Veradigm Inc (MDRX) 2007 Q3 法說會逐字稿

Good afternoon. My name is Felicia, and I will be your conference operator today. At this time I would like to welcome everyone to the Allscripts third quarter 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Tullman, you may begin your conference.

Thank you. Good afternoon, and welcome to the Allscripts third quarter 2007 call.

This is Glen Tullman, I'm the Chief Executive Officer of Allscripts, and I'm here today with Bill Davis, our Chief Financial Officer and Lee Shapiro our President. Before we begin the call, I'm going to ask Bill Davis to read the Safe Harbor statement.

Bill?

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts management as well 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 an 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 Securities Laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changed circumstances or any other reason after the date of this release.

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

Thanks, Bill.

I typically begin each quarterly call with an assessment of our market, and this will be no exception. The market for electronic healthcare solutions especially in the ambulatory area in which we focus continues to be strong and expanding at a rapid rate across each of the market segments we compete in. Large academic medical centers and integrated delivery networks, what we refer to as enterprise accounts as well as mid-level multi-specialty groups and smaller independent practices.

In terms of our traction, I think the best window I can provide into the market is, as you would expect related to sales. Are our providers buying and are they choosing Allscripts? The answer to both of these question is a definitive yes and at record levels as our team delivered excellent results in sales during the third quarter. I'm very pleased to report record clinical sales of $63.2 million, a 77% increase year-over-year, and the largest booking quarter in the history of the Company, and it came during the third quarter which is traditionally a light quarter not only for Allscripts, but across the industry.

As I had promised on our Q2 call, we expected to sign two significant enterprise agreements in Q3, and I'm pleased to report that we have delivered. Earlier in the third quarter we announced the largest contract in our history with Columbia University Medical Center, one of the premier academic medical centers in the world. Under this agreement, Allscripts will deploy our electronic health record to more than 2,000 physicians. Other than a press release, I haven't had a chance to talk about Columbia, but the prestige and size of Columbia has been raising eye brows and driving both interest and sales in the largest academic and integrated delivery network systems.

Earlier today we announced the signing of one of the most prestigious multi-specialty groups in the country, the Lahey Clinic which was actually the nation's first multi-specialty group practice. Lahey gives us a solid footing in Massachusetts along with our other enterprise client there the UMass Memorial Healthcare Hospital where we are deploying V11 as we speak. Columbia and Lahey raise our profile dramatically and re-enforce our position as the number one provider for both large enterprise clients and multi-specialty groups, and we are already seeing the impact.

In addition to Columbia and Lahey , we've been fortunate to sign agreements with a number of very prestigious organizations. For example, Albany Medical Center will implement our electronic health record for the 250 physicians in their medical faculty group. Butler Health System in Pennsylvania will deploy our HealthMatics ED solution, and our electronic health record to 65 non-employed physicians. ABQ Health Partners in Albuquerque which was previously known as Lovelace Medical Group and is a part of the Ardent Health Services selected our electronic health record for their 250 multi-specialty providers in a contract valued in excess of $3 million.

And in another big win, Ochsner Health System selected Allscripts to provide its electronic health record. Ochsner is not only one of the largest healthcare systems in the Gulf Coast with 600 physicians and seven hospitals, but they are among the most technologically sophisticated and they selected Allscripts because in the word of their CIO, Lynn Witherspoon, "without the architecture that Allscripts has developed, interoperability would be next to impossible, it's what allows Allscripts to offer solutions in a heavily automated environment like Ochsner". This is confirmation from one of the most prominent CIOs in the industry that our interoperability solutions work.

It's also important to focus on two other areas that address independent community based physicians. First in terms of direct sales to physicians in the small to mid-market, we had a very solid quarter with close to 100 contracts representing approximately 800 physicians. Our ability to connect those physicians to hospitals will become increasingly important in the sales process.

This quarter we also observed an increasing role that hospitals are playing in the purchase decisions for electronic health records in large part due to the change in the Stark rules. Our efforts in this area translated into sales of close to $5 million, a portion of which was delivered working closely with our hospital partner AmeriSource Bergen. Having ABC on our team is important because almost a third of the hospitals look to ABC as a strategic long-term partner.

Just today, for example, we announced that Poudre Valley Health System in Colorado will deploy our electronic health record and practice management system beginning with 200 of their non-employed physicians with a goal of hosting it for their more than 500 independent staff positions. Also during the quarter, we announced that Frankfurt Health System in Philadelphia will offer our combined EHRPM to 100 physicians, and we've closed several other Stark related sales including Blessing Health System in Illinois, St. Frances Hospital in New Haven, Connecticut, and Northwest Hospital in Seattle.

Our success in selling across key segments of the market is tempered by two challenges. First, during the quarter we had one or two major agreements with clients for add-on products push into the fourth quarter. Those agreements would have closed the gap between the third quarter revenues and EPS numbers we reported today versus analyst estimates. I'm pleased to report that I expect both will close during the fourth quarter.

Second, while our sales in the enterprise accounts area were very positive news, given the complexity of some of these agreements the required pre-planning and the sheer size paired with our conservative approach to revenue recognition, we will recognize revenue from some of these larger agreements over a longer period of time than we initially planned. While the pace of deployment and rollout among some clients is not always optimal from a revenue recognition standpoint, this has little impact on the continued success and growth of the Company.

In fact, our success during the quarter was not limited to electronic health record sales. In prior quarters we talked about our effectiveness in cross selling and I can share several examples of that beginning with another hospital group Butler Health System near Pittsburgh which purchased both our electronic health record and our emergency department information system. Another example that we announced just today is Carolina's Medical Center Northeast. A long time Touch Works user with 160 physicians that just purchased our emergency department product, and Lakeside Medical Group in Los Angeles who purchased our electronic health record for 100 of their physicians and also purchased our canopy care management solution.

