Veradigm Inc (MDRX) 2010 Q2 法說會逐字稿

Good morning. I will be your conference Operator today. At this time I would like to welcome everyone to the Allscripts Q2 2010 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.

I would now like to turn the call over to Glen Tullman, Chief Executive Officer of Allscripts. You may now begin your call.

Thank you. Good morning and welcome to the Allscripts fiscal 2010 second quarter conference call. This is Glen Tullman, Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer, Lee Shapiro, our President and Seth Frank, our Vice President of Investor Relations.

Before we get started I'm going to ask Seth to review our Safe Harbor Statement.

This presentation will contain forward-looking statements within the meaning of the Federal Securities laws. Statements regarding future events, developments, the Company's future performance, as well as managements expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of those laws.

These forward-looking statements are subject to a number of risks and uncertainties including the volume and timing of system sales and installations, our ability to integrate acquisitions and realize the benefits of the merger with Misys Healthcare, the implementation of speed and acceptance of Electronic Health Record provisions of the health information technology, for economic and Clinical Health Act and other factors outlined from time to time in our reports filed with the Securities and Exchange Commission to which you should refer including our 2009 Annual Report on Form 10-K, available through the website maintained by the Securities and Exchange Commission at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statement whether as a result of the new information, future events or otherwise.

Thanks, Seth. I'm going to cover five areas today. Financial results, trends for 2010, getting ready for accelerated growth, how our strategy leads to client wins, and innovation leadership, so let me begin with financial results. I was very pleased with our performance in the second quarter across all of our key business metrics, bookings, revenues, and earnings. Bookings for the quarter were $93.8 million up 16% year-over-year. We saw solid demand across all of our solutions. Two areas deserve special recognition. Very strong sales in our Professional Electronic Health Record and Practice Management Solutions sold into the mid market and our successful cross-selling efforts into our legacy Misys Practice Management installed base, which was of course key to our merger.

It's clear that with the new meaningful use proposed requirements made public December 30, and with only 12 months remaining before the first stimulus payments, we feel there is a long runway ahead of us. I would also like to highlight our no payments for six months stimulus program which provides financing through a banking partner and bridges the need for any out of pocket expenditures by our clients until they are closer to government funding. Couple that with our guarantees that our products will meet the meaningful use requirements and more rapid implementation capability and you have the most compelling program available to new buyers in our industry.

Total non-GAAP revenues were $170.7 million with approximately two-thirds generated from recurring revenue. Non-GAAP earnings for the quarter came in at $24 million or $0.16 per share demonstrating once again our ability to invest in building the business and new products. We'll spend approximately $70 million in R&D this fiscal year, while at the same time driving operational efficiencies and profits to the bottom line. Overall I was very pleased with our sales efforts across all of the markets we serve from physician practices to hospitals and post-acute providers as well as our ability to deliver operationally for our clients.

Let me move to trends for 2010. Last Wednesday, the HIStalk Blog published my Top 10 Trends for 2010. I thought I would comment on a few and then talk about what we're doing to capitalize on these trends. The first is that 2010 is the year of the Electronic Health Record. I'll discuss our efforts but suffice it to say that we're preparing for very substantial growth. The second trend is not one system, one patient record. Some people in our markets mistake the idea of one system for the real goal of one patient record. One patient record is possible when you pull together disparate systems to provide physicians what they want, a completely integrated view of the patient and once again Allscripts is the first Company in the market to deliver this capability.

We've introduced innovations such as semantic interoperability which provides the unique ability to organize information from a variety of systems including competitors and have it all translated into one language and one patient record. The third trend is connectivity in communities. Given that 90% of healthcare is provided within 60 miles of where the patient lives, our footprint, the largest in the physician office market and our efforts to connect all of our clients provide us and more importantly the physicians who use our system with a significant advantage for referrals between practices as well as connectivity to their community hospitals.

Another important trend is proactive actionable quality reporting. Our clinical quality solution leads the industry in being able to provide information that positively impacts medical practice, manage populations and enables our clients to qualify for pay for quality incentives. I encourage you to go to www.Allscripts.com/innovation to see Dr. Brenner from Summit Medical Group in New Jersey 100 plus multi-specialty physician practice talk about their successes with CQS.

