Veradigm Inc (MDRX) 2007 Q1 法說會逐字稿

Good afternoon . I will be your conference operator today. I would like to welcome everyone to the Allscripts Healthcare Solutions first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) . Thank you. At this time I would now like to turn the conference over to Mr. Glen Tullman, CEO. Thank you, sir. Please

Thank you. Good afternoon and welcome to the Allscripts's first quarter 2007 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, Lee Shapiro our President and Ben Bulkley our new Chief Operating Officer. Coming off the fourth quarter of 2006, which represented the largest sales in revenue in the history of our company and what is traditionally the strongest quarter for all software companies, the first quarter represented solid progress for Allscripts and included some key milestones that put us in a solid position to deliver on our commitments for 2007. We will go through the details in a moment 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 current beliefs of Allscripts management as well as assumptions made by and information currently available to Allscripts management. Wherever practical, Allscripts will identify these forward-looking statements by using words such as may, will, expects, anticipates, believes, intends, estimates, could or similar expressions. These forward-looking statements are subject to a variety of risks and uncertainties including those listed in the earnings press release issued by Allscripts today and in Allscripts filings with the Securities and Exchange Commission, which could cause Allscripts' actual results, performance, prospects or opportunity in 2007 and beyond to differ materially from those expressed in or implied by the statements. Except as required by the Federal Security laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, exchange -- (technical difficulty)

One moment, sir. We will take care of that line.

-- changed circumstances or any other reason after the date of this release. With that said I would like to turn the call back over to our CEO, Glen Tullman.

Thanks, Bill. Let me quickly take you through the agenda of today's call. First we will talk about major successes in the quarter and our rational for increasing sales guidance. Next, we will talk about Ben Bulkley joining our company as COO. We will follow that with important trends in healthcare and we will close the call today with how Allscripts is positioned to capitalize on those trends.

Let me begin. I'm proud to report that our first quarter revenues of $65 million actually exceeded our fourth quarter 2006 revenues. And we grew over $20 million versus Q1 2006. Note that the fourth quarter typically is 35 to 40% of our sales, 2007 will be no different with a very strong finish. I'm also proud that we were able to match our fourth quarter 2006 EPS at $0.08 and almost triple our EPS from Q1 of last year. During the quarter, across our portfolio of solutions, we added many of the major name brands in health care to our list of clients including Advocate Health Care in Illinois, University of South Alabama Medical Center, NYU Medical Center, and Winthrop University Hospital, to name just a few of the larger clients. Building on our progress, a strong backlog increased visibility, and a solid Q1 are intention is to raise sales guidance and Bill will provide that information later during this call. Bottom line, this continues to be a great business to be in. As I said before, we have the right solutions at the right time.

My confidence level in the remainder of the year has also increased given the smooth transition of the COO role. As you know, on April 23rd, we introduced Ben Bulkley as our Chief Operating Officer. Ben brings excellent experience from in vitro in GE's Health Care operations. Having Ben on board gives us added experience and fire power on the execution side. As I said, this is all about execution and delivering for our clients. Speaking of delivering, we now have TouchWorks V-11 in controlled release. There comes a point in time when good companies decide whether they want to incrementally improve existing products or create a new product that literally leap frogs the competition. We chose the latter and this requires the commitment to break away from our traditional approach and the patience to get it right. We have done that with version 11, just as we did last year with our release of HealthMatics 2006. Market validation at V-11 is a transformational product has been overwhelming. V-11 will allow Allscripts to become what I call the Bloomberg of health care. It will provide physicians with a product they want to use and need to have.

Supported not only by strong functionality, which will increasingly become table stakes, but more important uniquely valuable content and robust connectivity. And I want to communicate this very clearly. The game is changing and these two words, content and connectivity are mission critical to the future of this market and to the future of our company. Just as the stock traders wouldn't trade without Bloomberg, we believe that in the not too distant future physicians won't want to see patients without Allscripts. Try to give your son or daughter a computer that is not connected to the Internet or Google and you will understand exactly what I mean. I'm excited to tell you that V-11 will go live with over 300 physician users on May 21st, at the Washington University Medical Faculty Associates. Our Washington, D.C., reference site. They are, as we speak, in the hands-on physician education process. And I want to extend a special thank you to George Washington CEO, Steve Badger and their CIO, [Pravene] [Totaga]^ -- and the rest of the GW team.

For the first time we partnered with a key client to conduct a significant amount of our quality control and end user verification. We also gave them final sign off and they reviewed, tested and documented close to 100 processes before the final okay. This is the most tested product in our history. While we push back the market release date by four to six weeks, the time invested was well worth it. In addition to V-11, another example of leaping ahead of the market was the January launch of the National E-prescribing patient safety initiative or NEPSI. I talked about the coalition in our last call so I will provide an update on the $100 million program that we are leading along with our national sponsored Dell and our other sponsors. The program provides free electronic prescribing for every physician in America. We are seeing strong demand with thousands of physicians already registered. NEPSI has strengthened our partnerships and really captured the imagination of the industry. Opening up new doors for Allscripts and allowing us to broaden our reach. And we expect that it will be a major contributor to future sales as it builds brand loyalty fro Allscripts among the nation's smaller physician groups who represent the largest untapped sector of the market for electronic health records. Taking a look at the overall market for our solutions, we continue to be very optimistic about the trends. At the highest level, the nation continues to focus on our broken health care system.

There is growing consensus that information technology, electronic prescribing as well as electronic health records is the solution. I emphasized during my key note at the World Health Care Conference last month that this is because both the software and the technology are proven solutions with documented results and many examples of success. And also because the health care industry has tried everything else and it's simply hasn't worked. If we hope to improve health care quality and lower cost, virtually every stake holder has concluded we will do it using clinical software, connectivity and information solutions and that physicians will be at the center. The transformation will come from outside the four walls of the hospital. From alternate sites like retail stores. From onset clinics built at large employers, and pharmacists playing a more significant role. What I like to call the 3- Ws that are changing health care, Wal-Mart, Walgreens and Whole Health, which is a provider of employer sponsored onsight care facilities. Allscripts is right in the middle of this transformation.

