Veradigm Inc (MDRX) 2007 Q2 法說會逐字稿

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts second quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Mr. Glen Tullman, Chief Executive Officer of Allscripts. You may begin, sir.

Thank you and good afternoon. I want to welcome all of you to the Allscripts second quarter 2007 conference call. This is Glen Tullman, chief executive officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer and Lee Shapiro, our President. Before we get started, I am going to l ask Bill Davis to review our Safe Harbor statements. Bill?

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts management as well as assumptions made by and information currently available to Allscripts management. Wherever practical, Allscripts will identify these forward-looking statements by using words such as may, will, expect, anticipates, believes, intends, estimates, could or similar expressions. These forward-looking statements are subject to a variety of risks and uncertainties, including those listed in the earnings press release issued by Allscripts today and in Allscripts' filings with the Securities and Exchange Commission which could cause Allscripts' actual results, performance, prospects, or opportunities in 2007 and beyond to differ materially from those expressed in or implied by these statements. Except as required by the federal security laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this release.

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

Thanks, Bill. Today I want to make a few changes to the usual structure of this call. I will begin by commenting on our financial performance, business progress and sales successes. Then I will turn it over to Bill to cover our financial results in detail, and finally I will wrap up with comments on business unit performance and overall strategy. This change is in response to your request to provide highlights, get to the numbers and then summarize with the strategic view.

So let me begin. Q2 was the first time in the company's history that we surpassed $70 million in revenue. Up $10 million quarter over quarter. We also had record earnings at $0.13 non-GAAP adjusted earnings, Despite heavy investments in people and products. And we delivered our second strongest bookings quarter in the company's history, with over $54 million sold, $50 million of which was in clinical software. This does not include the large enterprise agreements that we discussed on prior calls. Our performance positions us very well for the third and fourth quarters, which are traditionally the two strongest selling quarters of the year. And prepares us to deliver on the guidance we provided previously.

From a business perspective, there is no stronger demonstration of the success we are having than our annual users conference, the Allscripts Client Experience or ACE. Just last week, nearly 2000 clients and partners gathered in Chicago for our largest ACE ever. Each of them paying roughly $700 to attend. The theme of the conference was Get Connected, which is a call to action to accelerate the development of an interconnected health care system which begins with connecting our own products and, of course, connecting with our clients. Every Allscripts business unit was represented. And cross selling opportunities were happening all over. What's also clear is that increasingly, we are solving our client's problems with a broad suite of product and service offerings, delivering on connectivity across the new enterprise, which revolves around the physician/patient relationship and is now about much more than the hospital. It's all coming together.

Just to cover a few brief highlights from ACE, our executive track was attended by over 100 executives and included a key note by David Brailler, the first National Coordinator For Health Information Technology, who made it clear that the health care environment is changing and filled with opportunities for those who use technology to take advantage of them. Over 100 separate sessions were conducted by our clients with CME credit earned for many of them. And [Praveen Proteja], the CIO of George Washington University Medical Faculty Associates, which as many of you know was our first V-11 reference site, conducted in-depth demonstrations on V-11 and over 100 clients attended. Sessions on TouchWorks Practice Management were also very well attended. Highlighting the opportunity for us to replace existing practice management systems. Overall, attendance was up over 500 people from last year.

While ACE was a clear win for the company, its success is a reflection of our investments in people and technology. Year to date we've hired over 120 people on a net basis. Many of those coming in the second quarter. Those hires are filling revenue producing positions in the areas of deployment and sales. Or adding substantial expertise in areas such as revenue cycle management and security. Additionally, we continue to invest in product and technology. And the results especially to clients are very visible. For example, our HealthMatics 2006 release, which offers substantial new functionality to our small to mid sized physician group prospects. I should reemphasize here that we will continue to have two electronic health records focussed on unique aspects of each market we serve and will continue to invest in our Healthmatics offering. Our Touchworks V-11 release which is live at multiple sites is another example of these investments. And something called the Universal Application Integrator, or UAI, which is our plug and play integration tool for third party medical devices and applications.

In addition, our investment in connecting our emergency department solutions and both of our electronic health records is clearly catching the attention of the market. And our efforts in clinical trials identification and recruitment, which will further our entry into the information business adds competitive advantage and positively affects our margins. Our Electronic Health Record leadership was recently recognized when both of our eLectronic Health Records were rated number one in their respective market categories by KLAS, The Consumer Reports of health care IT. The class rankings are based on feedback directly from clients which makes us all the more proud of earning the number one position. Klas is also a very important selling tool for our sales forces.

Our clients are also helping, proving that electronic health records provide solid return on investment. Late last month three physician leaders at the University of Rochester Medical Center published a peer-reviewed study in the Journal of American College of Surgeons detailing how Touchworks delivered savings to cover the entire cost of the system in just 16 months. Demonstrating that electronic health records pay you back. Not only through higher quality care, but with lower cost as well. You can find the study online at www.Allscripts.com/ROIstudy.

We also delivered a strong sales performance in the second quarter, which touched all of the aspects of the market, including strong sales across both of our electronic health records for both professional users with our Healthmatics offering and enterprise users with our Touchworks offering. Strong practice management sales, strong sales that were stark in MSO related, and strong cross selling based on the connectivity between products like our Electronic Health Records and our Emergency Department Solutions. That in turn validates our view that a connected health care system is vital not only to improving care and lowering cost, but to Allscripts' success as well. The number and breadth of contracts is indicative of the progress we have made.

I will comment on a few of those beginning with Novant Health. Novant is now our single largest practice management agreement to date for approximately 800 physicians. And Novant will be a key national reference site for us. There their willingness to replace IDX/GE flow cast practice management demonstrates the strength of the relationships we built, the fact that electronic health records are now the drivers in decisions around practice management, and also that Allscripts now has the functionality that IDX flow cast does not. It's clear that we accomplished our goal of meeting both the scale and the functionality concerns surrounding our practice management system and we will be competing for the largest accounts for both electronic health records and practice management. Both within and outside of the IDX space.