One last trend I'll mention is the increasing role payers, PBMs and pharmacies will have in partnering with physicians to enhance the care of patients. As shown by our release last week with CVS/Caremark, leading organizations in this space strategically view the connectivity that EHRs provide to those who treat patients.

Getting ready for accelerated growth is the next topic I'd like to touch on. If the market is going to grow anywhere near the estimates, and if the industry is going to continue to consolidate and we believe both of these are true, we need to be ready. We have built a strong market presence with our technology and sizeable footprint through both internal growth and via strategic business combinations. We have and will continue to be optimistic as the market evolves externally while at the same time strengthening our position through internal expansion. We do that in two ways.

First, with great people who have managed in high growth environments and second with systems and processes designed to scale. We built a world class team drawing the best from inside Allscripts, Misys, and each of our acquisitions over the years and by recruiting from recognized industry leaders. As you already know, our CFO, Bill Davis who has been with us for seven years of consistent growth and our President, Lee Shapiro who continues to lead our strategy, acquisition and partnership efforts. Some of you have met Eileen McPartland, our Chief Operating Officer. Eileen has world class technology industry credentials and an impressive record of accomplishments and growth at SAP, Oracle and Accenture to name just a few. Our outstanding sales team of over 250 sales professionals is led by Jeff Surgis, the former CEO of our acquisition, Extended Care Information Network and formerly a key sales leader at McKesson. Jeff works closely with our Chief Marketing Officer Dan Michelson, who has lead world class efforts for 10 years.

Rounding out the team are a few key healthcare veterans. John Zimmerman joined us to run Solutions Management bringing 15 years of industry experience at places like Siemens and a great reputation with clients for delivering outstanding solutions, Vern Davenport who runs our new government sector and Faisal Mushtaq who leads development teaming with Stanley Crane, our Chief Innovation Officer whose hands are all over the recent and consistent flow of innovations you see. Laurie McGraw leads our client experience, a big job during a growth period and Diane Adams who recently joined us from Cisco leads our Human Resources efforts, also mission critical during a period of significant growth. Diane was at Cisco when they had less than 5,000 employees. Today they have over 60,000. I'm confident she knows how to build a fast growth organization and do so with a lot less than 60,000 people.

Now if you have the right leaders, you need processes so you can deliver great quality, consistently and cost effectively. Eileen is leading those efforts by taking best practices around data conversion, implementation, and user experience from other industries and applying them to healthcare, many for the first time. One example is our new READY process to accelerate deployment. You've heard about it before. Today we have several ready go lives completed with an average 65% reduction in both the duration of the implementation and the number of effort hours and client satisfaction with these ready projects has been very high. Another example of our focus on operational excellence is our new upgrade enablement center which provides a quick and easy migration path for our legacy Misys EMR users to upgrade to our Professional EHR. We launched the upgrade enablement center in December and have already signed a group representing over 1000 physicians.

So operationally, we are preparing for the future but just as important we're making things happen right now in the market with new client wins and conversions, so let me talk about how our strategic positioning leads to major client wins. To understand our successes today and how well positioned we are for the future, it's critical to understand that Allscripts competes very successfully in all practice settings, among providers of every size and across virtually every medical specialty. This presence is a tremendous strategic advantage for us and a key differentiator in how we go to market and the proof is in the results.

One of every three office-based physicians uses an Allscripts solution. This is key in our win last quarter at Mountain States Health Alliance a 14-hospital health system based in Tennessee. In 2006, Mountain States selected Misys Practice Management and EMR for a small group of physicians. Now, in a net new multi-million dollar agreement, they have chosen enterprise Electronic Health Record and Practice Management to expand their deployment to all 231 of their employed physicians and another 70 non-employed affiliated physicians via the start Safe Harbor exception. This highlights that our legacy Misys relationships are paying dividends.