Frankfurt Hospitals which is owned by the Frankfurt Health System the group I mentioned earlier as a Stark related agreement for our electronic health record made the same decision. The idea of a suite of products that connects the ambulatory physician with information across the enterprise including care management and the emergency department and beyond the enterprise into the community is taking hold, and Allscripts is unique in our ability to play in the largest groups, in the smallest groups and in the specialties as well.

I'm also pleased to report that our National Electronic Prescribing Patient Safety Initiative, known as NEPSI, has now enrolled more than 5,000 physicians who have written in excess of 500,000 E-prescriptions. That number is accelerating as is the number of physicians. We expect very strong gains during the fourth quarter and we continue to add key partners including Quest who will provide lab information to the growing list of NEPSI partners.

So overall the sales machine is working well and across multiple products and service offerings, however, to build a great company it's necessary to continue to invest in improving processes, improving R&D, and in innovation. We are continuing to invest in systems to drive quality, service delivery and efficiency. This is being spearheaded by our new Chief Operating Officer, Ben Bulkley who is making great use of his years of experience at GE to take our deployment and client support to the next level of quality.

Our vision is to be an indispensable part of the way physicians practice medicine and delivering on that vision requires investment today for success tomorrow. Another critical aspect of our strategy is continued investment in R&D. For example, our version 11 Touchworks release, our connectivity strategies that link our products, our partners and our communities together, and our focus on adding content that will inform physicians at the point of care with the latest care plans and updated information on the patient, the diagnosis, the medication, and the best practices to treat them. We believe in vesting now in development, in resources and in quality will pay off for our client, it's one important reason we are number one in class, the consumer reports of healthcare.

Finally, in terms of innovation Allscripts was the first electronic prescribing electronic health record provider to connect to Microsoft's Health Vault web based solution that will enable consumers to store information for many providers, devices and share that information. It's part of the next wave of healthcare, connecting patients and we're there today.

Before Bill talks about the financials, I want to close with a few comments. First, I couldn't be more bullish on the strength of the market. Just this week the Centers for Medicare and Medicaid services said that for the first time Medicare will pay bonuses to doctors and other healthcare providers for using electronic health records and E-prescribing during calendar year 2008. CMS said a significant pool of money will be available to pay incentives for using technology beginning next year. This is one more signal to physicians in the market that electronic healthcare is happening and they need to get on board.

Point two, Allscripts is the leader in ambulatory electronic healthcare, and we are making investments necessary to continue our leadership. And finally, while it is sometimes hard to predict the exact numbers quarter by quarter, the trend in our performance are clear. We are growing, we are setting records and we are well-positioned to continue to do so and do so in a profitable manner.

Now let me turn the call over to Bill Davis for a detailed look at our financial performance.

Thanks, Glen, and hello, everyone.

As Glen indicated our third quarter included several significant accomplishments, but before I comment on those I would like to address the obvious question upfront. Why did Allscripts third quarter revenue and result in earnings per share fall short of market expectations? There are two reasons for this.

First, we have had a great deal of success in signing large enterprise agreements as Glen mentioned. While this is great news from a bookings perspective, it does translate into elongated take down of revenue because of the complexity and size of these deployments. While the pace of the deployment and rollout among some clients is not always optimal from a revenue recognition perspective, this has little impact on the continued success of the Company. It's important to note that we do expect some level of ramp-up to continue in the fourth quarter on several of our large customers.

Second, Glen also mentioned the fact that we anticipated approximately $3 million of additional license bookings and revenue in the third quarter. We are hopeful that such bookings and revenue will occur this fourth quarter. We continue to be very encouraged by the level of interest in Allscripts as evidenced by clinical software bookings. As Glen mentioned, we've had record clinical bookings in the quarter of $63.2 million, excluding ongoing support.

The third quarter clinical bookings represent a 77% increase over the third quarter of last year and a 21% increase over the second quarter of this year. Clinical bookings for the first nine months of 2007 total $144.4 million representing a 40% year-over-year growth. Our physicians interactive business contributed the balance of our bookings at $1.8 million bringing their year to date bill to bookings to $9.1million. PI's ability to deliver on $30 million of 2007 bookings is heavily dependent on the signing of three platform transactions in the fourth quarter. We are actively working several platform transactions that are in excess of the required three. Our near-term concern is the well publicized challenges pharma is facing and their impact on individual pharmaceutical company's ability to make independent buying decisions. The good news is that there are several platform transactions that we have confidence in, but ultimately it will be a question of timing.

Turning now to backlog, we ended the third quarter with $246.7 million in sold backlog. The backlog breakout is as follows: License and services related to our clinical software businesses were $133.4 million; software subscriptions which will be recognized over the next three to five years represented $33.6 million; support and maintenance fees for the next 12 months is $59.4 million; and physicians interactive made up the balance of $20.2 million, again for a total of $246.7 million. As I've indicated before, our reported backlog does not include anything related to our medication distribution business. Even though we view that medication revenue as recurring in nature.

So turning now to revenue. Our third quarter revenue of $73.4 million represented an $11.3 million, or 18% 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 $3.6 million in the third quarter, and this compares to $2.2 million in the third quarter of last year. The 60% increase is primarily attributed to the continuation of services performed under our platform deals.

Moving to our meds business, we saw another solid quarter of revenue of--of $10.9 million, this compares to $10.4 million in the third quarter of last year. Revenue for the first nine months of 2007 totaled approximately $208.5 million. Our clinical software businesses contributed approximately $164.9 million of such year to date amount, representing 32% year-over-year growth. In terms of revenue mix, our software and related services segment represented approximately 80% of total revenue in the third quarter. Our third quarter revenue by segment is as follows: our medication business again delivered 10.9 or 15% of total revenue; clinical software delivered 59 or 80% of our total revenues; and information services or Physicians Interactive delivered the balance of $3.6 million for a total of 73.4.

