the quarter of $3.3 million or $0.06 per diluted share. This compares to $2.8 million or $0.05 per share in the second quarter of this year and $2.9 million or $0.07 per share in Q3 of last year. Again, please note that the net income for the first three-quarters of 2006 reflect stock-based compensation resulting from the accounting change and changeable amortization due to the A4 acquisition and the full tax provision of 38%.

Consistent with that and as we've highlighted in prior quarters we believe another important metric is cash earnings or cash earnings per share we define it as net income giving the effect of add back of depreciation and amortization, stock-based compensation and provision for income taxes as well as A4 related transitional costs that we incurred in the first quarter.

Our cash earnings in Q3 were $10.4 million or $0.19 per diluted share. This compares to $9.7 million or $0.18 per share in Q2 and $4.6 million or $0.10 per share in Q3 of last year. Please note that our cash earnings per share continues to be computed on the same diluted share count used for GAAP purposes.

To that end, basic shares outstanding for the quarter were $53 million and diluted shares were $55.7 million. The 7.3 million shares issuable under our convertible debt offering continue to be anti-dilutive to our GAAP earnings per share. And therefore, are excluded from the diluted computation.

Net income for the first nine-month of 2006 was 7.4 million, $0.14 per diluted share. Year-to-date cash earnings were 26.6 million, or $0.51 per diluted share representing a 15.5 million or 140% increase over the same nine-month period last year. With regard to overall head count we ended the quarter with approximately 876 employees. This compares to 864 we reported in the second quarter.

Turning now, to our balance sheet. We ended the quarter with $71.5 million in cash and marketable securities, which is reflective of us generating approximately $4.2 million in cash from operations and $5.5 million of cash from option proceeds and other investing activities. Such inflows of cash were offset by approximately $4.1 million of capital expenditures and capitalized software.

Accounts receivable at September 30th increased to $57.4 million, which resulted in days sales outstanding of approximately 83 days. Please note that approximately $10 million of such AR increase were the result of billings that occurred in the month of September, which is unusually high for Allscripts but reflective of contracted billing milestones that we had.

As such we expect that overall receivables and associated days sales outstanding to return to normal levels in the fourth quarter. As it relates to our outlook for the balance of 2006 we continue to execute against a plan we laid out to you earlier this year. Based upon our performance through the first nine months of this year, we do now believe that we expect total revenues to be in excess of $225 million.

We also expect to be able to come in at the higher end of both our GAAP earnings per share guidance of 20 to $0.22 per diluted share and cash earnings per share guidance of 70 to $0.72 per diluted share. Turning to 2007, as a follow-up to our investor day last week, I do want to reiterate what I said regarding next year, Allscripts targeted to exceed $300 million in total revenue in 2007.

We anticipate GAAP earnings per share to be in the range of $0.42 to $0.44 per diluted share and cash earnings per share to be in the range, in the range of $1.04 to $1.06 per diluted share. Please keep in mind the $7.3 million shares with our convertible debt offering are expected to be dilutive next year and therefore are included in our estimated sharecount of 64 million shares.

I also want to reiterate something else I discussed at investor day, and that is management's belief that longer term we believe a more appropriate earnings metric to evaluate the company is adjusted GAAP earnings. That gives effect to the add-back of acquisition-related amortization as well as stock-based compensation, both on an after-tax basis.

Such metric recognizes the fact that Allscripts will ultimately become a tax paying entity, which again we still estimate to be no sooner than 2008. But we'll also improve the comparability amongst the analysts who follow if company. As such, it is our intention to report GAAP and cash earnings for the balance of 2006 and start referring to adjusted earnings starting in 2007.

To the extent you are interested in more information regarding the guidance we've provided for 2007, I do encourage people to refer to the slides from last week's presentation. Such slides are available on our website under our investor relations section. In summary, we are very pleased with our third quarter results and look forward to an even stronger fourth quarter and a phenomenal 2007.

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

Thanks, bill. Let me close with just a few comments. The third quarter was a solid performance by Allscripts, and I believe we're well-positioned to deliver a very strong fourth quarter. Overall, our vision of becoming an indispensable part of the way physicians practice medicine is becoming a reality, right now.