We are providing a comprehensive clinical and practice management solution and a real partnership with our physician clients centered on connecting health care and providing the content and information that enable doctors and care givers to make better, higher quality decisions and to enhance their practice revenue by doing so. We are heavily investing in connectivity. Like our Universal Application Integrator, which is connecting over 60 devices to our electronic health record. We are also investing in information to our Walters Core content development agreement. In addition, our HealthMatics ED and Canopy solutions are providing the connectivity to hospitals that physicians really want. We capture information from the emergency department and when patients are being discharged and provide that information to physicians to fill an information gap that previously existed. Our ED and Canopy solutions are an important part of our strategy to connect to hospitals. Especially as hospitals are becoming more involved in subsidizing physician purchases of the electronic prescribing and electronic health records for community physicians. These relationships will pay dividends for us. As I said, we were building a secure, interoperable health care system connecting patients, hospitals, labs, pharmacies, payors and physicians.

And we often get asked about the role of government. What we are seeing is that the federal government is doing just what we believe they should be doing. And that is facilitating the setting of standards and encouraging the private sector to step up. We were also seeing a significant amount of activity at the state level where innovation should occur. We expect it will be participating in a number of state sponsored programs. And all of this push from the government and big employers is driving interest levels that could clearly be seen at the industry's largest trade show the Health Care Information and Management Systems Society better known as HIMSS. In February, over 25,000 attendees came to New Orleans to see who had the best solutions for their organizations. And Allscripts was front page news. While at HIMSS we announced our partnership with LSU Health Care, which had 250,000 patient charts literally washed away in Hurricane Katrina. Our accomplishments in bringing their 500 physicians live were highlighted by Microsoft CEO, Steve Balmer during his key note address and on major networks including CNN, MSNBC, Bloomberg and FOX. Also during HIMSS, one of our premier electronic health record clients, Dr. Jim Morrow, was names HIMSS Physician IT Leader of the Year, for demonstrating that our HealthMatics Electronic Health Record delivered $1.2 million in direct cost savings in just the first year of operation in his 11 physician practice. A great example of that vision is being shown through practices like Dr. Morrow's. Shortly after HIMSS, we hosted close to 100 prospects in a Executive Summit in Las Vegas. One of the analysts who attended stated in his research note that this, quote, Reaffirms MDRXs leadership grasp on the physician market, unquote. He continued, Our discussions with existing and potential customers provide further evidence of MDRXs superior market perception on both technology and customer service basis, unquote. So, again, we were seeing accelerated interest in our solutions driven by our unique position as the go-to company. Whether your question is related to emergency department automation, care management, E-prescribing, document imaging, electronic health records, practice and revenue cycle management or inner operability and tying it all together. So let me move from the results generally to the results of our business units. Now I will talk specifically about our TouchWorks unit which had a strong quarter. Today we announced an agreement with Advocate Health Care, the largest health care provider in Illinois who started off with a small pilot project in one of their medical groups and is now expanding system-wide to more than 400 physicians in over 100 locations across the Chicago area.

Advocate, a GEIDX FlowCast user is one of the number of IDX sales we closed this quarter. We also announced today an agreement with Hutchison Clinic, another major sale of our electronic health record and our practice management system. A combination that is becoming more and more common as our practice management solutions gain traction in the market. Moving to HealthMatics, our HealthMatics unit also delivered a strong quarter and became the first electronic health record to interface with the nation's first statewide health information exchange. The Delaware Health Information Network. HealthMatics can interface with the Delaware system to automatic populate the patient record with information such as test results and procedures from the state's three largest hospitals and from Lab Corps. This will drive strong sales nationwide as it serves as a model highlighting our inner operable. A key competitive advantage.

Moving to HealthMatics ED, we were starting to see synergies across our businesses. As people begin to understand the importance of connecting ambulatory physicians to the information coming from the hospital. One example is Winthrop University Hospital which marks the first joint sale of HelathMatics ED and our TouchWorks Electronic Health;th Record. And we saw a record seven go lives of HealthMatics ED during the quarter. In addition, the class survey has named Allscripts as the leader in the adoption of a full EDIX or Emergency Department Information System with more clients using all modules than any other emergency department system. And this helps to exemplify that leadership. Of note, is that all seven go live included integration with the in-patient systems at those sites including Meditech, [McKesan], Siemens and [MICIS].

Let me move to our Canopy unit. Canopy is a care management and discharge solutions. It streamlines and speeds patient care management in hospitals. Canopy is a lot like Sales Force.com. As it is an ASP model with recurring revenues. The solution enable seamless transition with recurring revenues. The solution enable seamless transition from the acute setting to the ambulatory environment. The business is predictable, growing rapidly and fits nicely with our connect strategy. Canopy steady growth continued during the first quarter as we signed a number of significant new agreements including the University of South Alabama Medical Center, NYU Medical Center and Westchester Medical Center. Finally our PI business unit turned in a strong performance during the first quarter including signing of another enterprise client. We are also seeing strong interest from pharmaceutical companies in the NEPSI initiative and continued interest from pharmaceutical companies in our electronic health records and the information that they generate.

So a great start to 2007. I'm now going to turn the call over to Bill Davis to cover our financial results for the first quarter. Bill?

Thanks, Glen. Hello, everyone. As Glen indicated I will review our first quarter results in greater detail and then provide some update perspective on the balance of 2007. Turning first to our Q1 results in bookings in the quarter, total bookings during the quarter were approximately 34.5 million. Consistent with prior quarters, bookings do not take into consideration the 10.2 million of sales and medication. Our 34.5 million in bookings compares to 31.2 million of bookings in Q1 of 2006. And is reflective of the fact that Q1 tends to be one of our lower booking quarters in light of the historical strength of our fourth quarter we recently completed.