Our Electronic Health Record installations and relationships with some of the nation's largest health systems was significant in our win at Catholic Healthcare Initiatives or CHI, which just signed a multi-million dollar agreement at the beginning of our third quarter, so it's not included in the second quarter bookings we report today. CHI is the nations second largest Catholic health system. CHI selected our enterprise Electronic Health Record and this agreement is the first stage of their plan to implement Allscripts across all 1,000-plus of their employed physicians and will leverage our relationship with over 160,000 physicians nationwide by connecting and exchanging information with referring physicians. This win is especially satisfying because we are displacing an incumbent vendor who could not scale to meet CHI's needs.

We also serve an increasing number of smaller groups, the most typical type of physician practice. We just announced an expanded relationship with Renaissance Medical Management, a Philadelphia area MSO serving approximately 200 physicians in small and medium sized group practices. One of their largest groups had substantial success with our Professional EHR for several years. Going forward, Renaissance will host Allscripts EHRs for independent physicians in this region as well as their own doctors, using the success of one of their practices as a base to draw from.

Finally, we are also effectively leveraging our presence in the acute and post-acute market through our relationships with over 800 hospital clients using Allscripts Emergency Department or Care Management solutions. Our unique ability to offer a full spectrum of best-in-class solutions that span all care settings connecting providers in physician offices, hospitals, and post-acute facilities, home care and hospice agencies is a key differentiator. For example, Community Memorial Health System in Southern California selected our Electronic Health Record, Practice Management, Claims Processing and Care Management Solutions during the first quarter of this fiscal year. Then, in the second quarter community purchased our Allscripts Connect solution to have all of their Systems communicate with one another and with their community. Our Health Solutions business which includes our acute and other non-ambulatory offerings continues to be a great performer, with high recurring revenue delivered via software as a service based model.

An important win in what was a record quarter for this team was Legacy Health System in Portland, who selected our Care Management solution. We expect that home health and hospice agencies in Legacy's market will also sign on to our Care Management platform to allow them to capture the referrals from Legacy's new electronic discharge system from Allscripts. Legacy is a multi-million dollar agreement with significant recurring revenues.

Let me switch gears and talk a little bit about leadership and innovation which is so important. Our innovation engine continues to provide new excitement and value for our clients. This quarter, for example, saw the launch of Professional EHR 9.0, which includes a new user-friendly physician design interface and is easier to deploy. The reviews have been terrific. We also introduced Allscripts Remote for BlackBerry, yet another way for providers to have the information they need when and where they need it. We also brought to market innovations in our revenue cycle management business, including our partnerships with Intuit and their Quicken Health Bill pay and N-pay, both of which enhance physician payments and make it easier for patients.

Speaking of patients our patient kiosk which is already being used by leading practices such as the George Washington University Medical Faculty associates in Washington D.C. uses the latest technology to enhance patient satisfaction and reduce labor cost for practices.

So to sum up, this was an exciting quarter across-the-board, from a financial perspective, operational advances, important client wins and new innovations. Of course, one of the benefits of winning more business is its positive impact on our numbers, so let me turn the call over to Bill Davis who will discuss our financials. Bill?

Thanks, Glen, and good morning to all of you and thanks for joining us early on Monday morning during what we know is a very busy week for many of you. Let me begin by briefly reviewing the highlights of our financial results for the second quarter. Then we will discuss our outlook for the remainder of our fiscal 2010. As many of you know and as I've mentioned in prior quarters, we completed the merger with Misys Healthcare on October 10, 2008, and Allscripts was treated as the accounting acquiree in the transaction. As such, our GAAP results for the year ago period, the second quarter of fiscal 2009 reflect Misys Healthcare's performance plus approximately six weeks contribution from Legacy Allscripts. In comparison, the results we reported today for Allscripts second quarter fiscal 2010 reflect the results of our combined operations for the full quarter.

Secondly, please note that Allscripts consummated the sale of our Physicians Interactive business in September 2008 and our medication distribution business in March 2009. Thus, the non-GAAP results also reflect the exclusion of the results from these businesses that we divested. For these reasons, as well as for other reasons set forth in our earnings release, we do believe that the non-GAAP results are meaningful when evaluating and comparing our year-over-year results. Thus, I would direct you to the non-GAAP results and reconciliation table and explanation included in our press release to assist in evaluating financially comparable periods and adjustments to reconcile GAAP and non-GAAP financial metrics. In addition, we are making available supplemental financial data that includes previously reported financial information since the beginning of our fiscal 2009 on a quarterly basis including GAAP and non-GAAP information. We plan to update this document quarterly going forward. The supplemental data sheet in our press release can both be found on our website at investor.Allscripts.com.