I want to conclude the call today by thanking our employees for their commitment, our clients for their confidence in us, and our shareholders for their continued support. At this point we'd be happy to take your questions. Thank you.

[Operator Instructions]

Your first question comes from Richard Close with Jeffries Company.

Yes. Bill, I was wondering if you could talk a little bit about the bookings number, I think it was like 33% or something like that on the TouchWorks side. You just -- what are the targets, remind us what the targets are for 2007 on the bookings.

Sure, just to reiterate what we talked about as it relates to Q3, clinical software business delivered $35.7 million in bookings of which $13.9 million of that came from A4 and yielded the 33% year-over-year growth that you mentioned.

Again, our expectation for the year is that we're going to have overall booking growth of organic growth, that is, of over 40%. And again, I highlighted that, you know, that we're tracking closer to 49% for the first nine-months of the year. So we're very pleased quite frankly, with the progress we've made to-date and we're looking forward to a strong fourth quarter to finish out the year.

Relative to 2007, again, we'd refer you back to the slides and there is a slide in there, slide 27 from last week, indicating that we're anticipating about $240 million of total bookings next year and about $205million, $210 million of that would be coming from our clinical software businesses. So are representing something close to 40% year-over-year growth.

Okay. And then quickly, with respect to e-prescribing, I guess there was a press release out recently by Caremark essentially giving away some e-prescribing technology, and why don't you just talk in and around that if you could, in terms of, you know, how competitive are you in that market space, any commentary along those lines?

Let me ask Lee Shapiro, our President, to take that one, because this is one of the areas that he's focused on. Lee?

Thanks, Glen. With regard to electronic prescribing, we certainly see our offering being very competitive and of interest to numerous health plans as evidenced by a number of plans that we're working with today, such as Verizon, IBC and Blue Cross/Blue Shield of North Carolina.

In terms of the interest, I think it's been generated by the change in stock in the new OIG Safe Harbor that allows for electronic prescribing to be funded for both software and hardware 100% of the cost by prescription drug plans as well as by others. So I believe that we'll continue to see strong interest in our offerings.

With regard to the Caremark offering, frankly, we believe that will not be as much interest in the market because a program coming from a PBM is not likely to be as trusted for physicians as one that's offered by third-party independent companies like our own. In terms of what we're doing today, we see great traction in the market and believe that our electronic prescribing offering will continue to evolve and as Glen noted in his comments, expect to see some new announcements coming up in the quarter ahead.

Okay. Thank you. I'll jump back in.

Your next question comes from Sean Wieland with Piper Jaffrey.

Hi, guys. Thanks a lot. Glen, if I could ask you a big picture question on maybe some of the longer term opportunities of the business, because clearly you're doing a great job in execution and putting software in front of the docs.

Do you see any potential or any opportunities to expand into using your platform, using the software to put services, to facilitate the access of services I'm thinking disease management electronic data collection for clinical trials. How do you leverage this footprint that you got a technology in front of the physicians?

Thanks, Sean. Well, I want to be a little careful here in what I say, but I think it's clear that we expect that the platform that we're putting into place is a platform that absolutely will deliver services. You know, you mentioned a few of the services that we're already involved in.

As many of the listeners on the call may know and you may know, we have a strategic relationship with Advanced Clinical Systems, and what we do, I believe we're the first electronic health record that actually is integrated with the clinical trial management software.

So that means that physicians participating in clinical trials only have to enter their information once and the ACS system, which is the leading system in the market, actually then uses that. So that's a first step. We've talked a lot about clinical trial identification. And our version 11 will actually allow us to notify a physician when he or she is facing a patient to tell them whether that patient, their disease state or whether the particular medication that they are about to prescribe qualifies that patient to participate in a clinical trial.

It's real time information and again that's both an opportunity for the physicians, an opportunity for us, and something that pharma is extremely interested in. So we see that as an opportunity, disease management clearly we're already doing this with some of the innovative customers we have like Holston medical group, which is using electronic health record to do disease management in diabetes.