Our clinical software businesses contributed 29.2 million in bookings during the quarter. Excluding ongoing support. This compares to 27.1 million in the first quarter of last year. As I will discuss later in the call, we continue to be very encouraged by the relative strength in our pipeline in overall sales opportunities for the balance of this year. Our physicians interactive business contributed to the balance of our bookings at 5.3 million. Demonstrating continued demand for PI's offerings. PI's Q1 bookings compared to 4.1 million of bookings in the first quarter of last year representing a 30% increase. Turning now to backlog, we ended the first quarter with 211.6 million in sold backlog. The backlog break down is as follows. License and service fees related to our clinical software businesses represented 105 million -- $105.9 million. Software subscriptions which will be recognizes over the next 3 to 5 years, represent 26.6 million. Support and maintenance fees which are expected to be recognized over the next 12 months made up 52.8 million and then finally physicians interactive contributed the balance of our backlog for 26.4 million, again for a total of 211.6 million. As I have indicated before, our reported backlog does not include anything related to the $44 million expected from our medication distribution business, even though we view the medication revenue as reoccurring in nature.

Turning now to revenue. Our first quarter revenue of 65 million represented an increase of 22.8 million or 54% increase over the same three month period last year. Our clinical software businesses contributed a majority of that increase representing approximately 81% year-over-year growth. Please note that our Q1 2007 clinical software revenue excluded approximately $1 million related to the timing of our version 11 software release. We expect that $1 million of revenue to be recognized in the second quarter. Turning now to physicians interactive. PI had revenue of 3.6 million in the first quarter of 2007. Compared to 2.4 million in the first quarter of last year. The 49% increase is primarily due to the contribution of certain other previously discussed platform deals. As we discussed last quarter, Novartis and King Pharmaceuticals started to contribute to our revenue in this first quarter and we expect that to be even more meaningful in subsequent quarters this year. Moving to our meds business, we saw another solid quarter with revenue of 10.2 million. This compares to 11.5 million in the first quarter of last year. The revenue decrease is due to the absence of approximately $0.5 million of Tamiflu vaccine sales that occurred last year, as well as concerted effort to continue to reduce wholesale revenue this past quarter. In terms of revenue mix, our software related services segment represented approximately 79% of our total revenue in the first quarter. This is up from approximately 67% in the first quarter of last year.

First quarter revenue by segment is as follows. Again, our meds distribution business delivered 10.2 million. Our clinical software business delivered 79% of our revenue at 51.2 million. And our information services or PI delivered the balance of 3.6 million for a total of 65 million. Looking now to gross margins, overall, our gross margin was approximately 50% in the first quarter of 2007 versus 48% in the first quarter of last year and 54% in the fourth quarter. Margins by segment are as follows. We saw medication margins moving from 16% in the fourth quarter up to 19% in the first quarter. Our clinical software businesses delivered 56% gross margin and info services delivered 42% margin for a total of 49.6 margin for the total business. The sequential change in gross margin percentage can be principally explained by three factors. First, our gross margin percentage was adversely impacted by approximately 50 basis points due to the reclassification of certain revenue producing resources affective January 1, of this year from SG&A to cost of revenue. As well as classification of stock base compensation related to the employees classified as cost of revenue. Such reclassification did not impact our overall operating margins. The second factor impacting overall gross margin was the change in the clinical software segment that can be attributed to approximately $2.1 million more lower margin hardware revenue being recognized in the quarter and $2.9 million less higher margin add on license revenue being recognized in the quarter when compared to the fourth quarter.

Finally, physicians interactive sequential gross margin change was a result of the benefit realized in the fourth quarter related to the completion of certain E-detailing projects at higher than expected gross margins in the quarter. In the future, we continue to expect gross margin in this business to climb back into the mid to high 40s. Such decreases were offset by the previously mentioned meds gross margins. The increase in the meds margins from Q4 of '06 is attributed to our concerted effort to reduce the lower margin wholesaler revenue in the quarter. Turning now to expenses. Operating expenses excluding deal related amortization and stock base compensation for the first quarter were 21.8 million. This compares to 23.1 million of expenses in the fourth quarter. The decrease is attributed to the previously mentioned reclass to cost of revenue from operating expenses as well as lower incentive compensation expense related to our performance against our internal plans. With regards to capitalized software, we had 3.3 million in the quarter. This amount compares to 3 million in the fourth quarter and is reflective of the investment we continue to make in the development of TouchWorks Version 11.

We also recorded an additional capitalized software amount of $1.7 million in the quarter pertaining to the content development under our Walters Core partnership. As we indicated in the past. Capitalized software will fluctuate from quarter to quarter depending on our product development cycle. Stock base compensation was approximately $700,000 or $400,000 after tax. Representing a $0.01 per diluted share. This compares to $200,000 or a $0.01 per share of stock base compensation net of tax in the first quarter of last year. Deal related amortization was approximately 2.6 million, or 1.5 million after tax representing $0.02 per share. This compares to $800,000 or $0.02 per share of acquisition related amortization net of tax last year's first quarter. Net interest income was approximately $100,000 in the quarter. Net income from the quarter was 4.5 million, or $0.08 per diluted share. This compares to 1.3 million or $0.03 per share in the first quarter of last year and 4.5 million or $0.08 per share in the fourth quarter. Please note that net income for the first quarter of 2007 reflects a full tax provision at approximately 40%.