That said, where it makes sense, we will continue to work together with GE. For example, at Urology Associates of North Texas, the largest integrated private practice urology group in the United States, with 50 physicians in 20 locations, we worked closely with IDX and delivered an integrated solution to the client. That was a win for both of us. A second release today is about Oschner Health System.

One of the largest health care systems in the gulf coast region with more than 600 physicians. Oschner purchased our full electronic health record and practice management system and will integrate our EHR functionality with our own offerings. We also announced a contract with Albany Medical Center. Albany is a leading academic medical center with over 2 50 physicians and a substantial number of residents.

Albany will integrate Touchworks with its Siemens Envision in-patient system and with virtually every other IT system they have from pax to radiology to hospital notes. George Hickman, the Senior Vice President and CIO of Albany Medical Center who is also the Chairman of the board of HIMSS, the nation's largest health care IT association, was one of the key decision makers in the process. A valuable vote of confidence from a well-known industry leader.

For a number of quarters there have been questions about sales related to recent changes in the Stark rules, which now allow hospitals to donate electronic health records and E-prescribing solutions to physicians. We were starting to see the traction in this market, especially following the May IRS clarification that Stark donations will not endanger the tax exempt status of nonprofit hospitals. Some examples of this include Butler Hospital in Butler, Pennsylvania which is deploying our Touchworks electronic health record to 60 employed physician and plans to offer it to another 65, including many independent physicians who are not on Butler's staff. Another example is Frankfurt Health Care System in Philadelphia, which is deploying touchworks to 100 employed and independent physicians in their area and also offering Touchworks Practice Management.

And finally, St. Francis Hospital in Hartford, Connecticut, which has agreed to deploy touchworks to 650 physicians in their community. Following their purchase of our contract with the St. Frances Physician Hospital Organization, or PHO. There are many more success stories to tell and I have some other important announcements. But before I go on, I like to ask Bill to discuss our financial results for the second quarter. Bill?

Thanks, Glen and hello, everyone. As Glen indicated, I will review our second quarter results in greater detail and then provide updated perspective on the balance of 2007. Turning first to our Q2 results in bookings in the quarter, total bookings during the quarter were approximately $54 million. Consistent with prior quarters, bookings do not take into consideration the $10.9 million of sales and medications. Our $54 million in bookings, compares to $42.9 million of bookings in Q2 of last year.

Glen mentioned that our clinical software bookings were over $50 million in the quarter. Our actual clinical software bookings were $52.1 million during the quarter, excluding ongoing support. This compares to $40.2 million in the second quarter of last year. A 30% increase. Our Physician's Interactive business contributed the balance of our bookings at $2 million. This compares to $2.8 million of bookings in the second quarter of last year and is indicative of a trend we saw last year, and that is the sales cycle related to our platform opportunities are taken a bit longer.

Bookings for the first six months of 2007 totalled $88.5 million. Our clinical software businesses contributed approximately $81.2 million of such year to date amount, representing 21% year-over-year growth. Turning now to backlog. We ended the second quarter with $222.5 million in sold backlog. The backlog breakout is as follows. License and service fees related to our clinical software businesses represented $115.6 million. Software subscriptions which will be recognized over the next three to five years, made up $28.4 million.

Software support and maintenance fees that will be recognized or expected to be recognized over the next year made up $55.5 million. And physician's interactive made up the balance of $23 million again for a total of $222.5 million. As I've indicated before, our reported back log does not include anything related to our medication distribution business, even though we view the medication revenue as reoccurring in nature. Turning now to revenue. Our second quarter revenue of $70 million represented a $10 million, or 17% increase over the same three month period last year. Our clinical software businesses contributed a majority of that increase.

Physicians Interactive, or PI, had revenue of $4.4 million in the second quarter of 2007. That compares to $2.8 million in the second quarter of last year. The 60% increase is primarily attributed to the continuation of services performed on our platform deals. More specifically, Novartis and King Pharmaceuticals. Moving to our meds business, we saw another solid quarter of revenue of $10.9 million. This compares to $10.5 million in the second quarter of last year. Revenue for the first six months of 2007 totalled approximately $135.1 million. Our clinical software businesses contributed approximately $105.9 million of such year to date amount, representing a 41% year-over-year growth.

In terms of revenue mix, our software and related services segment continues to represent approximately 78% of total revenue. Second quarter revenue by segment is as follows. Again, our meds distribution business delivered $10.9 million. Our clinical software and services 54.7. And info services or Physician Interactive, the balance of 4.4 for a total of $70 million. Looking now to gross margins. Overall, our gross margin was approximately 51% in the second quarter of 2007 versus 50% in the first quarter. Margins by segment are as follows.

Medications delivered 17% margins in the quarter. We saw a 2% improvement in clinical software and services moving from 56% in the first quarter to 58% in the second quarter. And then PI delivered 40% gross margins for a total of 50.6. As we mentioned last quarter, overall gross margin percentage in 2007 has been adversely impacted by approximately 50 basis points, or one-half of 1% due to the reclassification of certain revenue producing resources effective January 1 of this year as well as the classification of stock based compensation related to employees classified as cost of revenue. Again, the sequential change in the medication gross margin is attributed to lower gross margin revenue in the quarter related to wholesaler sales. The favorable sequential change in the clinical software segment can be attributed to add on license revenue being recognized when compared to that same amount in the first quarter. Physicians Interactive sequential gross margin change was a result of certain hiring and platform development costs being incurred in the second quarter to help set up the balance of this year.

Turning now to expenses. Operating expenses, excluding amortization of intangibles and stock based compensation for the second quarter was $24.9 million. This compares to $21.8 million of expenses in the first quarter. The increase is attributed to the increase in head count Glen mentioned before, as well as more variable compensation in the quarter, including greater sales commissions which are commensurate with our revenue and bookings growth in less capitalized software in the quarter.