And I think it's I'm comfortable saying that we have right now a major effort underway in the diabetes area with some of our clients and with some of the device manufacturers and the like to integrate their information into it.

So I think you'll see us moving very aggressively into what I think of as the future of healthcare and that's using the electronic health record as a platform to deliver services that are valuable to physicians and delivering quality care that are valuable to physicians in making the electronic health record a revenue center for them, because our intention would be to share revenues that we garner with physicians and this really leads to our whole concept the EHR that pays you back the Electronic Health Records and the future of Electronic Health Records is about content and it's about services.

We're at the forefront right now. Right now, it's about getting them installed. But it's a great question. We're very, very focused on it, and I think you're going to hear a lot more from us in the near term next quarter and the quarter after.

Okay. And when do you think that from a financial perspective that some of those could start actually hitting the income statement? Some of it is now, but a meaningful impact, a meaningful amount?

Yes. I'm going to take a quick shot then turn the tough question over to Bill. I think we want to be careful, because any of these that you get started, it takes, you know, we've got three different things happening. We're getting - we're selling a lot of contracts for Electronic Health Records.

Then you've got to get them installed and you have to get full utilization. Then you introduce the services that layer on top of that. That said number of these services are already being used and tested by individual clients that we have. So we know they work. We know they produce revenue and the like. So even I would say, and allow Bill, that this is not meaningful impact in the next quarter or two. Bill may go further than that, but I do think that you will see announcements in the next few quarters from us in each of the areas you mentioned. Bill.

Yes. I would just say relative to kind of our perspective that we've shared on 2007, there has not been a heavy dependence placed on such revenues coming to attrition in even the next 12 months. So I would personally think somewhere kind of outside of that 12 to 15 month time horizon is kind of the starting point.

Okay. Great. Appreciate it. Thanks a lot.

Your next question comes from Atif Rahim with JP Morgan.

Thanks for the detail earlier. If you could just talk about the A4 system looks like bookings were down there sequentially is that something seasonal or was there something nonrecurring in nature there. And a follow-up to your investor day last week, you announced that you had scaled up the practice management system from A4 which could not cope or guide ex-customer base, were there any sales that you made to customers within that customer base during the quarter and any revenues recognized?

Yes, I'll take the first bookings question and turn it over to Glen relative to the practice management question. There is a certain amount of seasonality that we're seeing in A4s business. They principally focused on July and August. They had a very strong September. And prospects for Q4 are equally if not more strong than that.

So we're encouraged by the movement there, but we absolutely saw some softness in the July/August time frame which we would attribute to vacation schedules and the like. We also have to keep in mind that there is embedded in that the acute care bookings, which tend to be a little bit less consistent from one quarter to the next, just given the relative size and the decision making process and the acute environment and so that's the other consideration. But again all businesses are performing to our expectations and we think we're well situated as we go into Q4.

Let me take the second, relative to the scaling up practice management, as I've said and continue to say, it's a major initiative for the company. We have already tested the architecture for the HealthMatics system in a practice management capacity. We're very comfortable and we're doing some of that testing with potential clients for that.

We're very comfortable that technically it scales up. It can handle the largest clients in the country. The second piece of that, we're approaching it very scientifically and carefully, is we're having a third-party analyze our system, comparing it to every system in the market, to see what we have today in terms of features and functions, what we don't have and our intention is to build everything we don't have.

So when we scale up to the largest clients, we can, using a third-party, independent verification, demonstrate to them that our system has all of the functionality and we already have the technical data to show that we have all of the scale that anyone would need. We expect those processes to be completed over the next six months.

So from that perspective two steps, the technical step is done, feature and functionality is underway. We have teams both in US and in India working the problem right now, and I think in the next six months, you'll see some announcements that are of an even more significant scale than some of the integrated contracts that we've sign with people like North Medical.

Okay. That's good, and just on that IDX question. Your sales to existing to IDX customer base, you didn't mention those, if you could just follow-up on that? That will be great. Thanks.

Yes actually, I apologize for not mentioning that. Actually it was a positive trend. Bookings into the existing IDX customers was below 50% in the third quarter. So we had a nice balance of IDX, non-IDX sales in the fourth quarter.