Our GAAP earnings of $0.08 per share included the previously mentioned $0.02 per share of acquisition related amortization and $0.01 per share of stock base compensation. This compares to GAAP earnings of $0.03 per share in the first quarter of last year which included $0.02 per share of acquisition related amortization and a $0.01 per share of stock base compensation. Basic shares outstanding for the quarter were 54.6 million. And diluted shares were 64.5 million. The 7.3 million shares issuable under our convertible debt offering were dilutive to our GAAP earnings per share and therefore are included in our diluted per share computation. The 7.3 million shares were excluded from the first quarter of last year due to the shares being anti-dilutive. It's important to remember to add back net interest expense related to the convertible debt to net income when computing diluted earnings per share given that we added the debt's underlying shares to our diluted share count. That amount was approximately $523,000 net of tax. With regard to overall head count we ended the quarter with approximately 967 employees which compares to 914 we reported in the fourth quarter. Turning to now to our balance sheet, we ended the quarter with $90 million in cash and marketable securities. Which is reflective of us generating approximately 11.2 million in cash from operations in the quarter. And 2.5 million of cash from stock option and employee stock purchase plan proceeds. The inflows of cash were offset by approximately 6.7 million of capital expenditures in the previously mentioned capitalized software.

Accounts receivable as of March 31, was $57.4 million. Which resulted in day sales outstanding of approximately 79 days. Please note that our receivable balance contemplates the fact that we did a large percentage of our annual maintenance billing in the first quarter as highlighted by the increase in our deferred revenue. We expect both our DSOs and deferred revenue to come down over the balance of 2007. In addition, upon adoption of the new tax literature, Dealing with Income Tax and Certainties on January 1, or what's often referred to as FIN 48, we recorded an estimate of approximately 4.3 million for potential tax obligation relating to A4s utilization of net operating loss carry forwards in their 2003 and 2004 tax years that could be limited under Section 382 of the IRS code. This liability was recorded against goodwill in purchase accounting and so it did not impact our Q1 operating results. This increase to goodwill was offset by an additional $6 million in A-4 deferred tax assets that were recorded as of March 31, 2007. This adjustment was also recorded against goodwill. Which is related to A4's net operating losses generating during 2006 stub period prior to our acquisition.

Turning now to the balance of 2007, Allscripts continues to target total revenue to be an excess of 300 million. We also anticipate GAAP earnings per share that will be in the range of $0.42 to $0.44 per diluted share. Please keep in mind that the 7.3 million shares associated with our convertible debt offerings are expected to be dilutive for the entire year and therefore included in our estimated share count. As it relates to our share count for 2007, I'm estimating that we will average close to the previously mentioned 65 million shares for the full year. We are still estimating in an effective tax rate at 40%, but continue to evaluate ways to reduce that rate still this year. Our $0.42 to $0.44 per share guidance includes approximately 6.2 million or $0.10 per share of acquisition related amortization and 3.5 million or $0.05 of stock base compensation. Both amounts are net of tax. In terms of our bookings guidance, we see a lot of strength in our clinical software pipeline for our Q Electronic Health Record and Practice Management offerings. We were also encouraged by the large number of potential enterprise deals that we expect to close this year.

As such, we now expect total clinical bookings for the year to exceed $230 million versus our previously communicated guidance of $210 million. This will represent growth of 40% when compared to 2006. For comparability purposes, please note that A4's bookings for January and February of last year were approximately 6.9 million. We expect our physicians interactive business to deliver at least 30 million of bookings in 2007, bringing our total bookings expectations for the year to be in excess of 260 million. So with that, I would like to turn it back over to Glen for some closing remarks. Thanks, Bill. Let me close with a few comments. Our health care system is in crisis and everyone has concluded that information technology will be central to the solution which we believe is an inner operable connected electronic health care system and therein lies the opportunity for Allscripts. Our focus is on more than just delivering great software. We are in the information business and the electronic health record is the most critical element.

With that said, our portfolio is more robust than it's ever been with a set of solutions that provides a delivery platform for information and the connectivity platform for the many different stake holders who want to and need to exchange information. This vision is fast becoming a reality and its cleat that Allscripts, in partnership with our clients will continue to lead the market. I want to thank all of you for your time today and for your continued support of our vision. We are now ready to take your questions. Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Ross Muken with Deutsche Bank. Please go ahead, sir.

Hi, guys. I wanted to dig into sort of the growth you saw across the different segments for the quarter. Can you sort of segment it out in terms of strengths on sort of the five segments of customers you have been showing from enterprise down to the small offices and talk to sort of the increased confidence you have around the bookings guidance?

I would refer back to Ross what I talked to about publicly to simplify it I will take the five and condense it into three. The large in the enterprise market -- we continue to see growth opportunities in the 35 to 40% plus range. And again the pipeline that we are seeing is indicative of that the mid market we continue to see growth expectation in the 30 to 35% in the independent small markets in the 20 to 25% range. So it's based on those growth expectations relative strength of our pipeline. And the level of confidence we have in terms of where we are at and specific deals that gave rise to where we see the bookings coming out for the whole year and that's why we raised the guidance in the manor that we did.

I will just add that relative to the large enterprise deals, we have really good visibility on those. Any one of those -- I mean, we are talking about agreements that are anywhere between 3 to $5 million range with some larger than that that are in the pipeline. Those can have a pretty dramatic effect if you close one or two of those more than you expect in any one quarter. Again, based on our visibility of what's in the pipeline we feel comfortable raising the sales guidance.

One administrative question. On the 500,000 impact from Tamiflu, was that incorporated into the initial guidance you had given for that business of 44 million. If not, what do you estimate the full year impact may be on sort of foregone Tamiflu sales.

Just to clarify what happened, Tamiflu really in a lot of respect came about last year because of the absence of the flu vaccine that typically falls in the latter part. We miss out on flu opportunity Q3, Q4 in 2005. We continue to be confidence in the guidance that we have provided in the $44 million range for 2007. And it expects in terms of what isn't repeating itself in the first quarter and in effect to occur third quarter, fourth quarter as the flu vaccine presents itself in the normal course.

Thank you, guys.

Our next question comes from Cory Tobin with William Blair. Please go ahead, sir.

Good afternoon. Couple quick questions. Bill, a couple of things I want to make sure I heard correctly. Did you say the capitalized software was 3.3 million total or 3.3 plus 1.7?