With regards to capitalized software, we had $2.9 million in the quarter. This amount compares to $3.3 million in the first quarter, when you exclude the $1.7 million payment plead to Walters Core in the first quarter, pertaining to the content development work they are doing for us. The decrease is reflective of the fact that we released in general version a Touchworks version 11 and that occurred in June. As we have indicated in the past, this amount will fluctuate from quarter to quarter depending on our product development cycle. Stock base compensation was approximately $600,000 for the quarter. And deal related amortization was approximately $2.6 million. Both amounts were consistent with prior quarter.

Net interest income was approximately $200,000 in the quarter. Our second quarter results also benefited from the fact that in the quarter, Allscripts sold or optioned to purchase a greater equity interest in [Medham], which as you recall, provides personal health records to individuals. Medham was founded by the AMA and 40 other medical societies. The sales of the option resulted in a net gain of $2.4 million in the quarter. It's important to note that we continue to maintain an equity interest in Medham of approximately 14% and they continue to be an important partner at Allscripts.

Net income for the quarter was $6 million or $0.10 per diluted share. This compares to $2.8 million or $0.05 per share in the last year and $4.5 million or $0.08 per share in the first quarter. Please note that the net income for the first two quarters of 2007 reflect the full tax provision using a 40% effective tax rate.

Our GAAP earnings of $0.10 per diluted share includes $1.5 million or $0.02 per share of acquisition amortization net of tax and $0.04 or $0.01 per share of stock-based compensation, net of tax, bringing our non-GAAP adjusted earnings for the quarter to $0.13 per diluted share. This compares to GAAP earnings of $0.05 per share in the second quarter of last year which included $2 million or $0.04 per share of acquisition related amortization net of tax and $300,000 of stock base compensation also net of tax, resulting in non-GAAP adjusted earnings of $0.09 of diluted share in the second quarter of last year. Basic shares outstanding for the quarter were 55.6 million. And diluted shares were 64.8 million.

The 7.3 million shares issuable under the convertible debt offering were dilutive to our GAAP earnings per share, and therefore included in both our GAAP and non-GAAP adjusted earnings diluted share computations. The 7.3 million shares were excluded from the second 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 dilutive earnings per share give than we added the debt underlying shares to our dilutive share count. That amount was approximately $523,000 net of tax. With regard to overall head count, we ended the quarter with approximately 1036 employees. Which compares to 967 employees that we reported in the first quarter.

Turning now to our balance sheet, we ended the quarter with $87.1 million in cash and marketable securities. Which is reflective of us using approximately $5.1 million in cash to fund operations in the quarter and approximately $5.7 million of capital expenditures and capitalized software. Such outflows of cash were offset by proceeds from the Medham transaction and approximately $5.4 million of option exercises in employee stock purchase plan contributions. The use of cash in operations was driven by anticipated delays of certain of our client billings in April and early May to allow for our financial system integration that we completed in the quarter.

And the fact that we did a large percentage of our annual maintenance billings in the first quarter as highlighted by the increase of our deferred revenue and strong cash flows from operations last quarter. We ended the second quarter with approximately $69.6 million in accounts receivable in day sales outstanding of approximately 89 days. We expect both our DSOs and accounts receivable balances to return to normal levels over the course of the second half of 2007.

Turning now to the balance of 2007. Allscripts continues to target total revenue to be in excess of $300 million. We also anticipate GAAP earnings per share to be in the range of $0.42 to $0.44 per diluted share. We also wanted to highlight the fact we did complete a very small tuck-in transaction in July. The transaction resulted in us buying a maintenance stream related to approximately 600 ambulatory practice management customers from Source Medical in Birmingham, Alabama, for approximately $11.5 million in cash. This transaction is part of a broader strategic alliance with the leader in systems for ambulatory surgical centers. The maintenance annuity is expected to deliver approximately $3 million of annualized maintenance revenue starting in 2008. And is in the process of being integrated into the Healthmatics operations. Please note that the transaction will have very little impact on our top line or gross margins in 2007 due to the target having a significant amount of deferred revenue related to the maintenance stream that we will be required to adjust downward.

Such deferred revenue adjustment is expected to be fully recognized by the end of this year. The transaction will also add approximately 200 to $300,000 of deal related amortization per quarter starting in Q3. Taking the acquisition into account, our $0.42 to $0.44 per share guidance includes approximately $6.5 million or $0.10 per share of acquisition related amortization net of tax. And approximately $3.5 million or $0.05 per share of stock base compensation also net of tax. In terms of our bookings guidance, we continue to see a lot of strength in our clinical software pipeline both for our electronic health record as well as our practice management offerings. We also have increased confidence in our ability to close several enterprise deals this year. As such, we continue to expect our total clinical bookings for the year to be in excess of $230 million. Finally, as the company continues to grow, and as the interest in Allscripts also grows, we believe it is in the best interest of all of our investors to implement a formal quiet period starting at the end of the third quarter. Such quiet period will start on the last day of the quarter and will continue through the day we announce our quarterly results. To the extent we plan on presenting at a scheduled analyst conference during such quiet period we will provide notice to the market in advance of such appearance. As we talked to many of our investors in evaluate best practices in the marketplace. We believe that this is an appropriate step for the company to take. So with that, I would like to turn the call back over to Glen for closing remarks.

Thanks, Bill.

As Bill described, we continue to see strong interest in our solutions which is driven by our unique position as the go-to company whether your question is related to document imaging, emergency department automation, care management, E-prescribing, practice and revenue cycle management or electronic health records. While the size and significance of the TouchWorks sale I discussed is important, I also wanted to highlight sales in our HealthMatics unit which focuses on small to mid sized physician groups where more than half of the positions in -- physicians in this country practice. Healthmatics signed over 100 contracts for Healthmatics electronic health record, practice management or both up 38% from the second quarter of 2006 despite some intense competition and pressure on pricing. We continue to invest in Healthmatics as a business in the product and given the importance of the business to us I expect a personally spend more time focussed on working with our sales teams in that respective area. It's also important to note that our sales success isn't limited to our electronic health record offerings. For example, New York City health and hospitals corporation the largest municipal health system in the U.S. will deploy our canopy care management solution in four metropolitan New York hospitals with the option to extend to the deployment of 11 hospitals. Another example, OSF health care system which provides care to more than 2.5 million people in Michigan, Illinois and Wisconsin will deploy our Healthmatics emergency department information systems to cover more than 200,000 annual patient visits in five of their 7 hospitals and in three urgent care clinics.