Okay. Thank you.

Let me head off this question because Bill said it was positive, so we get pushed back either way if we have very high IDX sales, people tell us that's good because you're getting into that IDX base and you're pulling out everything that you can. If the sales are lower, some people say why weren't they higher other people say it's great because that means you're making real traction outside the base.

So that means bill's comment will make about half you happy and the other half will say why didn't you increase it. But the good news is, we got strong sales in both sides of the business. We're not dependent on anyone and in fact we're seeing very solid traction in a number of the other big names.

That's good to hear. Thanks.

Your next question comes from Corey Tobin with William Blair & Company.

Hi, good afternoon. Nice quarter.

Thanks Corey.

I had a couple of housekeeping questions to start off. If my math is correct A4 revenue contribution this quarter is 24 million, is that what you said, Bill?

It was at 23.8 million.

Perfect, okay. And in what percentage of the revenue stream right now at least the clinical software revenue stream has represented by the acute care products? I know you're not going to break this out on ongoing basis, but can you just give us sort of a ballpark figure just as point of reference?

Yes. Again, I mean it is tracking consistent with what I've said before of that 23.8, somewhere in the 25% to 30% of that's on the acute side.

25% to 30% of --

Of the 23.8.

Got it, okay. And then Glen you mentioned a little bit of discussion on the stark log, and clearly it's not the change in the law so far and not hurting your ability to win deals here, but just curious, if you're starting to see the hospital vendors become more aggressive in the last three months or so than what you've seen in prior years.

I think there is clearly a very heightened level of interest in the hospital space, and again as Lee, I think mentioned, you know, we expect or as I mentioned in my comments, we expect that some of our existing partners, who are more concentrated on hospitals will work closely with them to make sure that our solutions are getting offered to the hospital.

I think the message, the clear message that we deliver, when we talk to these hospitals is you know, you can pay for a system, you can give physicians a system, but if it's not ambulatory focused, if it's not modular, if it's not usable, then you're going to waste your time, your money, and your energy and frankly you're going to offend the physicians.

And I think many hospitals have concluded that, the existing systems that are in hospitals today are provided by some of the best names in the business are not sufficient in the ambulatory space. These are great companies doing a great job in the hospital, but when they venture outside into the ambulatory space, they've not been successful.

So that's the message you'll hear us driving home and that if they want to get the real advantage, which is connecting to physicians, getting referrals and the like, then what they're going to do is they're going to need to partner with an ambulatory. The good news is and the bottomline is that this brings more money into the market and we're perfectly positioned to capitalize on it.

So is it safe to say that you haven't seen any changes with respect to win rate against what we would historically consider more hospital-oriented vendors?

That's correct. In fact, we've seen -- if you look at the last quarter, frankly, we see the win rate and the interest in the market accelerating, because what's happening is many of these hospitals that own physicians that for years the physicians have kind of said, well, you know, the MR is not ready yet, those physicians today are saying, look, we want an electronic medical record.

But actually, we want an electronic health record, and we expect you to give us a choice and we want to evaluate the top two or three. We want to see sites that look like us where they're working. And again, so the interest is great because very few of these hospitals are making the decisions for physicians.

We've seen some very high profile people who are no longer in their positions, because they tried to decide and tell the physicians what to do. So the way these hospitals are doing it today is they create a panel. They put the physicians on it. They bring in a few top players and that's a great competitive environment for us to win in.

One last one on this topic. Is there any chance that the additional evaluation I guess of additional players in this space could lengthen sales cycles? Are you seeing in any way that the customers are saying, hey, you know, we feel comfortable. We just want to go back and double-check now that XYZ hospital vendor has rolled out an ambulatory product as well. Is that at all impacting sales cycles?

No. I think that's happened all along, because again, anybody who is involved, you know, is going to check the usual suspects. That's pretty much incorporated in our process today. And while I've not gotten Bill to say it publicly yet, I'm really working on him to say to the market that the decision process and the actual sales cycle is decreasing. But I think we're, you know -- at minimum, we're not seeing it increasing. And I think there's at least some evidence to demonstrate that that process is getting shorter.