So let me review the highlights of our second quarter financial results. As usual they start with our bookings performance, also known as order intake. They were strong totaling $93.8 million in the quarter reflecting 16% growth year-over-year. The $80.7 million of bookings recorded in the quarter ended November 30, 2008, again reflects Legacy Allscripts and Legacy Misys Healthcare combined. As a reminder, Allscripts reported bookings conform to our established definition of bookings which does not include transaction fees. In contrast if you follow Misys PLC, they in fact do include transaction fees in their bookings definition and if you were to include those, such transaction fees would add approximately $36.6 million to our quarters reported bookings for a total of $130.4 million.

Recall that in the first quarter of fiscal 2010, we did in fact sign one of the Company's largest transactions with North Shore Long Island Jewish Medical Center. As we discussed then given the nature of the North Shore transaction and minimum commitments assumed in our original agreement, Allscripts Q1 bookings of $97.5 million included approximately $10 million related to the North Shore transaction. We stated at that time we would update the market if North Shore represented a material portion of any future quarter booking performance. There was no such material impact from North Shore in the second quarter nor were there any other transactions of that order of magnitude in our Q2 bookings. Therefore, if one considered the exclusion of contribution to bookings from North Shore in Q1, Q2 bookings in fact grew approximately 7% sequentially.

Our Q2 bookings represent strong execution by our sales and marketing team and illustrative of diverse sales across our client base with particularly strong showing of Professional and enterprise EHR sales that include continued success cross-selling into our legacy Misys installed base. Also as Glen mentioned our health system group also had a record bookings quarter. It's also important to note given quarterly fluctuations to look at our year-to-date bookings which were up approximately 30% versus the first six months of fiscal 2008. Even excluding the impact of North Shore, bookings are up 23% year-to-date, a strong result that reflects the power of Allscripts market position, strong industry demand and the benefit of our substantial footprint.

A final important point on bookings is that approximately $22.2 million or 24% of our Q2 bookings are related to software as a service or SaaS transactions that again will be recognized as revenue over approximately the next 48 months. This brings our year-to-date SaaS bookings to $47.4 million or approximately 25% of total bookings and compares to $34.9 million or 24% of bookings in the first six months of fiscal 2009. We continue to expect that up to one-third of our bookings could result from SaaS deals in the future. This positive long term trend is a win-win for Allscripts and our clients as our SaaS offering aligns the cost and maintenance of clinical software with the proposed federal incentives that will begin in 2011. For Allscripts we benefit in terms of additional stability and visibility into our financial model in the enhanced long term revenue and margin profile.

Turning to backlog, and again you can see this information on the supplemental data sheet that I mentioned earlier. We ended the second quarter with approximately $741 million in reported backlog which consists of approximately $192 million of clinical software and related services fees, approximately $159 million of subscription and ASP fees, and approximately $246 million of annual maintenance fees that are expected to be recognized over the next 12 months and then finally approximately $145 million of transaction fees which principally consist of EDI transaction fees and again are expected to be recognized over the next 12 months.

Total revenue in the quarter on a GAAP basis was $169.3 million and were $170.7 million on a non-GAAP basis. Q2 non-GAAP revenue was up approximately 5% versus the prior year period. We had strong results across all of our solution and our portfolio in the quarter with solid quarter performance specifically in our Enterprise EHR. We also saw a noticeable uptick in our SaaS related revenue. Systems revenue growth was impacted this quarter by a lower volume of hardware sales in the quarter. We also benefited from an uptick in maintenance revenue as more of our clients continue to go live on our solutions. We continue to expect that our overall revenue growth will reflect an increased mix of SaaS transactions from smaller practices on the subscription basis in enterprise revenue from larger physician practices both of which will continue to take longer to convert into revenue.