OSF is one of the growing number of examples of the power of cross selling. Our sale of our ED prod together OSF was helped by the solid relationship we built in implementing the touchworks electronic health record. I could point to numerous instances across -- of cross selling but I will mention a few. Iowa health, highly regarded touchworks client is deploying our EDIS solution in 11 locations. Ten hospitals and one urgent care clinic. In large part due to the inner operability between touchworks and our ED system. Butler hospital which I mentioned earlier as a new touchworks client also bought our EDIS system with the intention of connecting the ambulatory and in-patient records. And our successful EDIS go live at Alexium's brothers which displaced Medic EDIS followed Alexium's purchase of Healthmatics electronic health record and positions us for continues expansion with that client.

Overall, our Healthmatics ED business had a record quarter with sales to 25 health care facilities. Part of the reason for their success is the natural fit of integrating the emergency department with our electronic health record. Finally, I want to update you on the progress with our ERX business which is intimately tied to NEPSY or national e-prescribing patient safety initiative. A program we were leading along with Dell and who is who of technology in health care companies to provide free electronic prescribing for every physician in America. I'm happy to report that we now have thousands of physicians using the system every day to write electronic prescriptions more safely and more quickly than ever before. Strengthened our partnerships not only with technology companies but also with major payors like well point -- and captured the imagination of the industry opening up new doors for Allscripts and allowing us to broaden our reach.

This quarter, for instance, we announced a new partnership with medics and you can expect to see announcements relating to the integration of lab results to the electronic prescribing solution as well as continued progress the state's push mandatory electronic prescribing forward. On a separate but important note, I want to announce the planned departure of David bond, President of Healthmatics on January 31, 2008. David joined Allscripts through the acquisition of A-for health systems in March of 2006. After the acquisition, David agreed to stay on for one year to ensure the successful integration of the business. January will be close to two years and after 30 years in a successful career, David wants to spend more time with his family and pursue some other interests. David's service and commitment to the company have been outstanding. And David is determined to deliver another exemplary finish to 2007, a capstone to what has been a stellar career. At the same time, David will work closely with us on a smooth transition over the next few months. Both in sales and for the business management generally. He leaves a very strong and capable team who will work directly for Ben bulky, our COO and given the importance of this business unit and this segment of the market it will give me an opportunity to spend more time with this team as well which I'm very excited about.

I'm also pleased to announce the appointment of Greg is that righten, currently Senior Vice President for touchworks to Senior Vice President of sales for the Healthmatics division effective January 1, 2008. Greg is just one of the many talented leaders that have been cultivated in our familiar system and -- pharmacist time and have their strength in our touchworks business that allows us to make this shift without missing a step. If Greg had reported to executive Vice-President Dan Michaelson who will continue to lead the touchworks sales team and head marketing companywide. We were confident that Greg's leadership and sales experience combined with a top notch sales talent we have in the current Healthmatics sales team will have a significant positive impact and will add fuel to their drive to lead the small to medium market. Make no mistake, Allscripts is committed to the long-term development and support of Healthmatics EHR. We will continue to add the right people to leverage and expand this profitable and critically important segment of our business.

So in conclusion, for years we have talked about the market for clinical software connectivity and information services focussed on the ambulatory market and driven through physicians. That market is here today. And Allscripts is best positioned to capitalize on the opportunity. Through our broad and industry leading products suite and our ability to deliver across the board. Our record performance this quarter is indicative of our persistence and drive to transform health care. Each quarter we get closer to reaching that goal. So I want to thank you for your time today and all of your continued support. We are now available to take your questions. Thank you.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Atif Rahim from JPMorgan.

Thanks for taking the question. Could you update us on the enterprise deals you had talked about last quarter and I guess we haven't seen any results about those yet. Just the status is on those? And second, Bill, could you update us on the adjusted EPS guidance that you provided in the past. Will that still be in a $0.60 range and would you include game from the Medham option and guidance at this point?

Let me take the first one on the enterprise deals. Of course, as you recall those were actually not introduced on the call by us. But what I would tell you is that, as Bill said in his comments we are making excellent progress on the large enterprise deals. We have a separate unit focussed on it and we remain highly optimistic that we will close a number of those prior to the end of the year.

And relative to your question, Afif, the adjusted earnings, it is in keeping with what we had said on prior quarters in terms of our expectation and in the $0.58 to $0.60 range, our commitment to the market is that the only two reconciling items that we would call out different from GAAP earnings would be the deal related or acquisition related amortization as well as stock base compensation. So by definition the gain would be considered in that. The only thing I would highlight though from a GAAP earnings perspective is the absorption of what I highlighted as the incremental deal related amortization from the small tuck-in transaction we did in July from Source Medical.

Understandable. A quick follow-up on the enterprise deals. Can you give us an amount or is that included in guidance?

I think what Bill had said is that any agreements that are over $10 million that we'll announce those agreements as they happen. And in terms of the overall guidance, again, we have not built as you saw this quarter we were able to deliver in excess of $50 million, almost $52 million in clinical sales without including any of those larger deals. My expectation is that will continue to deliver according to the guidance. Whether or not we have them. That said, I would expect that as we formulated the year, we did include some value to larger enterprise deals. Maybe not of that size, but clearly including some of those enterprise deals.

I would just add to that if I may, that historically we have seen somewhere around 20% or so of our annual bookings come from enterprise size deals. And this year we really don't anticipate anything different in that regard thus the dependency if you Will is in keeping with prior years. And as I often said as well, we are very confident we have ample enterprise deal opportunities to deliver on our commitments to the market.

Okay. That's great. Thank you.

Your next question comes from the line of Alex Alvarez from Goldman Sachs.