Good to hear. Congratulations again. Thank you.

Thanks, Corey.

Your next question comes from George Hill with Leerink Swann.

I didn't think I was going to make it, guys. Thanks.

Hey, thank you for -- actually, it's a great report and not just because you ranked us number one. But frankly, I think it's a good analysis of the entire market.

George Hill. I'll just say thanks for embarrassing me, Glen.

That's okay.

George Hill. So then I guess I have to come around and ask you some tough questions. We were talking a little bit about A4 in the small practice market. You have got a new entrant to the market with a different pricing model in Cerner, and you have a smaller entrant to the market in eClinical System being successful with a highly competitive pricing model.

I guess how do you guys feel like you answer the challenge in the small physician practice segment of the market, given that other companies are taking a different approach?

Yes. George, this is Bill. I'll touch on the Cerner model and just encourage people to really do the simple math. My understanding is that they've introduced a monthly pricing structure and that if you actually can do the math out for ten years based on what's being contemplated there and compare that to both our capital investment requirements and that $10,000 to $15,000 range, plus the related SMA, or maintenance. It actually yields a much more favorable result.

So I analogize it to the kind of classic conversion in automobile industry of taking, you know, what was once, what does it cost me to buy this car to a monthly payment debate or discussion. So I would encourage you again to do the math there.

Relative to that, you know, when we find situations where clients, you know, are limited in terms of capital, we are very, we have a lot of alternatives, principally third-parties who are very interested in participating in the funding, you know, of those transactions. So we have vehicles in place that enable us to convert that to a monthly payment or some other form of financing for those practices. So we don't view that as being a huge competitive threat.

Yes. So I mean in summary what Cerner really did was introduce the financing vehicle, they didn't change the product, the product is the same they didn't change anything, but say, hey, we'll finance this. When you do the math for a client you find out you're actually paying a lot more than you pay and if you really want to go that way, we can give you a better product and we can get it financed, too.

So that's our answer there. Still fundamentally people based on reference sites. They want to see it working, see it live, reputation for service and commitment and results. And we have all three. We work hard to have all three and I think that's been borne out in the market. So that's one that we'll keep pressing.

There are going to be, and they're going to continue to be new models that are out there in the market. We want to make sure, we're responsive to all of them. You mentioned Cerner. You also mentioned I think E-clinical. E-clinical has introduced an interesting model. And again we haven't seen a whole lot of them, but we're starting to see more why they were generally focused on very small groups, that were used to buying in the segment of the market that even our A four unit wasn't operating in.

They've got nice software. They've moved up scale a bit. So we're continuing to watch them, and we continue to compete with them. That said, as you get into the larger groups, even five and more, I think they're going to look for, again, reference sites. They're going to look for reputation.

They're going to look for viability, are you going to be around years from now and I think also you're going to see this movement to what I think Sean asked the question about earlier, and that is what else can you give me? What about, Bill, how is your cardiovascular content? Do you have templates, do you have best practices, do you have ways for me to participate in clinical trials. Do you operate on all different kinds of hardware, what's the complexity of the software?

So I think they're going to be a viable competitor and you know I think they've done a very nice job and they've gotten on the radar screen, which is admirable. So we continue. We take every competitor seriously. We take them seriously, and you know I think they're going to be a very strong player in the low-end of the market and that will touch us as they try to move into the middle of the market.

But again we're used to competing. We're happy to compete and there's a lot of market out there. So we don't think of it as having to beat any one competitor. We think of having to get in front of as many people as we can.

Do we have time for one more?

Sure.

At your investor day you guys had talked about the technology a little bit. And what I'm going to refer to as having a plug-in feature available in version 11. What types of other software vendors would you allow to have like a plug in or modular compatibility with Allscripts, and I guess like with -- like what functionality would you guys choose to have third-party vendors provide versus build yourself?

Well, the product is called UAI or Universal Application Integration. We're very excited about it, it's essentially share-wear almost that we give to a variety of people to make it easy for them to build plug-ins. Well, showing as an example has connected a number of their devices.