Looking now to gross margins. Overall our gross margin was approximately 50% in the third quarter of 2007, versus 49% in the third quarter of last year. Margins by segments are as follows: our medication segment delivered 15% gross margin; our clinical software business delivered consistent gross margins at 58% when compared to the second quarter; and we saw a decline in our information services segment from 40% in the second quarter to 32% in the third quarter, for a total of 50.1%. The sequential change in the medications gross margin is attributed to the lower gross margin revenue in the quarter related to flu vaccine and a mix of drugs that were sold in the quarter. Our Physicians Interactive sequential gross margin change was a result of certain hiring and platform development cost being incurred on a lower revenue base in the quarter.

With regards to expenses, operating expenses, excluding amortization of intangibles and stock-based compensation for the third quarter were $25.9 million, this compares to $24.9 million of expenses in the second quarter. The increase is attributed to the cost incurred related to our annual user's conference held in August and less capitalized software in the quarter. With regards to capitalized software, we had approximately $2.2 million in the quarter, this amount compares to $2.9 million in the second quarter. The decrease is reflective of the general release of Touchworks version 11 that occurred in June. As we've indicated in the past, this amount will in fact fluctuate from quarter to quarter depending on the product development cycle.

Stock-based compensation was approximately $1.5 million for the quarter, and deal related amortization was approximately $2.8 million. The anticipated increase in stock-based compensation is due to the full quarter effect of grants approved in June and certain additional grants that were made in August. The slight increase in deal related amortization is related to our $11.5 million acquisition of a maintenance stream related to approximately 600 ambulatory practice management customers from Source Medical in Birmingham, Alabama, which was consummated in July. As we mentioned last quarter, this transaction is part of a broader strategic alliance with the leader in systems for ambulatory surgical centers.

Net income for the quarter was $4.1 million or $0.07 per diluted share, this compares to $3.3 million or $0.06 per share in the third quarter of last year. Please note that the net income for the first three quarters of 2007 reflect a full tax provision using a 40% effective tax rate. Our GAAP earnings of $0.07 per diluted share includes $1.7 million or $0.03 per share of acquisition related amortization net of tax and $900,000 or $0.01 per share of stock-based compensation also net of tax bringing our non-GAAP adjusted earnings for the quarter of $0.11 per diluted share. This compares to GAAP earnings of $0.06 per share in the third quarter of last year which includes $1.9 million or $0.03 of acquisition related amortization net of tax and $400,000 or $0.01 per share of stock-based compensation also net of tax resulting in non-GAAP adjusted earnings of $0.10 pr diluted share in the third quarter of last year.

Basic shares outstanding for the quarter were 56.2 million and diluted shares were 65.2. The 7.3million shares issuable on our convertible debt offering continue to be dilutive to our GAAP earnings per share in 2007, and therefore are included in both our GAAP and non-GAAP adjusted earnings dilutive per share computations for the third quarter as well as for the full nine months. The 7.3 million shares were excluded from last year's results 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 quarterly amount of interest was approximately $523,000 net of tax.

With regard to overall head count, we ended the quarter with approximately 1,062 employees, which compares to 1,036 we reported in the second quarter. Turning now to our balance sheet, we ended the quarter with approximately $75 million in cash and marketable securities which was reflective of us using approximately $11.5 million to fund our previously mentioned Source Medical acquisition and approximately $3.2 million of capital expenditures in capitalized software. Such outflows of cash were offset by cash from operations of approximately $2 million and approximately $700,000 of option exercises and employee stock purchase plan contributions.

We ended the quarter with approximately $81.2 million in accounts receivable and day sales outstanding of approximately 99 days. The anticipated increase was primarily due to several large milestone billings that occurred in September and is partially reflective of the increase you see in deferred revenue. We expect both our day sales outstanding and accounts receivable balance to come down in the fourth quarter.

Turning now to the balance of 2007. As I mentioned at the beginning, we are seeing some near-term impact on revenue associated with the ramping up of resources on some of our largest clients. While we believe it's possible to mitigate that exposure with add-on license sales in the fourth quarter, we believe it's appropriate to recalibrate market expectations for the full year. We now expect total revenue for the year to be in the range of $286 million to $288 million, a 25% increase over last year, and GAAP earnings per share of $0.34 to $0.35 per diluted share, a 55% increase over last year. The 2007 GAAP EPS guidance contemplates $0.10 per share tax effected of deal related amortization and $0.04 to $0.05 per share of stock-based compensation also net of tax.

It's important to note that we remain confidence in Allscripts positive outlook. So as we look into 2008, we continue to see a business that is positioned to grow revenue approximately 20% to 25%. Fueled by 25% to 30% growth from our clinical software business. Given the operating leverage in the business, we see that top line growth translating into 40% to 50% earnings per share expansion. This takes into account an expectation that deal related amortization will remain fairly consistent with 2007 levels and stock-based compensation will move closer to about $10 million next year or $6 million on an after- tax basis.

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 and our practice management offerings. We expect the fourth quarter to be another record quarter for Allscripts. Finally, we've also gotten a lot of questions regarding an investor day. We are looking to schedule an investor day in the first half of 2008. In the meantime, both Glen and I are scheduled to present at several analyst conferences over the next several month.

With that I will turn it back over to Glen for some closing remarks.

Great, thanks, Bill.

So let me conclude with a few thought for investors. If you believe that healthcare will continue to eliminate the paper and become electronic like every other sector, you want to be in this space, and if you believe that healthcare is moving outside the four walls of the hospital to the ambulatory space and into the hands of physicians as we do, you want to invest in companies that are the leaders in the ambulatory electronics space.