I want to start off with the revenue guidance and keeping it where it's at. Given the first half results, I want to get a sense from you in terms of what drivers you are sort of counting on here to accelerate the ability to convert the backlog into revenue. Just sort of seen that's a $5 million sequential revenue improvement this quarter and sort of where the guidance stands now kind of implies about an 8 to $9 million or so sequential dollar improvement over the next couple of quarters. Move just a little higher than what we have been seeing. What are you expecting to sort of drive that acceleration?

Absolutely. Alex, the perspective on our outlook for the second half of the year is in keeping with our outlook on the bookings in that we have the benefit, one of nice things about Allscripts model we draw very large percentage of our revenues from our reported backlog. And so we have clear visibility as to where we expect our revenue to come from. It is a function of increased productivity in terms of the implementation resources on the Touchworks side but it's also in recognition that we have identified specific incremental license opportunities with existing customers and the like. I would think about the relative sequencing, working off the $70 million base. We tend to think about it in that 9 to 12% sequential range. And again, feel that we have sufficient backlog and sales opportunity to convert that to deliver on the $300 million for the year.

And one other question, in terms of the tuck-in acquisition, what about the strategy there? It seems like small deal for you guys and will take up some resources. What is the thinking there in terms of making that investment?

Why don't I have Lee Shapiro, our President, answer that. Lee?

Thanks for the question. Strategically the importance was working with Source Medical, a leader in providing solutions to ambulatory surgery centers. Source medical has installations in over 2000 ambulatory surgery centers and what we see as an important part of the relationship is the ability to offer to the physicians who own and are affiliated with those ambulatory surgery centers our electronic health record and practice management offerings. There is more than 10,000 physicians associated with those offices and what we see as a marketing opportunity to all those physicians while we continue to grow our relationship with Source as they grow their business.

And if I may just add to that. And as we look at the financial model of that acquisition in '08 as I suggested, based on the maintenance annuity that we acquired, approximately $3 million of revenue at very attractive both gross margin and operating margins because there is little to no infrastructure requirement associated with delivering on that, and then again I articulated the amount of deal related amortization we expect to be applied against that. And it is a nice contributor once we get outside of this deferred medical adjustment we will absorb the balance of this year and to at least point a lots of cross selling opportunity both into that existing install base but more broadly into the Source Medical relationships on the surgical center side.

Thanks, guys.

Your next question comes to the line of Corey Tobin with William Blair & Company.

Good afternoon, it's Jeremy for Corey. Bill just a quick house keeping question. Can you provide the break down between the different line items for stock comp. Do you have that handy?

What do you mean --

Between cost of goods, the different cost of good sold items and SG&A.

It's -- it's about $150,000 cost to sale and about $450,000 SG&A.

Thanks. With respect to version 11 or just broader touch works, I'm wondering has there been any change in sort of your implementation times. Have they changed at all in the quarter or are they roughly consistent in the past?

They roughly consistent with the past. We had some I think many on the call are aware. We had a very concerted effort in and around the George Washington implementation. They really played a unique role in aiding us in the quality assurance process. There was incremental effort associated with that. As we had subsequently rolled out additional sites, we seen some consistent trends relative to the deployment requirements on those upgrade processes.

So I guess you hit on just one small extra follow-up, which version 11 did you activate other customers in the quarter and maybe you can give us highlights on some of the successes they are seeing.

Yes. This is Glen. We did in fact activate a number of other clients in the quarter. And specifically, we tried to make sure that we had a mixture so folks like Tennessee Oncology, the largest oncology private practice in the country, came up and a number of others as well, we were looking at -- GW had on the order of 250 physicians. We are looking at a few thousand users probably by the end of August. That rollout is going very well. The real issue now is after ACE, everybody will like to get on and they would like to get on quickly. We have tremendous reception there.

Thanks.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

My first question is around Novant. Can you give us a sense of when they signed. If you can talk about the size of the deal. And specifically you mentioned some functionality that you developed that flow cast doesn't have and enabled you to swing the deal if you can give any more detail on that.

The Novant agreement was signed in the last month of the quarter. As you may recall, earlier we had signed an agreement with Novant for our electronic health record. And the other side of that agreement was IDX GE. After a period of time of working together, initially Novant was concerned about the level of functionality that we would have them in practice management. As we told the folks on this call and everyone else that we would -- we were working very hard to make sure that Touchworks Practice Management would scale and that not only did it meet or equal other practice management system capability, but that we expect it to surpass that. Specifically relative to Novant's situation, Touchworks handles split billing between a hospital and a clinic and IDX doesn't. That's one example. There are a number of examples where Touchworks Practice Management now exceeds the functionality. Not just of IDX, but of other major practice management systems.

Thanks. And on the Medham transaction in the quarter, Bill, was this approximately $0.02 in your original thought process when you gave the $0.42 to $0.44 GAAP EPS guidance?

It was -- as we came forward to the market on the first quarter of call, it was. In recognizing that it closed in the early part of the second quarter so we had clear visibility in that respect. I just reemphasize what I said earlier in terms of updating the guidance for the balance of this year. I'm taking in consideration the incremental cost associated with the Source Medical transaction that will mitigate some of that as well. Both of those considerations are at play in terms of updating our thinking for the balance of the year.

I missed what that incremental cost is.

It's going to be about $300,000 a quarter in terms of incremental D&A and then there will be another couple hundred thousand dollars on top of that in terms of carrying the maintenance stream with depressed revenues by virtue of the deferred revenue adjustment I talked about.

About $800,000 in incremental expenses in the non-cash for the balance of the year?

Yes, that's about right.

And last question, C-Chip, the latest round there, you weren't in that. Was that by choice or what's going on?

Again, first of all I want to be a little sensitive because I'm on the board of trustees of C-Chip. That said, the way that C-Chip was designed was that certifications would last three years. When we went through the first C-Chip certification and we are the only ones with two certified C-Chip products, both our Healthmatics and Touchworks, but when we were going through version 11 the initial standards for C-Chip weren't even set. So frankly, we taken the position that right now we are going to our certification on C-Chip last which was completed last year lasts for three years. The next time we go back for certification we will certify version 11. So we don't see that really as much of an issue and again in most cases especially relative to the issues like security we are the clear leader in the industry.