Turning to margins and expenses. Non-GAAP gross margin percentage for the second quarter was 56.8% up 210 basis points sequentially and up from 55.3% in the second quarter a year ago. The improvement in gross margin was attributable to several factors including improved efficiency in our Professional service organization with gross margin of 18.6% and incremental maintenance revenues from existing clients. We also benefited from a lower mix of hardware revenue as I mentioned earlier which yields lower margin in software and again helped us from a gross margin perspective in the quarter. Overall we continue to expect gross margins to track in the mid 50% range for the remainder of this year once again depending on our overall revenue mix.

GAAP operating expenses were $68.8 million for the quarter and included approximately $1.4 million in pre-tax transaction related expenses which represents mostly wind down of integration and severance costs associated with the Misys transaction. We expect this to be the final quarter in which we have transaction related costs related to the Misys merger.

Non-GAAP operating expenses before stock based compensation, deal related amortization and transaction related expenses were approximately $60.5 million which were up slightly compared to the $57.8 million in the first quarter. This slight increase in non-GAAP operating expenses is primarily due to an increase in incentive based compensation associated with our continued strong financial performance. On a run rate basis, we have largely achieved our planned cost synergies from the Misys transaction offer $25 million to $30 million in the current fiscal year.

Looking to the second half of fiscal year with the proposed meaningful use roles criteria set forth by the Federal Government on December 30, we believe it will be critical to accelerate investments in key corporate initiatives that will further solidify Allscripts competitive positioning to maximize the stimulus opportunity. For example, and as Glen mentioned, our READY program is a cornerstone of our strategy to transform our approach to implementations and will ultimately result in significant long term benefits for Allscripts and of course for our clients. We also are focused on public sector and will invest in several projects to bolster our position relative to regional extension centers and other organizations. Also, I would point to several important R&D initiatives that will continue to allow us to stay ahead of the competition and meet our client needs to be stimulus ready.

Turning briefly to a few other items. Capitalized software was approximately $5 million in Q2 bringing our year-to-date total to $8.5 million or approximately 27% of our year-to-date R&D spend. As we've indicated our capitalized software expense will fluctuate somewhat on a quarter to quarter basis based on our product development schedule and this will be true for the remainder of fiscal 2010. Our GAAP tax rate in the quarter was approximately 39.9%, a slight increase from the 38.6% rate we recorded in the first quarter. We continue to anticipate a full year tax rate in the range of 39 to 40% and have used the lower end of such range for non-GAAP purposes. GAAP net income for the quarter was $15.8 million. After adjustments, non-GAAP net income was $24 million which compares to $16.6 million in the second quarter a year ago and represents a growth rate of 45%. Details on the adjustments to reconcile GAAP and non-GAAP income are included again in our press release as well as the supplemental financial information referenced earlier.

On a per share basis, our diluted earnings from $0.10 on a reported basis and $0.16 on a non-GAAP basis. Regarding our share count, we anticipate a fully diluted share count of approximately 151 million to 152 million for the remainder of 2010. With regard to overall headcount, we ended the quarter with approximately 2,307 employees which compares to 2,404 at the end of the first quarter which is largely due to us outsourcing approximately 100 individuals related to our field support team.

Turning to our balance sheet and capital structure, Allscripts ended the quarter with approximately $90.5 million in cash and marketable securities, a net increase of $3.6 million from the $86.9 million in the first quarter. We generated approximately $19.8 million in cash flow from operations in the quarter and $41.1 million for the first six months of the year. We also reduced our long term debt by approximately $20 million leaving Allscripts with approximately $24 million in long term debt which represents a two-third reduction this fiscal year and it's also due in part to the conversion of our convertible debt in Q1. We continue to expect solid cash generation going forward.

A key driver to that is our accounts receivable which we saw a slight increase of $5 million to $155 million versus the first quarter yielding a one day increase in day sales outstanding to 83 days. Please note that in the third quarter, which is consistent with prior year, we do in fact expect a slight increase in accounts receivable as a result of our annual maintenance billing that occurs typically at the beginning of the calendar year and represents a substantial component of our go forward revenue, so we see opportunity going forward as we not only capitalize on the significant in flow of billings from our maintenance but also continued focus in our cash collection area.