Finally, the results demonstrate that quarter after quarter Allscripts continues to lead, to grow, to satisfy our clients, and to do so in a profitable manner. So I want to conclude the call today by thanking our employees for another solid performance during the third quarter, to thank our clients for their continued support and to thank our investors who are helping us to provide the tools for a better future of healthcare in this country.

Thanks very much and we are happy to entertain your questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Charles Rhyee with CIBC World Markets.

Had a quick question about the quarter itself . You guys had an existing backlog as it were and I know that you guys spent a lot of time hiring and training a lot of implementation staff, can you give a sense on their productivity in the third quarter and their ability to draw--pull revenues and margin into the

Sure, Charles, it's Bill Davis.

We actually saw close to about 25% increase in the production of our resources in terms of overall billable hours in the quarter. We had anticipated that by virtue of a lot of resources being dedicated to Version 11 efforts earlier in the year and the like. So we absolutely saw a nice improvement in terms of overall productivity. The challenge is we tried to highlight in terms of that conversion into revenue was where those efforts were focused on in terms of ramp-up of some of our larger customers and given the long duration and the overall number of hours involved in those implementations, what that translated into overall revenue. So we absolutely are seeing the capability being there in terms of the production capacity to pull the backlog through, but also recognizing that we were moving large customers into production at the same time.

So is it fair to say that when we're talking about these large--these are deals that were signed earlier than the ones that we talked about in the last quarter or so?

It's a combination of both, actually. We absolutely have had enterprise deals as part of our bookings going back to the fourth quarter of last year, all the way to the third quarter, but it's also indicative of the fact on some of our largest, Columbia included that we are committing resources--have committed resources even starting in the third quarters.

Great, thanks a lot.

This is Glen, let me just add to that because this is really critical.

The point here is that we are spending resources, we have more resources but those are going in part to support V-11, in part for some of these large clients that we are not yet billing for, and there's one other piece and that is in the sales process as we were working with many new large enterprise clients they are requesting and we are deploying some people presale to do some analysis of implementation and the like and that is also drawing on resources.

So we have more resources, training was successful, some of that work that we are doing we will bill for, it's just the timing isn't working for us this quarter, and we are concerned that as we ramp up on some of these larger deals there's going to be a delay.

Thank you.

Your next question comes from the line of Corey Tobin with William Blair.

Hi, good afternoon. A couple things if I could, please. On the guidance, can you guy give us a bit of a feeling here, would you characterize the guidance for 2008 with respect to the amount of cushion that you have in there versus your internal goals, would you say it's sort of a comparable level to what you had in '07, more or less in terms again cushion compared to the internal plan?

I would say it's more cushion than what we feel we came into this year with, and again, trying to appropriately calibrate what we believe to be some of the risk factors that we highlighted through our prepared remarks.

That's--I'm assuming when you say the concept that there is more cushion that's on both just the clinical software piece and the overall revenue lines?

Yes, again, our outlook just to kind of break that down, the meds business, we continue to talk about that one as being a very consistent performer for us. We are expecting continued improvement from our physicians interactive business, but as you think about it in terms of overall our absolute dollars, it's not going to drive the significant portion of our overall increase.

So the reality is that our growth engines are our clinical software businesses, and so as we talk about 20% to 25% growth in expectation that our clinical software businesses are going to be driving 25% to 30% growth from that segment perspective. So it is indicative of what we see in terms of the relative robustness of the marketplace and it's also indicative of the strength of the backlog that we continue to build.

Okay, great. Switching gears for just a second here on bookings. I think in previous calls we've talked about roughly $40 million or so from your enterprise sales force. Just curious as to how that team is tracking to that goal and where you expect that to end up for the full year?

Yes, what we've actually talked about is that we expect somewhere about 20% of our clinical bookings to be driven by our enterprise sales force. We have been very encouraged by the work that they have done to date. I will tell you that by virtue of our outlook for the fourth quarter it's possible that they may contribute more than that 20%, and again, indicative of what we believe to be a very robust market in terms of market rich opportunities.

Okay, great. Then finally last question, on the cash flow, or the operating cash flow more specifically, I understand ramp in DSOs was quite a bit, do you expect that number to come down it sounds like in Q4 and in turn should we expect to see a ramp in the operating cash flow in the fourth quarter?

Absolutely. I can tell you that the some $15 million or 14 to $15 million increase specific to the Touchworks business and again we saw major--I think 95% of that, it's certainly close to 90% of that is sitting in the current category indicative of the fact that it was billed in September. A lot of that was these milestone billings in terms of the upfront deposits and whatnot on some of these larger deals, but also just in terms of where the timing of some other billing milestones fell. So I am absolutely expecting a reversal of the cash flow from operations in terms of a pop in the fourth quarter and of course spawning decrease in overall receivables in the DSOs in the quarter as well.

Great, thank you.

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

Hi, thank you.

My question is around the reduced outlook in 2008, and Bill, if I understood you correctly it's because of some of these larger deals are taking a little longer to implement. Is this related at all to Version 11 that's being installed in the market? Could you give us an update on early success stories with Version 11, how many customers are adopting it, is it a longer sale cycle because of that version or because of the nature of the market or something along those lines?

If I can comment to your first part of your question and then I trust Glen will answer the second in terms of the uptake of V-11.

First and foremost this is the first time we've come forward in terms of providing a perspective on 2008. What we are attempting to do, Sean, is recognizing the dynamics, but also recognizing the dynamics in terms of the backlog and some of the considerations that we highlighted. We want to be very considerate of kind of the expectation setting process and making certain that we are setting realistic expectations that the market can fully understand and expect that we will deliver upon, and in light of current year performance and in light of the relative robustness of the backlog, and also the prospects of terms of that backlog continue to be replenished in terms of strong bookings next year, we believe that we are being prudent in the terms of the guidance that we provided.