The 3.3 pertains to our internal R&D development effort. Incremental capitalization, so it is incremental of 1.7 are fees that were paid directly to Walters Core as part of our $14 million five year commitment related to our Walters Core content relationship. That is incremental. But specific to Walters Core.

So 5 million all together will be capitalized. That's how we should look at it?

That's right.

Quickly, could you break out four bookings in the quarter. We have not. As I talked about on last quarter's call, given the relative comparable, recognizing there are no results for ten months last year it's not our intention to do that. Shifting gears a second here. I did hear correctly, was there a comment that expenses were down because of lower incentive compensation accrual?

Yes, in two respects. All Allscripts employs a quarterly bonus structure our bonus eligibility escalates over the course of the year. So on a relative basis Q1 represents the lowest period in terms of incentive dollars that are at play. That is a dynamic. Relative achievement to our own internal plan was slightly lower than that of the fourth quarter, as well. It's both a eligibility consideration but also achievement that drove that comment.

Plan is based on bookings or reported results or combination of both --

No, its based on our own internal budget and driven by revenue and operating income achievement.

Understood, on the bookings and increase in guidance, can you give us a little color. Sounds like the pipeline is strong which is something we have seen for a couple quarters now. Was there anything in Q1 which kept conversion rates from pipelining into bookings lower than normal? Or anything that you see in the horizon that's going to accelerate the conversion rates that gives you the confidence to take the bookings up as we look at the rest of the year?

Cory, this is Glen. A few things, we saw one or two very large enterprise agreements that frankly could have easily closed in the first quarter, slip into what we expect to the second quarter. So relative to that, we were in a choice situations and we are far down the pipeline. But in terms of the size of these agreement, they weren't thing that could be push food one quarter or another and not that thing that we want to do in that respect, so that's one issue. A second issue is especially given the size of the fourth quarter, some of those agreements in the fourth quarter that were signed ended up being signed frankly a little earlier than we thought so we might have expected them in the first quarter. That said, these large agreements you may spend the first month or two actually in the planning process before you get into the actual implementation process so when you are dealing with enterprise customers, you have got two different variables going on. Does that give you some help.

It certainly helps. There is a follow-up, there is nothing that gives you the sense that customers' appetite to purchase or conversion rates, whatever it might be, might be slowing down incrementally.

No, in fact the reason we are raising sales guidance is the market continues to heat up. Everywhere you turn there are customers not only new customers, Greenfield, but existing customers who have some of the first generation electronic health records who are coming back saying, given what's coming in terms of connectivity, in terms of content, in terms of the need to connect to personal health records we will need to make conversions to updated systems that are web based in the like and Allscripts is the leader in those kinds of systems and those kinds of capabilities. So we are very, very bullish on what the selling market looks like.

And one last one and then I will jump in the queue. Shifting into incorporate the expense side, Bill on operating margins in this year, obviously looking for a nice ramp within your guidance, any thoughts on what the sort of peak or target model operating margin might be for the business as we look a year or two out?

Absolutely, Cory. We have talked about in guidance of we provided in terms of the 300 plus million and that parlaying into $0.42 to $0.44 of GAAP EPS, that conveys an incremental contribution margin somewhere around 30%, slightly above that. And so we absolutely think that that is indicative of the leverage that is in our operating model. Also believe that it is indicative of where we see the overall operating performance of this business growing to recognizing that the guidance for this full year will be mid teens. So expectation in the two year time horizon you are talking about clearly we would expect we would gravitate into the 20s in that general time frame with still some room to grow off of that. Thank you.

Our next question comes from Sean Wieland with Piper Jaffray.

I think it's Sean Wieland from Piper Jaffray. Could we -- I want to talk about this bookings number for a minute. I think -- let's ask it a different way. Help me draw the correlation between the macro level environment which is incredibly bullish regarding the industry and the results on the Q1 bookings number from an apples to apples basis and quick math would suggest that organically the bookings was flat to maybe even a little bit down. Were there any changes to the sales compensation plan that could have affect this traction within the IDX base or anything changing within the company or the market that could have contributed to that?

Sean, this is Glen. First of all we have to take into account that the fourth quarter was a monster quarter. As Bill always talks about, the fourth quarter represents 35 to 40% of the overall year-end bookings. We had an incredibly strong fourth quarter so we saw a little bit of planned pipeline get converted in the fourth quarter that could have in the first quarter. That's number one. Number two, as I mentioned one or two of the large enterprise deals that easily could have closed in the first quarter will probably push to the second quarter now. Had those -- had just one of those closed, again, we would have been looking at different number there. So it's part of the reason that we give guidance over the course of the year and it's tough to predict and in some cases quarter by quarter when it comes to sales. In terms of changes, no, there are no changes in the sales comp plans that would have driven any reason for people not to want to close business. The IDX pipeline remains very strong. It's comparable in terms of percentage of our sales relative to what the fourth quarter was which is a very strong quarter and we continue to see that the largest customers who are using IDX practice management continue to favor Allscripts and TouchWorks as solution of their choice. We don't see other competitive solutions really coming from the IDX base.

Okay. And then with the change in the royalty payment going away essentially I think starting in the third quarter, are sales reps -- I wanted to make sure there is no incentive for sales reps to carry the deals into the third quarter. They are incentive to get deals done in the second quarter?

No, there are sales reps enjoy a lot of attention. And a lot of focus on their is selling activities here, as you know. The idea of holding off on a deal -- one of the things we do, we have a lot of touches on any individual client. So those clients may be at an executive summit. They may run into me or other executives, Lori McGraw or Lee Shapiro or Bill who are asking them how is the process going? Where are we in the close process. We get all kinds of different touches and different validations. And the sales reps specifically are incentive to close sooner rather than later on any particular agreement. Again, we don't attribute this is a first quarter that is not much different from what our expectations are would have been. And when we talk about a sales number per se or bookings numbers as Bill would call it, the difference between one or two agreements is the difference that we are talking about here. So that's part of the reason we felt comfortable enough to raise sales guidance now because of how robust this market is.