So in summary, we are pleased with Allscripts results for the quarter and our year-to-date performance. We are seeing robust demand across our business and continued progress cross-selling Allscripts clinical solutions into the Misys install base. Importantly we are committed to continue to invest in the critical initiatives Glen and I have discussed that will better position Allscripts to maximize the stimulus opportunity and improve the Company's position in the market for years to come.

It's important to reemphasize that we do expect to see gradual increase in demand of EHR solutions driven by the federal stimulus program beginning more noticeably at the end of this calendar year. As stimulus based buying increases, we anticipate higher deal volumes, albeit with smaller values per deal as buyers shift to smaller practices. In addition, our anticipated shift to increasingly higher mix of SaaS revenue through increased adoption electronic accounts records among small physician groups will also impact our revenue growth. Finally, our high mix of reoccurring revenue which is approximately 67% is derived from our maintenance revenue, SaaS agreements and our EDI business should continue to yield a mid single digit organic growth rate.

Based on these factors we are making several upward adjustments to our financial guidance for fiscal 2010. With regard to revenue we are affirming our anticipated revenue range of $680 million to $700 million for fiscal 2010. We are raising our net income guidance to $64.5 million to $66 million which equates to an EPS range of $0.41 to $0.43 per diluted share and our non-GAAP net income expectations to a range of $93.5 million to $95 million which equates to an EPS range of $0.61 to $0.63 per diluted share. Our non-GAAP net income guidance contemplates approximately $13.5 million or acquisition related amortization and approximately $9 million of stock based compensation, both of which are net of tax. So with that, I would like to turn it back over to Glen for a few closing remarks.

Thanks, Bill. In closing, I want to wish all of you a prosperous 2010. 2010 is the start of a new decade which we believe will bring dramatic change in the practice of medicine. We will look back on this time as a moment in which the Electronic Health Records delivered a sweeping change from a fragmented system of healthcare silos into a connected system of health. I want to thank all of you for your confidence in us, thank our clients for their support, and thank our employees for their hard work and committment. I can assure you that we will continue to work hard to earn your confidence, deliver for our clients and capitalize on the opportunity to lead this market. Before we go to Q&A I want to cover two things. I encouraged you to go to our website to see Dr. Brenner from Summit Medical Group talk about their successes with CQS, and I want to make sure that I give you the correct reference there. It's www.Allscripts.com/innovation. I think I said back slash the last time.

Second, I know that many of you are interested the proposed final rules on meaningful use and product certification. This topic is of significant interest to our clients and we have over 3,000 participants already registered for the first of three webcasts being held this afternoon at 1 p.m. Eastern time. I'd like to invite you to participate in any one of these events. You can register at Www.Allscripts.com/thetimeisnow.

So thank you and now we'll turn it back to the Operator to take your questions.

(Operator Instructions) Your first question comes from the line of George Hill from Leerink Swann. Your line is now open.

Good morning, guys, can you hear me okay?

We can, thanks.

Good morning. Just a couple of quick questions. Was there any more material revenue or bookings in this quarter that came from the North Shore deal?

There were not, George. I mentioned first on the bookings front that we did not have any material additions to our bookings in the quarter. We have made good progress in terms of the start of our deployments there, so we did recognize some amount of revenue but I've characterized it as fairly immaterial in the quarter.

And then safe to assume then that the CHI deal with the initial sell perspective financially will probably look a lot like the North Shore deal. Can you take a minute and talk about how historically when you sold a contract like this with the hunting license on the back end of it how you guys have historically sold into the hunting license portion of it and the time it is normally taken to harvest the additional license sales?

Yes, I'll take that one, George. I'd tell you a few things. One, these are very different than deals we signed in the past. Number one, they typically include as did North Shore, as does CHI all of their employed physicians, so step one is getting your employed physicians up and operating and ready for meaningful use and then step two is to go out to the community. In both cases this is much more than a hunting license. In the case of North Shore Long Island Jewish, there are substantial financial incentives, larger than the federal incentives for physicians to adopt this solution, so not only are there financial incentives but there's connectivity to the hospital which is very very important. There's connectivity to the emergency department, all of that provided by Allscripts, so if you're a physician, you're referring your physician to a North Shore Hospital, one of their 13, you're referring to a long term care facility which they're the largest provider or you're sending a patient to the ED, all of that provides a full connected experience and in the case of CHI, once again, it is a full marketing and sales program and again, that is being aggressively marketed by CHI. Why? Because they want to use the start exemption to get those referrals and be easy to do business with.