So if you go to some of our sites and they put a blood cuff on someone that goes via RF into our application. But we're using that and we're prepared to integrate and interface using UAI with anybody out there. That includes competitors. I want to be very clear. It includes all the lab companies. Many of whom, we're already working with. This is an easier way and a less costly way to interface and integrate with the product.

In terms of what we'll build versus others, you know, I think this is the classic kind of iPod issue, and that is there are certain things that we will build but we like the innovation, we like other people who are saying pushing our product along, because it's easy to work with. And, again, there's so much to do that if someone comes along and builds a great disease management plug-in, then that's great.

And if ours isn't as good, we want to give the client choice. If they build some other great thing to do, that's just going to push more sales and more attention to our products. So, again, we think this is part of the interoperability, part of opening up these products, and if our plug-ins aren't the best then they'll use somebody else's plug in, but they'll still use our engine.

Okay. And I'll say -- I'll by my math the break-even is five to seven years depending on the interest rate.

That's not right. Thank you.

Your next question comes from [Doug Tosso] with Lehman Brothers.

Hey, guys. I'm calling in for Larry. I have a question. Obviously congratulations on the North American deal and integrated sale, which is the largest. How many of those types of sales have you guys executed on since the integration of A4?

I don't know that we've given out a number. We continue to make I think pretty solid progress. Keep in mind that we've only really been pitching touch works integrated. Remember, every A4 sale, which is now called HealthMatics, is already integrated. So we have HealthMatics has both sides of that. That integration is most critical in the lower to middle market. In the high-end market, the integration is not quite as critical.

So when we're talking about TouchWorks, what we're talking about in TouchWorks Practice Management we recently finished the integration between TouchWorks and what used to be the HealthMatics engine, it's now TouchWorks Practice Management, and I would say we've got a consistent flow of those deals coming in.

More important, virtually every new deal that we're pitching in the mid market with TouchWorks includes Practice Management. So I think you'll see more-and-more of those contracts that come in with both sides of the equation.

I believe, Doug, that our Q2, Q3 results contemplate five or six of such deals that -- of the combo deals, but agree with Glen that, you know, the momentum from our vantage point is really the significant story. And we certainly expect that number to grow, you know, as we look forward.

Okay. Great. And then also could you comment on how you feel your internal capacity is from both the sales standpoint, but more importantly in implementation standpoint? And to what extent -- I know you've talked in the past about having to utilize consultants to implement large installations. You know, are you being forced to do that? And, you know, can you quantify what kind of impact that might be having on margins?

Well, I would just say that we are hiring across the Company. For any of you, we have resumes of great people. We're happy to take them in sales and in implementations. We think we have it under control, but we have openings in each one of our business units in sales. And we have a lot of younger people in training, in our deployment and implementation, because it takes a little longer to get them up to speed.

So from that standpoint -- and I'll let Bill comment on the use of consultants. But from that standpoint, you know, the issue is if I could hire tomorrow 8 to 10 more salespeople across the business, I would do that. And we're very focused on HR and on hiring.

So you know I think that it's not dragging us down. But, you know, this is a growing market with enormous opportunity. And we want to be in front of every client we can. Bill?

Yes. Relative to the margin impact, I would put it in the kind of 1 to 2 percentage points range.

Okay. Great. Thanks a lot.

Your next question comes from Sandy Draper with JMP Securities.

Thanks. Most of my questions have actually been asked. Just a couple of quick ones. One, Bill, on the guidance for the year, if you sort of back into a fourth quarter revenue number, it would imply sort of a flat number, maybe even slightly down. Is that just because of the flat backlog or is there anything else that, you know, some of the bigger sales are maybe going to take a little bit longer to hit revenue?

Sandy, what I'm anticipating and what I highlighted in the third quarter is we had the benefit of the $2 million of hardware revenue that I am not expecting to reoccur necessarily in the fourth quarter and be replaced by higher margin software service revenue.

And again just to reiterate my comment was is that, you know, recognizing what we've produced year-to-date, I just wanted to make certain that the market understood that we expect at least 225 million, but there's certainly an opportunity for us to over achieve that number.