Great. One other quick question, when could you looking out into the future, when do you envision the business or do you envision the business going from a tipping towards from a transaction oriented environment signing one customer, one contract to having some of these larger governmental drivers of state wide initiatives kind of contributing more to your bookings number?

We don't -- I'm always careful about wanting to build a business or set any kind of expectations based on what the government, federal or state will do. And we also indicated that we have a very robust business independent of what government does. That said, there was an interesting editorial in a small paper in the south that talked about who was going to be first to actually enstate a mandatory electronic prescribing. I think you will see changes like that coming. We had some conversations with a number of different states about the topic that will spur adoption not just of adoption of electronic prescribing which we think as an on ramp to the prescription highway. But adoption of electronic health records as well. Net-net, we think that all of these trends will be very, very helpful in pushing adoption. We see continued growth in the market.

Thank you, thank you very much.

Thanks, Sean.

Our next question comes from Richard Close with Jefferies.

Yes, thank you. Maybe if you could comment a little bit on your win rate in the quarter. Did you see any change there? Maybe on the competition side of things.

Sure. We haven't seen change in the win rate. We see significant win rate in fact my biggest concern, if you ask me about it, is not our win rate. It's the fact that we are not losing as enough. What I mean by that is we are not engaged in enough agreements which is part of the reason we continue to expand the sales force -- in the HealthMatics Group we added seven or eight sales reps and opened at West Coast territory for our HealthMatics teams. Our biggest concern is focus on how we are prospecting and getting in front of more people and we have specifically created new incentives to focus the sales teams on making sure that -- making quota isn't enough. That we are also measuring the new amount of new prospect in going on. We continue to see strong interest. We continue to see very high win rates in all of our agreements.

Okay. And then, Bill, if I could jump in here with you, I think you said on a pro forma basis, A4 was 6.9 million for January and February in terms of clinical software bookings.

That was for January, February of '06.

Correct. About 6.9 million was the number.

That's correct

And then when we look at, Glen had mentioned, you previously stated 30 to 35% of your annual bookings come in the fourth quarter and then the remainder amount divided up essentially evenly between the first, second and third. Obviously something slipped here and I guess from the first into the second. Would we essentially look at the second and third quarter evenly? Or should we skew more toward the second half of the year from a bookings clinical software that is.

Again, I really resist wanting to give quarter specific guidance. I appreciate the question. Again, my expectation is that you will see 35 plus% of our annual booking commitment following in the fourth quarter. I don't have a crystal ball in terms of the relative distribution between Q2 and Q3. I will say relative to the cumulative effect, my expectation is coming out of September and we were on track in delivering on that expectation both in terms of total value but also relative split in terms of the first nine months versus the last three. In terms of how it will fall, obviously Q2 should be more robust than the first quarter. But in terms of relative split between Q2 and Q3, I would be hesitant to predict what that will be at this point.

And then maybe just quick follow-up. If we were to look at maybe there is one or two deals that were slipped in potentially into the second quarter. Would you have been in line with that evenly distributed remaining part over first, second and third quarters?

And in some respect, one that Glen was referring to, one of the transactions given to its relative size could have put us in excess of that relative distribution. So comfortable in saying with two of those types -- two of the deals that were referring to, we would have definitely been in keeping with that and maybe even above that.

But those deals were not lost. They are still in play?

Absolutely. Correct.

Thank you.

Our next question comes from George Hill with Leerink Swann.

Good afternoon. I thought it looks like we will dig into the bookings more. As we talked about the year, when you provide color around maybe what you're expecting in growth from the A-4 small practice business versus the A-4 hospital ED business versus the TouchWorks business, just how you feel about the relative strength of each business?

Again, George, we decided not to -- decided not to get into that level of specificity. I would refer back to the segment growth expectations that I talked about before. I think in keeping with that relative to the acute businesses comfortable saying expectations in and around that 25%, 25 to 30% general range in keeping in terms of what we are seeing on the lower end on the ambulatory side of the equation. Going further than that I don't believe we were prepared to do that.

George, let me give you an example as to why. When we talk about HealthMatics versus TouchWorks, the reality is different customers may fit better than the other. And we never want to be in a situation where we are trying to manage to growth in one versus the other. We look at it as clinical software in solving the problem for the customers. We don't want to be in a situation where we are saying let's push business to HealthMatics and to TouchWorks and try to meet some kind of expectation that was set out there. We looked at it we have to set of solutions that we provide to all different sizes of practices that also starts to come across when you deal with MSOs who may be hosting TouchWorks but providing it to a number of smaller practices. Again, a significant amount of overlap and we look at that as one business.

I want to hit a couple of topics briefly. I know we were running short of time. Are you taking any pricing pressure in the environment? We know some lower cost competitors are having success in the market.

The only place we are seeing pricing pressure is as you point out in the lowest end of the market. There is probably one competitor in particular that has gone out with price as a competitive strategy. We were starting to see and customers are starting to see that there is some real inability to support on the back end the systems that are getting installed. I think as that message gets out, the real cost to these systems isn't what the software or implementation costs up front. It's whether or not they get used and whether or not they have to be deinstalled. We see that. We see some price pressure on the lower end. But our expectation is that, that is probably not a long-term or deepening issue for the business. We think people will look for results.