I'll just give you one example since I've been giving lots of web addresses out today. If you go www.NSLIJ.com/EHR you can see an example of the kind of integrated marketing efforts that we're providing, so again, that should give you an example but these are much more than a hunting license.

If I could just make a few confirming points on CHI specifically, one I just want to reinforce that's a transaction that actually was signed in the beginning of our third quarter so it is not included in our Q2 bookings performance and I agree with you, George, the order of magnitude in terms of what CHI could mean to us over time is very significant but just want to emphasize that again from a bookings perspective in Q3, we will be relying on the minimum contractual commitments there and so the market ought to think about that actually a little bit less than what North Shore represents in terms of total deal value initially.

Okay, fair enough. I just wanted to make sure I was thinking about it the same way. And then just one last question, Glen, sorry, you touched on it at the end, I know a lot of people on our side of the business were waiting with bated breath for the meaningful use requirements to come out. Have you guys seen any material change within the client base with respect to meaningful use and how they've reacted once they've seen regulations?

Again, we've always categorized this as a step function. Step one was when the legislation was actually passed. Step two has been when people start to understand what it is and then meaningful use will be something that we won't have any difficulty having our products meet the requirements of and in fact we're assuring that by providing the guarantees we spoke of and then the last step will be kind of what I call the cash for clunkers effect, when the first physician on your block gets a check, the rest of the physicians will really, there will be a mad scramble for those who have not yet adopted. We also see of course adoptions starting at the largest groups because they have to do the most planning and it's now moving very quickly through the middle market and through some of the independent physicians and small practices as well.

Thanks guys. I appreciate the time.

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

Hi, it's Sean Wieland. My comment is around the area of increased investment that you alluded to. Could you be more specific on what areas of this product is the implementation capacity?

Yes, I wanted to just tell you that we are investing in a number of areas and really, Sean, the areas that we're focused on as Bill and I both mentioned one is READY, the ability to quickly implement because we know that's going to be important; two, it's useability, we want our Systems to be much more intuitive and when we talked about our Professional product in the new user interface, the physicians who have been using it for a period of time have really raved about how easy it is to use and how we listen to physicians to better design the product. Community and connect is another big investment for us and that is the capability. I mentioned this great term semantic interoperability. The ability to have whole communities connect and share information and you see that out in Connecticut where not only our customers but connecting with all kinds of labs and competitive practices and the like and you see that in a variety of places where we're connecting with hospital systems, so one, useability, two connectivity, three, innovation, all of those are driving some of that investment and the last one is, there is that investment in people and that is that we are carefully but reasonably aggressively bringing on the right kind of people to 1) help us grow and 2) make sure we can accommodate the future growth, so that's where the investment is going.

Okay, thank you.

Okay, your next question comes from the line of Richard Close. Your line is now open.

Great. Richard Close here, thank you. With respect to bookings, you guys mentioned the health system sales were a record in the quarter. Can you give us any indication if you exclude the health system area what the bookings growth would have been?

Yes, Richard, we have not gotten to that level of specificity in the past. I'd prefer not to go to that next level of detail. As Glen indicated I will tell you though that in all areas including Professional, Enterprise, and Health Systems, we delivered on our own internal plan all of which contemplate meaningful growth in the respective quarter and thinking about it on a year-to-date basis as well so we're very encouraged by our overall performance, did not mean to suggest that our bookings performance was solely driven by Health Systems, rather we saw strong performance across all our respective segments.

Okay, and then just really quick, on the ready process and I guess some of the statistics that you threw out there since it started in September I believe you said, does that include the enterprise product at all and then if you could just give us a little bit of an update on maybe Version 11 and how those rollouts are going or upgrades are going, have the implementation times improved and we'll leave it at that.