Are you pretty confident that version 11 would meet the 2007 requirements for C-chip?

Absolutely. Not only meet but exceed those requirements.

Thank you very much.

Your next question comes from the line of Sandy Draper with Raymond James.

Thank you very much. First, just a housekeeping question I think for Bill. Bill, on the stock based comp it looks like you are running after tax about $800,000 for the first half of the year. So I think I may have missed what Shawn had asked. So you expect a solid ramp-up in that number to get to your 3.5 and just trying to understand why that number would jump up so much in the back half.

The reason for that is that we had a meaningful grant in the first half of the year that was subject for shareholder approval. And the shareholder approval was obtained through our annual shareholder meeting that was in the latter part of Q2. And so you will see that accelerate and also we do split our annual grants between the first half of the year and the second half of the year so we anticipate following through for our employees in the August/early September time frame in terms of the second year grants. It's for those two reasons we see the ramp coming from.

Okay. Thanks. And then the second question I know this may be a little bit of semantics or nit-picking but if you look at not the GAAP numbers but the adjusted numbers basically being unchanged but now including the gain in the quarter which I estimate at a $0.02 number from the sale of Medham. You are not changing revenues, your gross margins were pretty good this quarter. Is there anything you would articulate as being higher than you would have expected in terms of expenses at the beginning of the year that would have maybe taken up the couple of pennies? Or is there anything that has changed in your thought process on how you are spending?

Nothing really. Other than the fact that Glen touched on the fact that we have made some hiring decisions earlier in the year to prepare ourselves for what we anticipate in the balance of the year. That's one consideration. But again as I thought about the GAAP guidance for the year and the relative tradeoffs between the amortization that I highlighted, the associated costs of this transaction and the associated gain in recognizing that I came forward to the $0.02 range in the first place, I was comfortable that we are best served leaving the range of where it was at. I don't see fundamental shifts one way or the other. On the margins I felt there were enough give and takes it was appropriate to leave the range exactly where it's at.

Great. And then a final question will be a higher level one for Glen. Glen, you highlighted some progress you're making on the ERX and prescribing side. Would you be willing to venture when you think that whole electronic prescribing and net could start to contribute meaningful or at least material revenue to the overall model. Is that any chance that's '08, or is that an '09, 10' type potential.

I would push out any speculation on that. Having said that, I believe you are going to see in the next few months a number of states, in fact it's already happening in New Hampshire. I think you will see Governor Schwarzenegger talking about electronic prescribing and NEPSY in the State of California over the next probably 60 days. You will see the State step up and make electronic prescribing a patient safety issue now that it's free. And that will ultimately help all providers of electronic health records because electronic prescribing is the on-ramp to the electronic highway. I also mentioned that we are going to be adding some functionality, things like labs and the like. That will also drive utilization. That said, I surely wouldn't put anything into this year. And we will leave it to Bill to figure out how that impacts next year's number when we give guidance for next year.

Great, thanks.

Your next question comes from the line of Richard Close with Jefferies and Company.

Yes. Thank you. Bill, I was wondering, you had mentioned software bookings $230 million and you put a plus in there. Would you say you had more confidence now in your bookings guidance, than three months ago and is the plus something new or am I just reading too much into that?

I mean, I actually think the words are consistent in that I have always talked about bookings in excess of $230 million. Absolutely. As you progress over the course of the year. With the shorter more finite period of time. My confidence does improve because we are working off of a very robust pipeline. As I talked to the market consistently about we look at our projections based on not on high level growth rates but rather specific deal activity and what we expect to close in the respective periods. So we are very pleased with the performance in the second quarter. We think it's totally in keeping with the justification that we brought forward on the first quarter call in terms of raising the guidance in the first place at that time. So we are encouraged in terms of how the second half of the year is set up and our ability to deliver again in excess of $230 million of clinical software bookings.

I would add to that that when you look at Healthmatics landing over 100 deals when you look at Touchworks and the ability to deliver $52 million without including any of the mega deals that have been talked about, you get a sense of a level, the buoyancy of the market and the opportunity out there. And we continue to refine our sales force and drive forward. So again I think I would share Bill's level of confidence on our ability to deliver on what we talked about.

Okay. And then with respect to just to be absolutely 100% clear here, the $230 million does not include the mega deal that was discussed on last conference call, correct?

I don't think that's a fair statement. We have talked about is the fact that approximately 20% of the $230 million we expect to come from enterprise sales. We tend to think about more traditional enterprise sales as being in the 5, 6, $7 million range. We have acknowledged the one deal that is in excess of $10 million. And what I often characterized that as is the extent it does materialize and we were committed to come to the market when it does in some respects it makes this enterprise sales force job that much easier. But at the same time, we don't believe that our ability to deliver on $230 million is dependent or solely dependent on that deal materializing. I'm not prepared to say that it's incremental, but at the same time we do think that there is a lot of opportunity in the marketplace. But $230 million is the guidance we provided.

And then with respect to Healthmatics contracts, you said around 100, I think Glen, up 38% year-over-year, how does that compare to the first quarter because I know that on the Healthmatics you a drew a lot from the pipeline into 4Q and didn't necessarily refill. How much does the 100 compare to 1Q?

I'm going to check on that number real quick. But what I would tell you is that again, I think the indication is that it's a very vibrant market out there and we see a lot of activity on a same-same basis. My expectation is that's up but I don't have the number in front of me about how far up it is.

Okay. And then finally, I guess you mentioned a lot of hiring. I guess over the first six months of this year. Are you done there and should we look for margins to ratchet up as you sort of are done adding expenses on the employee count?

I think I will let Bill handle part of it. I will handle the first part. As we mentioned, we have in some respects overinvested up front to make sure we have trained people on board to deploy the systems we were selling. We continue to hire in the sales forces and Healthmatics, we'll continue to hire in Touchworks. We will continue to hire. We added some very strong sales talent in Touchworks in the last few weeks. Two senior guys that came from a competitor. So I think you will see that. Overall, however, the overall rate of hiring I think will start to slow other than in direct revenue producing or sales producing positions. Bill?