Okay. Great.

So those are the two considerations.

Okay. Thanks. And then the second question is, obviously, you know, you pretty much knew what you were going to do in Physicians Interactive when you gave the '07 guidance. You put up a good bookings number. It sounds like you are really encouraged about the next year.

But just, you know, are there any other things you can give us to give us comfort or confidence that you're going to have a pretty darn big growth rate in '06 in Physicians Interactive, if you hit your numbers? And that's, you know, probably been the one area that's been the bumpiest, and you guys do a great job executing on the clinical software side.

Yes. We absolutely, you know, have been somewhat disappointed relative to the timing of some of these platform deals, you know, hitting when they're hitting. As Glen indicated, we have a high level of confidence as it relates to a significant one that's forthcoming here in the fourth quarter. But at this juncture, I really would say, you know, stay tuned based on our expected performance in the fourth quarter, most importantly on the booking side and we believe that that will convey to the market place a level of confidence in terms of how we're set up to deliver on, you know the expectation for 2007.

Yes. I would just add, I think that, you know, wonder as we talk about this platform, it looks a little bit more like a TouchWorks kind of install. So the good news is that you will see, and I've mentioned our view that in addition the kind of standard stuff, I think you're going to see a pretty solid acceleration in the bookings number from some of these platform deals beginning in the fourth quarter.

So I think you're going to see that bookings wise. Those, however, take some time to start to move through. But to the extent that we're signing, you know, $5million, $6million, $7 million deals, I think it starts to make that business much more predictable. It looks more like TouchWorks and I think it's a good predictor for margins as well.

Okay. Now it's going to be my last question was just in terms of that the margin benefit, is it more just the types of deals that you're selling or is it just -- is it scalability that would be driving margins back up in that business as you get the revenue?

In the PI business?

Yes.

PI business will be the scalability consideration. Again, you know, having the types of deals that we're describing and the predictability of that, and then ultimately as multiple deals follow, you know our ability to leverage the infrastructure that will have been put in place for the earlier deals, you know, that's what's going to drive margin expansion in that business.

Okay. Great. Thank you very much.

Your next question comes from Jackson Spears with Capstone Investment.

Glen you made a lot of noise about e-Prescribing can you give us a feel for what you expect the revenue model be, what kind of transaction revenue you can get on revenue per transaction? Will the payors pay for it, and what kind of costs we have to layer in this service e-prescribing business?

You know, what I would say is, one, we're working very hard on a variety of different models relative to e-prescribing and including non-ASP type deployment, which requires very little onsite if any installation capability. Think and it is almost accessing a Google or something like that and being able to write real time, have the information populated and the like.

So, we're very focused about providing models that take the cost out of e-prescribing relative to the transaction model, we have seen and I think Bill has talked about the fact that, we've seen some movement towards focusing more on getting folks to use it and we've been very supportive of that as opposed to trying to drive out transaction fees now.

So, we have a number of relationships where we've waived transaction fees if the respective managed care carriers and the like would provide incentives or help fund the installation of our software. Longer term, we continue to be very bullish on the value, the 3 billion transactions will bring in terms of transaction fees.

So I think, one, you need to install very low cost. We don't expect much in the way of huge costs for rolling this out, two, we expect rapid market penetration, and three, you know I would be very moderate on transaction fees in the immediate short-term and much more bullish longer-term on transaction fees.

Thank you.

Why don't we take one or two more questions?

Okay. Sir, your next question will come from Alex Alvarez with Goldman Sachs.

Good evening. Just one thing on my end. If I could follow up on Cory's earlier question about the changes in the Safe Harbor laws, with those now in place and with providers thinking about their strategies, is there any concern that during this evaluation period given that the rules have changed the markets actually see a bit of a hiccup in demand?

Well, again this is really new demand so we don't see it. We see people who in the past had told us, you know, they're not really interested, right now. We're getting calls from those people to say, "Hey, we are interested again. We're interested right now, because we've been contacted. We understand the funding available. Some of them haven't even waited. They just know that the hospitals are going to be approaching them. They've called us directly. So we haven't seen it."