Okay. Given that you raised clinical software bookings guidance, I will say pretty solidly for the year, but you didn't raise revenue guidance. Assume you said it was without saying the lion share of the bookings will come in the fourth quarter. What gives you confidence that those deals you expect to sign in the fourth quarter won't slip next year

We are increasingly confident of when the agreements will hit. Bill kind of touched on and wouldn't let me say it but he touched on the size of some of these agreements. These larger agreements are ones that you work on for a number of months that they get into vendor of choice and get into legal negotiation. So you have good visibility as to when they are going to be signed. As I mentioned, some of those larger agreements also take a few months to actually get geared up and start producing conversion to revenue. So we gave ourselves a little room on the conversion from sales or bookings to revenue. I would clarify something you said. And that is that I don't think what we are seeing explicitly or implicit, is that all of the sales will fall to the fourth quarter. We have been consistent in the expectation that fourth quarter will represented as it has in prior years, a meaning p[percentage of our total revenue and we talk about that in the 25% plus range of the total booking but in recognition relative staging as you know and larger deals, the take down from a revenue perspective for Allscripts is different than a lot of our competition. We put it into percentage of completion mode, were recognizing those software dollars over the installation period which can be any where where from 9 to 12 months. We are taking that into account, as we think about the relative booking strength in '07, parlaying into the P&L strength. So we think we were well situated based on the booking performance that we put on the board last year because quite frankly that's what set up our P&L for this year. What we were selling this year business setting up '08 and beyond.

Then quickly following up on that comment, are you seeing any hesitancy to purchase by a large practice as they are waiting for the tax issues to be reconciled between HHS and IRS with them hoping if they wait six months or nine months some hospital will come along and pick up the tab for their IT system.

Absolutely, zero. None at all. The only place that would see any impact of the hospitals and people waiting is in the smallest practices. And I'm talking about ones, twos and threes where frankly we aren't very focussed. And those are the ones that are most price sensitive as well. That -- our strategy there, of course, is to get in from an entry level perspective with NEPSI.

Thanks, guys.

Thank you, sir. Our next question or comment comes from Larry Marsh with Lehman Brothers.

Thanks. Good afternoon. Just three I guess questions to follow-up with everyone else. Glen, I guess one of the themes you highlighted in the last couple months is going after the high end of the market. You talked about it at our conference in the fourth quarter. Fair to say that there is some disruption of note within the largest high end vendor in the market that you are taking share? Is that too strong a comment?

No, I would agree with that. I think the largest vendor has their hands full with challenging situation in California. Number one. But I think it's more fundamental than that. You're dealing with some of the early adopters who use that system. The system is an old system. And it's not web based. As you start to see what's going to happen over the next three to six months in terms of personal health records and some of the murid of new entrants who are producing personal health records, everyone from Microsoft to Google to Revolution Health, to Web MD, and of course Medem who is we work very close with and when you see that, and you see the interactivity that's going to start to happen when also and Bill mentioned our work with Walters Cores and our investment to create that ambulatory content that will be pushed to the patient health record's we were seeing what's going to be a see change and what physician see. Not the whole concept like the Bloomberg for health care. Imagine going to one of your traders and saying we will take away your Bloomberg. They say we can't trade effectively without it and we think increasingly physicians are going to see these systems have platforms to get and deliver information and to be connected to everything they need. So from that perspective we think we have a very strong leg up relative to some of the more traditional systems that are out there and clearly as you mentioned one that has their hands full and just getting the system actually working

And just I don't want to put words in your mouth, but it would sounds like based on the comments you made here on the call, there is one potential customer that could represent bookings by itself 25 to $30 million. If that's the case, will it be by far your single largest customers if and when that were to happen?

I think it's reasonable to say that there is a number of agreements in our pipeline, all of which would represent the largest agreements in the company's history. Your number seems a little high to me. But I think there are very, very substantial agreements out there as we replace some of the existing systems that you made reference to earlier.

So clearly to put that in context, the advocate relationship you announced here today while a nice relationship would be just a small fraction of some of these relationships you are talking about?

Well, that's correct. And I want to mention that the advocate relationship, advocate, as I mentioned on the call, has hundreds more physicians as well as independent physicians that are not covered by this first stage. This expansion. They have agreed to expand system-wide with our system. The agreement we announced today only covers 225 of their physicians and it's a first stage and rather than they made an announcement that they are rolling out system-wide. They signed the first agreement in the system-wide rollout for 225 of their physicians. That's only a fraction of their overall physicians. So they made the commitment. They haven't signed. Other agreements we have signed for the entire number of physicians but then take a number of steps to roll it out. That's the only difference there. Advocate right there, that represents only a small portion of what they will eventually -- the business they will eventually do with us.

To put it in context, if they move to the full 800, could this be among your larger in a relationships at some point in the future? Or a small fraction of what some of these larger relationships could be?

I would expect it would be among our larger, but it's not in the same category as the earlier ones we were talking about.

Okay. Two other quick things. I know in the past you responded in giving us a figure of what percentage your clinical bookings are, IDX FlowCast customers, do you have that number for the quarter?

Sure, this is Bill. In context of the total clinical software bookings that we reported on, it represented just around 19%. If you were to break that down to just TouchWorks, Glen made reference to it earlier, it's in keeping with about a third of the TouchWorks specific bookings in the quarter.

And finally just you talked about the V-11release being pushed back four to six weeks with Steve Badger and his team providing a lot of the quality control of the product, are you suggesting that had any impact in the quarter? Or will it have any impact in this upcoming quarter?

I made reference, explicit reference to that from a revenue perspective. We saw about a $1 million of production where we were limited to recognizing because it was tied to ultimate delivery of V-11. Again, in keeping with the expectation that GA is forthcoming we expect that to fall through here in the second quarter.

From a bookings standpoint?

From a booking standpoint, you are right. There are I think we did see a few agreements that basically said we want to visit. We want to see it up live and operating before we put pen to paper. In both ways that delay had an impact. That said, I couldn't be more pleased with what's coming out and from the standpoint of the fact that it's in controlled release and running on GW servers today, and they will probably within about a week and a half of being live will be hosting site visits. There is a very substantial amount of pent-up demand. We were a little concerned in the fourth quarter that people might hold off and that might impact the fourth quarter. I think the issue was that we told folks they would be visiting live sites in the first quarter and we were off that by about four to six weeks given the size of the project, given how significant a change it is and capabilities. I think we were still pleased with where it came from. Interestingly, by the way, the delays in the project came not from development. They came from the fact that we did an awful lot of design work and that actually delayed the start of the development work.