I think Glen said what I was intending to say is that the hiring plan I do think was a bit front end loaded. But that is in no way mean that we are done hiring in the growth environment that we are in. We will continue to attract and retain quality people. Your specific point, our expectation, as we look at the model and relative profitability of the business we do expect incremental improvement quarter on quarter and part of that will be by virtue of some of the hiring being front end loaded.

Thank you.

Thank you.

Your next question comes from the line of Steve Halper with Thomas Weisel Partners.

Hi. This is actually Allen Fishman in for Steve. I was wondering you talked about the Healthmatics. Is there anyway to put a sales figure around that number?

No we don't, because the range of that business unit is from anywhere from a single physician to up to 25. And one or two cases we will see the deals even larger than that if they like the Healthmatics software better for some reason or if it's uniquely suited to a particular client. We don't break it out in that category .

Okay, I guess qualitatively then you would agree that you are seeing greater strengths in that market than you have before, I guess. Can you provide color on that?

Well, what I would tell you is that each one of the markets that we are in, we were seeing it accelerate. That's a market that the lower end of the market is one that Bill and I talked about is being anywhere from three to 4% growth and I think it's clearly starting to take off in a big way. Electronic prescribing is helping, the scanning or document imaging are helping but just the overall push in the market. And we expect that's where half the physicians in the country are. That's why Healthmatics was such a critical acquisition for us and why we are going to continue to expand both in that business unit and expand our focus there.

Glen, I think you meant to say 3 to 4% penetrated.

Sorry.

Not growth.

Thank you.

Your next question comes from the line of George Hill with Leerink Swann.

Hey, guys I was wondering if my phone was working. Can you speak to the deals that were included in today's bookings or still included in next quarter's bookings?

All of the deals that were announced today were included in prior quarter.

Okay.

If I may, George, because I got several questions on this today that I did not respond to. Again, as a general rule of thumb when I encourage people to apply is that we typically there is some delay in announcements of transactions when they are actually closed. And generally speaking I would assume one quarter of deferral. So deals announced in the early part of in Q3 would be reasonable to assume they are Q2 deals.

Okay. Good to know. And the second part is maybe, Glen or Bill, could you quantify the degree again or remind us to what degree enterprise deals are included in the greater than $230 million bookings guidance for the year?

Again, what I commented on was is that in keeping with prior years it's around 20% or so is what we are expecting to come from enterprise sales.

I don't know. I don't think this has come up. But Physicians Interactive bookings of $5.3 million in Q1 and $2 million in Q2, you will you still do $30 million for the year?

We still have ample opportunity to deliver on that and so we have not changed that outlook. It is dependent as I alluded to in my remarks on a couple of large platform deals that we have clear visibility to, the challenge is one of timing and orchestrating it through the large pharmaceutical companies. The opportunity and robustness of their pipeline clearly supports our ability to deliver on that.

And I guess following on an earlier question to get to the $300 million of revenue for the year, at least according to my model. Are they assuming that prepackaged medicines and PI don't grow abnormally faster than usual. The ramp in software and related services has to be faster than you guys have done it before ex acquisition, should our assumption this activity you are bringing on line with the new hirings is what will allow you to put up $240 million revenue number or maybe a little better than that in software and related services?

Yes. In terms of how I think it's a response to a question we got earlier as well. Absolutely the hiring and the capacity that we have put in place is a key determinant in our comfort to drive the revenue forward. And again we are drawing a unique advantage of our Allscripts model is that we are drawing a large percentage of our revenue from our backlogs. Yes, we are comfortable with having the requisite capacity and, yes, we believe we have the requisite backlog and opportunities to drive towards the $300 million. And I think it's fair to say that we are not expecting the meds business to deliver that. A meaningful difference in what we talked about previously.

As we look at earnings given the visibility that we have. We aren't expecting any more unusual gains, are we?

No. There is nothing in terms of the outlook for the balance of the year. Again, the small -- the small transaction that I talked about this quarter as well as the Medham transaction, the two considerations.

Thank you.

Your next question comes from the line of Larry Marsh with Lehman Brothers.

Thanks for the time. Maybe first, Glen, the sales force you are communicating today that you added a couple of senior guys from a competitor here in the last two weeks. Do you have a certain number of size now in terms of sales force of Touchworks and Healthmatics and confirm who is overseeing that effort on both ends and who would be replacing Greg when he moves over to run the Healthmatics area?

Yes, I will comment on just the leadership in both areas. As I mentioned, Dan Michaelson is responsible for all of our touchworks sales and marketing. And Greg reported to Dan. Dan will now have the four regions that we have directly report to him. He wanted closer connection with those folks. And frankly I think all of us are very comfortable with that. In terms of the Healthmatics team, Greg will effective January 1 take over responsibility and ownership for that team. In the interim, David Bond owns that sales number will continue to work side by side with Greg.

Greg is relocating his family down to Cary, North Carolina, and they will share a conference room and Greg will be learning the business but David will continue to own it through the end of the year. Dave will take over January -- Greg will take over January 1. David will still be on board and for another month. And more if we need it. Part of the nice thing about having a planned transition is you work through any of the kinks that might happen and you don't miss a step. In terms of exact numbers, Bill?

On the Touchworks side we ended the quarter with 37 quota carrying individuals in Touchworks. That is exclusive of the two individuals that Glen made mention of. And then on the Healthmatics side, we had 48 unique quota carrying individuals in that business.

And the two recent hires will be part of the Touchworks team?

They will, yes.

Great. Secondly, just elaboration of the last quarter, you introduced to us, talked about Ben Buckley as new Chief Operating Officer and has been in the position for a bit. Any points of focus or feedback from his stand-point about his priorities or is it pretty consistent with what you told us last quarter?

I think Ben is totally engrossed in the business. And coming up to speed very, very quickly. I have been very impressed with his ability to do that. He is focussed on the processes by which we deliver our revenues so the deployment and implementation processes is probably the first and foremost opportunity. And then the overall operations general business operations of the business. So we were fortunate to have a very experienced COO come on board and we are looking for great things from Ben.