So with that, I'll ask Glen to respond to the V-11 question.

Yes, I'll just to add to what Bill said again, I think the earlier answer he gave more cushion in those numbers and frankly, Sean, there have been a variety of your counterparts who said to us we are making our lives more difficult than we should by pushing these numbers. So we have taken some of that guidance, we've tried to give very realistic numbers with solid space to allow for error and for delays realizing we may have more of the larger deals, for example, in 2008.

Relative to Version 11, we continue to see good progress there and rolling it out we see very strong demand, and again, in some respects the demand has outstripped what we expected because of the positive response and that means that we have taken our resources and deployed them to Version 11--to rolling out Version 11, those upgrades are profitable but they aren't as profitable as implementing a new client. So we have seen a number of decisions that are the right decisions for our clients, but that have had timing impacts in terms of revenue recognition and that is yet another one, but we're talking about it's dozens now of Version 11 installs that are underway and that have been completed.

Okay. So I think I understand, but I just want to make sure that when you are going and installing a net new client, you guys are no strangers to selling and installing large deals. Are the deals taking longer to implement, or is it just a mix of there is a higher mix of Version 11 upgrades in there?

Well, I think it's all of the above. I think that some of the deals are more complex, we are talking with larger and larger sites, that's number one. In terms of those sites, some of them have revenue recognition milestones that mean that we do more of the work upfront before we bill for it.

In terms of Version 11, clearly on the Version 11 deployment where they take people, those are less profitable than a net new customer. That said, they are profitable and that said we need to do them to move the base along. So it's a combination of factors and the last factor very important was not unlike a prior quarter, one or two of these deals that we expected to be signed which were license expansion deals from existing customers would have driven those numbers, but didn't get signed with the right timing.

Okay. That's helpful, and one other question related to CCHIT certification, what is the plan to get the '07 certification done?

We have--and again, it's little awkward because I'm a trustee on CCHIT. The initial plan with CCHIT was that you had three year certifications. That's still the plan today, and in fact, both of our electronic health records, HealthMatics was the first to be certified and both were certified very early on. That was great in the first nine months. Subsequently now people have said, well, what about 2007, and I think CCHIT and we are clearly struggling to say is this a yearly certification, or is it a once every three years to the extent that it becomes a yearly certification, that's going to put a reasonably large drag on a variety of folks.

That said, we're moving both products along to 2007 certification. The products themselves actually have the requisite attributes in them to be certified today, we just have to go through the process and in fact some of the 2008 certification that we have seen the products already have that functionality in there.

One other note, the certification--2007 certification has not been a buying requirement of prospects for us. We have seen very little of it other than in some of the smallest accounts where we have seen the issue come up, but the larger, more sophisticated accounts understand the three year process and they understand the inner operability aspects of the product are really the next phase in certification and we're a leader there.

Okay, all right. Thank you.

Thank you.

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

Hey guys. I guess the first question, I didn't hear you guys speak to this explicitly, Glen, is are you guys backing off the $230 million number for the full year clinical software bookings?

No, we didn't--we were not backing off that number. So that's the one piece of the guidance we didn't change.

Okay, and--

We still see, again the message continues to be and you saw it this quarter, we see very robust sales, and the issue this quarter was one of turning those sales into revenue.

Okay, and then I guess we started to talk a little bit about preliminary 2008 guidance. Can you talk about where you think the market is from a market penetration perspective? You guys continue to see robust demand right now, but is this a market that continues to grow at close to a 40% clip in 2008 from a bookings perspective, or are we getting to a point where the incremental sale is harder to get?

No, I think the growth is going to continue to accelerate. I think you will see a little more competition in the various markets. Clearly the entry of hospitals as a buying entity will accelerate growth for the smaller clients who were previously very difficult to access, but we see continued, very vibrant growth across each section of the market, the largest academic medical centers in integrated delivery networks, the mid-sized multi-specialty groups and again even in the smaller groups because based on the change in the Stark rules, hospitals are stepping up to equip those physicians that paired with our NEPSI initiative are going to drive more and more of the individual, independent physicians and very small groups into the automated world.

Okay, can you talk a little bit about what I'll call demand mix and how much-- can you talk about demand mix for the HealthMatics product versus the Touchworks product?

I think they--we focused both of those products on separate segments, so the demand mix has been strong in both cases, it's a different buyer in both cases. So HealthMatics is typically the smaller independent physicians and stretching up to some of the small to mid-sized multi-specialty groups and that's where they have been focused. It is, I will admit, a little bit blurred when hospitals get involved because depending on whether the hospital wants to host the application, or what the hospital is using, Touchworks is unique in being an application that a large group could use but it could also be deployed to a smaller group. So we see robust demand in both products.

Okay, I have two more brief ones, I'll be real quick. First, seeing any material pricing pressure in the market?

I think we are seeing some pricing pressure in the low end of the market, and there you see some segments that are on the very smallest groups they are buying on price and that's something we are watching very closely and we're making sure our folks sell on value. I think in the larger groups we haven't seen that, and in fact, I would call it pricing stabilization. The issue is the larger groups are so focused on simply making sure that physicians use it, that they are actually willing to invest more in certain cases to make sure that the technology works and is used by physicians, because there is millions of dollars at stake in pay for performance and pay for quality perform programs. So, again small market yes, larger market we see stability.

And, Bill, one last question, just I will say the growth of revenue in earnings on the income statement is obviously not keeping pace with reported bookings growth. From a modeling perspective, do you think investors should think about what I will call the waterfall effect off the backlog as taking place at a slower pace now? As it seems that the deployment cycles are lengthening and maybe you guys--?