The flip side of that is remember hospitals are absolutely excited about the opportunity to do this funding, because it builds a permanent relationship with these physicians for referrals, for exchanging information, for reducing the hospital cost by going electronic rather than paper submission.

And so again, we don't expect that hospitals are going to be a big drag on this. The real key here for us is educating the market.

Understand. Thanks, Glen.

Your next question comes from Greg Haddad with First Analysis.

Thanks for taking my question. With respect to your guidance for 2006, I think you've articulated an overall gross margin rate for the year around 52% give or take. Is that still, is that still your expectation?

Fair question, Greg. I think there's an opportunity for that to maybe slightly lower than that. My expectation is we'll finish the year north of 50%. So I guess, I would broaden that to be somewhere in that 50% to 52% range.

Thank you. And then, in 2007, do you see any significant or meaningful shifts in terms of your clinical software sales, for example, you know taking into account of course the April acquisition was in March, but leaving that aside do you see a shift perhaps towards more HealthMatics sales or more hardware sales or less hardware sales just in terms of the overall revenue stream of the business.

No, we don't. I mean, our modeling assumptions, you know, as we see that evaluate the pipeline, the relative mix, both between TouchWorks opportunities in A4 or HealthMatics opportunities, you know, are relatively consistent with this year.

Certainly, as we've talked about, we expect over time that the HealthMatics market will continue to accelerate and begin to catch up, if you will, with the growth expectations that already exist for the TouchWorks solution. So we've baked a little bit of that into our expectation next year but maybe not to the fullest extent that might come to fruition.

Second is that relative to the composition of both the TouchWorks sales and the HealthMatics sale, in terms of, portion of hardware versus service, versus software, you know we're not seeing a significant shift there.

Great. Thanks for giving me the time to ask a couple of questions.

Sure. Let's take one more question. We've -- the queue keeps building and I would be happy to stay here all night. But some of you have asked us to try to limit these calls so we'll take one more and we appreciate all the questions and the opportunity to tell you more about our business. So let's see who is next.

And our final question will come from Eugene Mannheimer with Caris Company.

Thanks for taking the question. Nice quarter. Two quick ones, one in the north medical deal which practice management system did you replace there, if you could share that with us, and second, how much visibility do you have in the '07 guidance? In other words, how much new business do you have to go out and win to get you comfortable with the guidance? Thanks.

In terms of North Medical and replacing the system, that's a good question. I don't know the answer, so I'm going to have to, I probably should have cut it off one question earlier. But I don't know the answer. We'll see if we can have somebody pull that up quickly, while Bill is handling your second question.

Sure, so Jean, relative to the visibility, as I indicated, our backlog at the end of the third quarter, the $174 million I think it's fair to assume, I certainly would be disappointed if we exited '06 with a number that wasn't higher than that. And we're foreshadowing, you know, when expectation of bookings will improve in the fourth quarter as we've indicated before.

So, when you couple that or you would add to that $174 million, $40 to $45 million of medication revenue. You know, you're getting it up to somewhere close to 218-220 million. So simple math, conservatively I've got call it north of $200 million because you'd have to back a little out for the subscription portion of our backlog, but say $200 million of the $300 million already baked in.

Okay. Thank you.

And now I know why I didn't know the name of the system it's called Medent M e d e n t. So I haven't heard of it before, but we're happy to replace them. Well, let me conclude the call today. Again as I did earlier and say, we think it was a very solid quarter.

We are very excited about what's coming in terms of the fourth quarter traditionally the largest sales quarter in our sector and the sector of the business that we operate in. And we're working hard to get our fair share and then some. This business is at an exciting juncture right now.

It's an opportunity, where people are starting to realize they have to automate. They want to automate. People are not only seeing the ability to automate their existing activities, but to connect with the rest of the market, the rest of the stakeholders in healthcare, and ultimately to transform healthcare. And we are a big part of that, we're excited to be here.

So, once again thanks to all of you who stuck with us on the call. Thanks to our employees who are doing such a great job, to all of our great clients and to all of our shareholders. Thanks very much.

That does concludes today's conference call. You may disconnect at this time.