Okay. Two other quick things to wrap up. You mentioned buying the mainstream with Source and you have a lot of cash still generate cash. It's been awhile since you bought and successfully integrated. What would you say the likelihood is that Allscripts take advantage of its market to be an acquirer of larger properties here in the next year or is it just strictly something happens to come our way?

I think there is clearly going to be consolidation. In the market. There is -- I can guarantee you that any of our competitors or any of the other interesting deals that come into play that we will look at those deals and just make sense for us to do that. That said, we're a careful buyer and we want to make sure that we understand what we are doing in that space. We will take a look at everything. We're inquisitive. So that's inquisitive. Not necessarily acquisitive. But we will be very careful about that.

With that said, I know there are rumors about one of our main public competitors being up for sale. I know there is a lot of talk about some of the previous large practice management companies potentially being available and we are going to evaluate the market very closely and look for opportunities. To the extent that we can bring in practice management and add our electronic health records, either Healthmatics or touchworks on top of those bases, that makes a lot of sense for us.

And finally just communication, I know last quarter you talked about good confidence about as you said the mega deal. My interpretation was it was imminent. Communicating today, still a lot of confidence, but no official word yet. Without having been too specific, what would be the kind of things that could cause a larger deal like this to really vary in timing and what has caused this to be delayed as I guess I would interpret it? Or is it in the message it's not being delayed at all?

I think it's a function of there is when you start to get to larger and larger deals there is a board approval process and these are large organizations. So from that perspective, we are moving through the processes at a rate is that never fast enough for us. The flipside of that is that we have seen nothing to indicate that we have issues and that's why Bill's comment was that we continue to expect that one or more of those will close prior to the end of the year.

Sounds like you continue to have, I guess if anything, higher confidence, extremely high confidence as you say one or more will close here and in the near future.

Extremely high confidence, yes.

Thank you.

Your next question comes from the line of Richard Davis with Needham & Company.

Thanks. With regard to the large deal, particularly large deals can you characterize those as, are they competitive takeaways of the preexisting electronic health record product or is it more than just the customer to whom you are trying to sell just has an effectively includes together legacy system?

Again, I think we are getting into levels of detail. There are multiple opportunities that our enterprise group has. Some are net new. Some are directly competitive. And others are take aways from kind of the first generation large expensive electronic health record systems that may not be performing in the market today. So we have number of these opportunities in different in each of those different segments, and I'm hopeful that whichever one hits first, the market will all say great that was it, and we cannot deal with the consistent questions about the one big deal. There is a lot of opportunity out there. We expect that one or more of them will close prior to year end. And I think that's probably as far as we should go.

Okay, fair enough.

Why don't we take two more questions and then we will call it a call.

Your next question comes from Charles Rhyee with CIBC World Market.

Thank you for taking the question. I had one question to clarify. Think someone asked earlier in terms of the guidance. The gain of the $0.02 you had already known when you guys talked about it at the first quarter of the Medham sale, am I correct in hearing that?

That is correct.

Those are imbedded with the number that you gave us?

Again, we had visibility not only on the Medham transaction but the prospect of the small tuck-in transaction that I highlighted as well. So we -- and coupled with the fact that we are in the market with the $0.02 range felt appropriate to work all those through. Keep the guidance where it's at.

Okay. And if I could ask you, I know you give this in your Q later, do you have what the operating income margin was for the three divisions or the three units.

I don't have that readily accessible. We will file our 10-Q in the next couple of days, though.

And that case when I think about people we talked about the ramp here on the revenue side but in terms of the income operating income side, it also seems like you really are looking forward to a big jump in the margin in the operating margin. As we think about where that -- the sequential increase in margin coming from, should we think a bit more from the gross margin side? Or is it really a lot of different functions particularly in the expense side.

Quite frankly I think it's a combination of both. Think you will see incremental margin on the gross margin side and that will be principally driven by mix. In terms of relative complement of revenues that we were recognizing. But also to our earlier point with having made the investments that we had from an infrastructure personnel point of view that leverage will show itself through the operating income line as well.

Okay, great, thanks a lot.

Your next question comes from the line of Sandy Draper with Raymond James.

This is a follow-up to those two to make sure I'm clearing up. And I apologize Bill for doing this. With the improved bookings in the back half of the year, seen accelerating growth. You are saying you would expect to see even the gross margins were up nicely this quarter, a continued sequential improvement over the balance ever the year.

I did say -- I qualified it by saying incremental. I don't want to set unrealistic expectations.

Not necessarily as high as we saw this quarter but certainly the opportunity.

Absolutely not. But in terms of keeping with what you saw this quarter. But we do absolutely see with the relative robustness or expectations of booking in the fourth quarter. That representing some 35% of our annual bookings. Some of that tends to be add-on sales to existing customers, which has very positive effect not only to our top line but also to our gross margins in that quarter. So, yes, I think there is opportunity quite frankly in both Q3 and Q4 to see some improvement there.

Great. And then on the SG&A line, there was nothing in there that would be one-time in nature except for the higher sales comp because of the strong quarter, but if you are continuing to expect strong bookings for the balance ever the year, SG&A you may get leverage in terms of percentage of revenue but certainly wouldn't expect SG&A to be declining over the back half of the year. Is that a fair statement?

That's a fair statement. The only variable to that and it's fairly marginal is that we add some fluctuation in terms of the marketing activities that we have and the like. But for all in all, I would think about what we exited the quarter with was pretty much as our cost structure going into the balance of the year.

Great. Thank you very much.

Thank you. Let me just wrap up with really three bullet points. One, $70 million in revenues. The first time in the company's history we have done that. Second, sales of clinical software in excess of $52 million, without any of the large deals that we talked about. Last but not least, hiring in advance of our need to make sure that we can deliver both on the revenues and from a sales perspective.

So I think the takeaway here is the company is delivering. The market is ready. We have more and more capability to go out there and get the business and that's what we plan on doing. Appreciate all of your questions. Appreciate your support. And look forward to delivering on the guidance that we provided to the market. Thanks very much.

This concludes today's conference call. You may now disconnect.