I mean, George, I think that's exactly what we try to communicate and is in keeping with our thinking around our outlook for '08. By virtue of adding some of these larger transactions, some of the other factors that Glen talked about in terms of Version 11, being incorporated and those deployments are like, we are seeing a little bit of a longation there and again, trying to incorporate that into our thinking in terms of the outlook not only for the balance of this year but also into next year.

Okay, thank you.

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

Great, thank you.

With respect to the clinical bookings, did you give a specific guidance number for '08 and if not, why?

We have not, Richard, because we--it's so much of kind of that momentum is built off kind of how we exit this year. Our fourth quarter represents as we have talked about many times some 35% to 40% of our annual bookings amount, and in order to kind of perfect that outlook really want the benefit of having completed this year and so our expectation is is that something we will be in a better position to provide early part of '08.

Okay, and then with respect to I guess the third quarter revenue, I know everyone we seem to go around and around on this, but I would suspect that you weren't really anticipating much revenue contribution from the Columbia and Lahey wins, so when did you just come to the realization that some of your existing customers weren't going to be deploying on schedule and if you were to break it down, how much do you think it's internally and Allscripts implementation situation or how much the clients are actually putting the brakes on a little bit?

I guess I would characterize it a little differently in that it was a conscious decision on our part to redirect resources and/or allow some of these larger ramp-ups to consume those resources as opposed to it being kind of opportunistic by virtue of some of our customers stopping or delaying. We don't mean to convey that sentiment because that's not what's occurring, so that was a consideration. The dynamics at play kind of in the quarter as we were evaluating it really gets to the second consideration that I highlighted and that is that we saw an opportunity to in effect mitigate that by virtue of some add-on sales that we were anticipating that would have immediate revenue recognition impact, enable us to kind of fulfill what we felt was the right business decision in terms of moving some of these larger deals forward maybe sooner than what was originally anticipated and those ultimately didn't materialize. So quite frankly in terms of understanding its full implication on the quarter it really went up to the very end of the quarter in terms of that we--fully understanding where those add-on deals were going to ultimately shake out.

We really made a client-focused decision about accelerating and investing in certain of our existing clients thinking that, as Bill said we would be covered by one or two of these agreements that frankly, went to the last minute and ultimately didn't sign for a variety of reasons. They will sign this quarter, so we are comfortable with that.

If I could add one more thing because it's a critical point, and that is we actually believe that we have more actionable backlog today than we have actually the requisite resources in terms of deploy in the near-term, and so we are constantly making those business decisions in terms of where we are dedicating those resources. Obviously we desire to maximizing revenue, but we also want to make certain that we were balancing that with kind of the broader business objectives that we are focused on at the same time. So I don't think it's a fair characterization to suggest that we moved resources because either clients delay or some other fact, when the reality is that we have very actionable backlog and are focused on maximizing that as much as we can.

Okay, I know this is small in comparison, but you made some references to Physicians Interactive and something with regard to three platform deals and all that, can you go over what you said there?

Absolutely. What I did say was that our ability to deliver on the guidance that we provided of $30 million is heavily dependent on signing three platform deals in the quarter. The good news is that we have more than three platform opportunities before us that are being actively worked. I continue to be concerned at the kind of gentle state of affairs in pharma and their preparedness to move is quite frankly as--as we need them in order to us to be able to deliver on that.

The reality is is that we had anticipated one of those deals to occur in the third quarter, it moved to the fourth quarter and so I'm just highlighting the realities in terms of what we are up against there. We have not moved off of that, but are clearly trying to communicate to the market in terms of what is going to be required in order for us to deliver on the previously made commitment on the booking side.

Okay, and then just one follow-up and sorry for jumping around here, but going back to implementations and all that, you guys mentioned you did have a great bookings quarter, is there anyway we run into a situation where we're oversold in the marketplace and then we can't deliver on the sales that we have succeeded in landing, and thus obtaining sort of the whole market? We've heard about people going out there and selling a whole bunch of business and not necessarily executing. How would you gauge your position with respect to I guess that comment?

Let me take that one, this is Glen.

Part of the reason that we made the investments and it was commented on earlier I think it was pretty evident to everyone that we hired a healthy amount of implementation specialists and we spent a good deal of the quarter training them. So we feel like we were adequately prepared for that. There is always an outlet and that is we have a number of consulting firms we work with, some of those firms are right now on implementations managing them in the light. That said to the extent we outsourced the implementation process, we feel it's a higher risk to the client depending on who it is and more over our margin gets impacted. So we are again trying to manage that as opposed to just dumping it all to third parties.

Okay, and you mentioned the new COO and mentioned focus on customer service. Have you had any issues on customer service that may be--has changed significantly from first or second quarter to third quarter?

I think the biggest thing that we were finding is one, we talked about being indispensable to our clients and what that really meant is that we wanted to say they couldn't practice without our software and that was great. In the past when we had any kind of software interruption, people would go back to their paper based files or they would go back to their script pad. Today our clients increasingly don't have anything to go back to, they are truly paperless and that puts an added responsibility on us to make sure that we are up 24/7 to make sure that our level of responsiveness is what it needs to be.

So again, we are making investments now to protect our clients and to make sure we are prepared for that. Similarly we want to make sure that as we add client we don't keep adding support people and the like. So that requires as you grow a company you go through stages and that requires investments and systems and the like and Ben brings experience in helping companies make that transition.

So again, much of what we are doing is preparing just as we prepared in hiring implementation folks, preparing in advance and making the investments to accommodate both the strong fourth quarter as Bill called it, and I was happy to hear him say it, a record fourth quarter that we expect in terms of sales and then furthermore very solid guidance that we have given for next year. You need the infrastructure to deliver that, that's our promise to our clients and that's what we intend to do, so that's where Ben is focused.