Okay, for somebody waiting to see have a live site visit that could manifest itself in bookings in the second quarter.

Absolutely. And we expect it will.

Okay very good. Thanks.

Our next question comes from Sandy Draper with Raymond James.

(technical difficulty) Just a quick question on the gross margin sales. Similar level with what we saw in the third quarter, with the million dollars that comes back in with the live release and the build up, would you still expect gross margins to end up at the same level you talked about back in October? Thanks.

I mean, in terms of our modeling and this will come through in our investor presentation and both the one that exists today but also in the presentation that will be updated on the heels of this announcement. We are expecting overall gross margins for the combined business to be in the low 50s as we convey previously as well as at the October investor day and again my expectations on a segment basis, I think about the meds business being in the high teens. The clinical software businesses again being in the high 50s and info services as I commented before migrating back up into the mid up to high 40s. Again, I do expect that you will see relative shift or progress being made in that regard for the full year as well as the individual quarters yet to occur.

Thank you, Bill.

Our next question comes from the line of Atif Rahim with JPMorgan.

Hi, guys. Thanks for taking the question. Bill, On an apples to apples basis (inaudible) the right number to look for clinical software bookings and the first quarter of '06? And then secondly, Glen, with the Bloomberg analogy you provided, does that change in the business model perhaps? Or do you just intend to stick with everything the way it is right now?

Yes, the $34 million number would be taking what we reported publicly last year and adding the $6.9 million. That's the right way to look at that.

Okay.

And relative to -- help me understand your second question is will that analogy change the business model?

Correct, right just in terms does it become more of a subscription model or more just licensed space?

We absolutely hope it will be both. In other words, we believe that there is significant value added in the software. That said, we see very high margin services coming from a variety of transactions and a variety of subscription based models. Wherein physicians will get additional information that will allow them also to increase and enhance revenue to their practices. The example I like to talk about is clinical trials identification. Pharmaceutical companies is costing them 100 to $200 million a month because they can't fill clinical trials. We have 20 to 30 million opportunities where we know the patient. Where we know the disease and where we know the medication and based on that, our ability to present that and run that against an exclusion and exclusion -- inclusion and exclusion criteria and identify people for clinical trials creates a revenue event for the physician, for their practice, for us and Pharma is very happy to accelerate their clinical trials. We see Version 11 as an example and helping us to introduce drive services just like that.

You talked about the sales force that you are dedicated to the hospital customers. Any comments on how that progressed during the quarter?

We continue to be spending time to make sure that as hospitals get ready to make these stark related decisions that we are in the mix, in front of them, we were helped by the fact that many of the large hospital, HCIT companies don't have systems that are geared toward the ambulatory environment today. So we are helped in that respect. But we were focussed there and we are between our own sales force between sales forces of our partners and last but not least between the two products that we do sell into hospitals, our Canopy product and ED product. We are getting a lot of focus and visibility with these various hospitals.

But you don't provide numbers on the bookings for hospitals?

No.

Thank you.

Thank you. Why don't we take one or two more questions.

Thank you, sir. Our next question comes from Newton Juhng with BB&T Capital Markets.

Thanks. Really quickly on NEPSI, trying to get an idea how much cost you had built into the quarter here.

We talked about the full year being somewhere between 2 to $3 million. There was-- my recollection, Newton was close to about somewhere between $0.5 million to$ 0.75 million in cost here this first quarter.

Again, relative to that I would say that there are a number of these areas we talked about NEPSI and UAI. We were making investments that we think are going to pay very substantial dividends, but not necessarily in this quarter or next quarter. I think you will start to see those layering in.

Sure, Glenn, thanks. Norvartis deals wondering if you got a full quarter of contribution there? Also what the potential is that you are looking at going forward?

Relative to-- your are asking Norvartis and King?

Yes, for the PI segment.

Again, we see and quite frankly back to this notion of investment, part of the dynamics at play there is that we are getting both of those initiatives launched. So I was intimating in my comments expectation that the course of this year you will not only see increased contribution from them on a top line basis but also them being a substitive contributor to our expansion on the gross margin line as those respective revenue streams build.

Thanks for the comments, Bill.

Why don't we take our last question.

Thank you, sir. Our last question comes from Frank [Sparacino] from First Analysis.

Hi, guys. Maybe, Glen for you. I'm curious on the technology risk as you move existing customers to Version 11 and if the live sites (inaudible) -- new installations versus migrations or how you look at that.

Well, in terms of again Version 11 we have been working on it for a period of time. We have probably upwards of 15 to 20 different clients that are in different versions of reviewing the software, getting trained on the software. We were conducting courses for a period of time. And again, it's not just GW. Organizations like Sharp have the software, have run it on their servers. We have done performance testing. This has been a very open process. So when we did the performance testing, we did it at labs with clients standing side by side with us. So we have -- we don't expect issues to come up relative to the actual installation and -- or conversion or transition to the 11. We did a tremendous amount of work on that process to make sure that doesn't happen. So one standard thing to the extent they are using Version 10, and they customized it in some way. They added data or the like, all of that ports into Version 11. Does that answer your question.

It does. Thank you.

Thank you very much. Again, I want to thank everyone for joining us on the call today. I would kind of repeat what I said at the beginning of the call. We think Allscripts is very well positioned to take advantage of a substantial need in the market and that need is to use software and information technology to address the largest issues in health care today. We think we were well positioned to do it. We think the market is vibrant and based on increasing the sales guidance, I think you can understand from management how confident we feel in delivering not only the sales, but in delivering on the guidance that we have give tonight market. I want to thank all of you and we look forward to talking with you next quarter or before.

Thank you.

Thank you, sir. That does conclude this afternoon's conference call. You may now disconnect.