Okay, thank you.

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

Thanks and good afternoon Bill and Glen.

First one, maybe, quickly, Bill, basically it sounds like you are guiding to about $85 million or so in clinical software bookings in the fourth quarter, I know you aren't being that specific, but I just wanted to also make sure, are you giving any breakdown of expectations of revenues with the change in revenue guidance for this year, or is that something you would hope to give here early '08?

So I think you are computation is right in terms of what bookings are required to deliver on our previous commitment on the booking front of $85 million. I'm not sure I followed the second question.

Okay, yes, I wasn't clear at all.

Let's see, in the past I know at the Analyst Day last year you gave us a breakdown of expected revenues in your prepackages medications business, software business and information services, PI. You're giving an updated view of total revenue guidance, did you or are you in a position to give us a breakdown of the expected revenues by the three divisions for '07 or '08?

For '07, the delta in terms of where we were at previously to our outlook now is principally being born by the clinical software businesses, so no reason to believe that our meds business won't be in the $44 million to $45 million range, and Physicians Interactive close to the $16 million. So I think you can work your way back into the clinical booking--or the clinical software revenue number by virtue of that.

Relative to next year, I made mention of this in response to another question, again, for planning purposes we are thinking about the meds business continuing to be a solid contributor, at or maybe slightly higher than the levels that we've enjoyed the last couple of years. We are expecting some moderate amount of growth out of Physicians Interactive call that to kind of 20% to 25%, and that resulting in a large percentage of the growth being fueled by the clinical software businesses.

Okay, very good, thank you. And then (inaudible) gross margins, sort of thoughts as well, too premature to go into that level of detail?

Well, it is, and again, the one dynamic and I've talked a lot about that over the course of this year that I've always been attempted to be a conservative on in terms of--there is a lot of reasons to believe that the business as gross margin level should enjoy gross margin expansion. The one reason, quite frankly, why I've held that in reserve is some the pricing dynamics that we've experienced at the lower end of the market, and I think at this juncture just given the landscaping and what it is, that's a prudent thing to do.

With that said, we see tremendous operating leverage in our operating expense structure, and it's for that reason why we, even at moderately flat to maybe a slight uptick in gross margins we see the level of expansion at the bottom line that we conveyed in our guidance.

Got it. Two other quick things then. First, great to hear about the second mega deal, I'm assuming they were both--showed up as bookings in the third quarter. I'm also assuming--I know you aren't being as specific, I'm assuming collectively about $15 million to $20 million, and I guess, you don't have to make a comment specifically on that unless I'm way off, but I was just curious over what period of time do you expect to recognize revenues as you do POC with these two, and when does it really start to kick in for these on the revenue line?

So we--all I have I said relative to the Columbia deal in keeping with prior quarters, it was a deal in excess of $10 million. It's important recognizing that that's a 2,000 physician practice that like all academic settings those tend to get priced on an FTE basis so the pricing would in effect equate to a fewer number of docs than 2,000. In terms of calibrating that against our typical per doc price of about $10,000 per doc. Relative to them substantively showing up in our result as I commented last quarter and expectation of Columbia as well as for Lahey , we will see a very small amount in the fourth quarter, but much more (inaudible) contribution next year, and I'm not familiar with the Lahey roll out plan in terms of total duration, but as it pertains to Columbia, we are talking about call it 18 months to 24 months type of period in terms of the substantive work being done

Lahey will be a little bit faster than that.

I would expect that to be.

Okay, and then just, I just want to make sure I'm clear on the discounting you mentioned on the lower end, is that really impacting your HealthMatics business more or are bookings there still what you hope, and is Greg Shorten still set to take over for David in January.

Greg Shorten is already on board. He has no other responsibilities other than running the sales force now. So he is down there moving his family down there and so that's all done, that transition has occurred. Even though David is still there working the quarter, and so we have kind of two folks for this entire few months as that transition happens.

We see the pricing pressure that I talked about in competitive environment, we do see primarily in the HealthMatics accounts. That's correct, and in terms of the number of sales, I'm not sure it's impacting at all the number of sales, in fact, I think increased competitiveness there will help drive the number of sales. I think we are watching very closely in terms of any impact on margins.

I would just add to that, actually the volume of transactions in the HealthMatics space have outpaced our expectations, but that overage from a volume perspective we have given some of that back from a pricing perspective.

And then just are you still about 37, 38 sales people in Touchworks and high 40s in HealthMatics, Bill?

Yes, that's about right, I think we did add--we added a few more in total across both of those sales forces, but those are very close.

And then just very quickly, you laid out still a very interesting growth projection for '08 clearly, Glen, you probably already talked about it in summary. As you talk about the opportunity, what's your biggest concern as you look at the market in the next year?

In terms of biggest concern, I mean, right now I think this quarter just the revenue recognition. We know how to grow the Company, we will continue to do that, we know how to grow it rapidly, we know how to grow it profitably. Frankly I think this year we've--our challenge has been managing the market and managing some of the market expectation. So from an investor standpoint as we guided this coming year, as I think Bill replied earlier there is more cushion in the numbers and we have a lot more focus relative to that.

In terms of the market itself, we expect that the market will become more competitive, and that is not just from a pricing standpoint. We expect that some of the folks that have not been able to compete in the ambulatory environment will be able to compete, will become more competitive, we hope that doesn't happen but our expectation and our planning for it, we are preparing for that. That said, all that will happen at the same time that the market is going to expand dramatically. So we are very comfortable from a business perspective in terms of where we are.

It's really all about execution. The market's there and we will just continue to execute and frankly that's what we're pretty good at doing.

Very good. Okay, thanks.

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

Thanks, guys. Good job getting those two deals signed , it's unfortunate it's not playing into revenues as expected, but as we look out to '08, do you expect the mix of these larger enterprise deals with kind of a longer deployment cycle to increase or

I expect everything to increase. So I think across the board we're going to see more agreements in the large market in the mid-market and in the smaller market. Bill did mention that we may see in the fourth quarter a stronger mix from the enterprise group than we expected in terms of delivering the numbers.

So from that standpoint, the enterprise group and the willingness of the enterprise organizations to move forward is accelerating. I think we were also starting to see the first replacement market in the enterprise group. The other area that's very strong is practice management for us and that continues to be a very positive fortelling of what's going to happen for next year.

Okay, so if I was just to dig deeply into that, if the deals with longer deployment cycles are increasing, your revenue growth is about 30% this year and the software segment and are guiding to about 30% next year, how do you see the revenue growth coming in at about the same line given that some of these deals have--or the mix of the larger, longer deployments cycles is lengthening?

I guess I would, Atif, I would answer that question a little bit differently in that I don't believe as you look at our overall booking expectation next year and the relative contribution from enterprise sales, I don't expect on a percentage basis to be materially different than what we will deliver this year. So I think the relative complement of enterprise deals, large deals, mid-market deals and what have you, will remain.

It's also important to note that a very large percentage of what we actually recognize in revenue next year will be drawn from the backlog that we carry into next year. So in some respect to the extent that mix--to the extent that mix were to shift on us, it actually would express itself more fulsomely in '09 than it would in 2008.

Okay, and then in terms of the hiring that you have done, it looks like most of it is on the implementation side, does that result in a net benefit near-term, r is the head count cost just showing up the SG&A in terms of the insourced versus outsourced implementation, do you have any cost savings from that?

We classify all those deployment resources actually as cost to sales. They don't actually sit in SG&A, so I think if your question is--I think about the benefits from that in a couple of respects. First is is that obviously as they become more productive our ability to pull through more of the backlog, there is benefit with no incremental cost associated with it. Second is is that to the extent we are able to absorb more of that work and lessen the reliability on third party resources, that's more profitable for us as well. So both create benefits for us and that's how I'd think about it.

Okay, but can we expect an increase in gross margins from that or not?

Again, in response to the earlier question, I think that that's one factor that I would point to say that gross margins should absolutely expand within the clinical software segment. I'm hesitant to offer that up for the reason I stated before relative to the pricing dynamics of the lower end of the market. At this juncture I'm thinking about those being within some reasonable range in terms of what we have delivered on in that segment to date.

Now, overall, you are going to see gross margins continue to expand because as the software segment continues to become a larger percentage of our overall revenue, it's going to create natural margin expansion just by virtue of the mix shift in overall revenue, but at a segment level I would be very hesitant at this point to be offering up a lot of gross margin expansion.

Okay, understood, and then lastly on the NEPSI initiative, you said you had 5,000 physicians downloaded. Can you give us an idea what the uptick has been in terms of physicians actually buying your product?

Relative to the NEPSI initiative, first of all, we have 5,000 physicians, more have downloaded it, but we have 5,000 actually using it to prescribe which I think is the kind of material number. In terms of the full electronic health record upsell, while we have seen a limited number of those, number one, it's very early, number two, we have not dedicated any real marketing focus on that. We said we wouldn't, we surely didn't want to spook people to have anyone think that initially that was simply a marking tactic. We're very interested in having it deployed widely for use in electronic prescribing, so we've not focussed on that. That said, I think a few people have come to us but it's a relatively small number, I wouldn't say it's significant at this point.

Okay, do you have any idea on when you expect that to kind of accelerate?

I wouldn't speculate on that right now. We continue to support and expect the NEPSI initiative to expand and because of that, the more physicians you get using electronic tools, the more of them will upgrade.

Okay, thank you.

Why don't we take two more questions, since we were trying to manage the timing on the call?

Okay, your next question comes from the line of Steve Halper with Thomas Wiesel Partners.

Glen, could you just update us on how you feel about the meds business these days it's kind of a--it's there, it's good, it generates cash flow, but strategically how does it fit today?

Sure, I would pair it--your words, it's there, it generates cash flow, it's a consistent performer, and while it's not particularly strategic, we are not rushing to make any changes with it. That said, it's interesting because in some respects we have more people asking about dispensing medications now than ever before in part because there are all new sources of retail clinics that are out there providing that service, but that said, I don't--I think our guidance is the same and there is no impending decision.

Bill, you want to add to that?

Well put.

Thanks.

Sure.

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

Thanks. With regard to your partnership with Microsoft, Google has also kind of made some commentary that they would like to do electronic health records at least on the consumer side, would you partner with them or do you have a point of view as to what they are doing or is it just so early days, it's almost impossible to tell?

Sure. Google is a strategic partner of Allscripts today, and I would expect that to the extent that anyone wants to be operating in this business, if they want physician participation and they are a partner that we would be working together. That said, Google has been very tight-lipped about what they are doing and they've asked their partners to also maintain that confidentiality, so unfortunately I'm not in a position where I can comment on that.

Got it. Okay. Thank you.

Well, thank you very much. Again, I will just conclude the call by saying that to kind of paraphrase a statement I made earlier, we have been good about knowing how to build a business that's very client focused that meets or client needs that continues sales revenue and bottom line expansion and will continue to do that. We don't feel great about the quarter in terms of that fact that there were analyst expectations out there that were in excess of what we delivered. That said, we are very, very focused on continuing to do the right things for our clients, continuing to invest in the business, and continuing to build the business in a very profitable way. I think that speaks to the guidance that Bill gave for 2008.

So again, I want to thank all of our employees for continuing to make Allscripts successful, to thank our clients, we think we have the best client base in the business and finally to thank our investors for helping us to build the business. Thanks very much, and we'll look forward to talking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. At this time you may disconnect.