I'll take the first part on the READY and then Glen can comment on the V11. Interestingly enough our ready initiatives actually started in the enterprise suite and the successes that we've seen have been predominantly focused on the enterprise side. Given its success and the criticality of needing to do it across our portfolio, the investments that we spoke to are actually moving that aggressively in the direction of Professional and ultimately will have some contribution to our total portfolio set, so we are very encouraged on what we're seeing on the Enterprise side in terms of our ability to deploy these principles and with that I'll see if Glen you want to comment on the V11.

Yes, I'll comment and just going forward we're going to ask that if we can try to limit the questions to maybe one question as opposed to kind of a cluster because we're trying to get to as many people as possible. Relative to Version 11, we've seen great progress there. I think the best example of that is out at Sharp in California, Bill Spooner and his team implemented the entire organization, brought them up on the brand new Version 11 order functionality, all seamless. It was a big big step because the entire organization one day converted over and they had a terrific seamless upgrade and install. Version 11 where we're putting it into new customers we're seeing great results and one of the challenges and you always have this when you're dealing with an upgrade from a product that people have been on for years, some people really love the functionality of V10. They've been using it for a long time and when they moved to Version 11, there's things that frankly are just a little bit different in Version 11 and so we've also worked through those issues so we're seeing great progress across-the-board on Version 11 and we continue to vest a lot in it because it's our lead product. We're also seeing a lot of innovation come out of Version 11 as we add all of this new functionality, it is first available in Version 11, things like our CQS module which I've mentioned give people real capability, they would otherwise not have.

Similarly, if you look at our clinical trials functionality available in Version 11, the only one in the industry that has it and that kind of capability and innovation is what we hoped for with Version 11 so through the bumps continue to focus on making it better and better and some great results to show for it. Thank you.

I'd like to remind everyone, for our question and answer session it's one question, one follow-up. Your next question comes from the line of Jamie Stockton, your line is now open.

My question applies to hospital employed physicians. I think on your website you said this was an area the legislation that seemed a little ambiguous as to whether or not they would qualify for the incentive payments. It doesn't look to me at least like they will. Do you think that will have any impact in the marketplace I guess is my question or do you agree that it doesn't look like they will qualify for the incentive payments?

Well, I'd say a few things. One this is a controversial area and anything we say here understand these rules are not yet final. I just did a session for a few hundred people at a health system and that was one of the big questions which was do they qualify, do hospital employed physicians qualify, what billing codes should they be using, some organizations have told us that they would rather continue under their existing billing code as opposed to change to one that qualifies but I think it's up in the air. What I will tell you is there's simply not any hospitals out there that either employ physicians or have affiliated physicians that aren't looking at Electronic Health Records. I mean, if you are a large organization in the market today, you're looking at it almost independent of the funding, so most of these organizations see the funding especially for large hospitals as a really good thing. It's brought this discussion to the fore but whether or not that ends up as including them or how it's resolved, I don't see that as being material to our results or to the sales growth that we're seeing.

Okay, thank you.

Okay your next question comes from the line of Corey Tobin, your line is now open.

Hi, good morning, congrats on a nice quarter. A couple of quick ones if I could. On the upgrade enablement center, Glen, I think you mentioned this, did you say there was a thousand doctors that have purchased EMR through this since December?

Yes, what the upgrade enablement center was a way to take the existing Legacy Misys space and make it very quick and easy to upgrade them to one of our newer products whether it was our Professional product which it is in most cases or enterprise product so it's a way to systematically approach it. That's one of the investments that we've made and what I said was that approximately a thousand physicians have already contracted for being a part of our upgrade enablement center so in other words they are already signed on and in process of being upgraded just since we opened it which was in early December, late November, early December. It was really the time frame.

Corey just to clarify, these are Misys -- Legacy Misys customers that are principally on Misys EMR that we're converting again as Glen mentioned to one of our go forward products solutions, whether Professional or Enterprise predominantly Professional thus far.

I think the important point here, Corey, is that what we didn't want to do is have our existing salesforce go out to existing base, spend a lot of time selling them. What we wanted was to make it very, we want to make it a total no-brainer for this existing base to convert so low cost, low complexity systematic and no involvement of the salesforce and that's the real success of the upgrade enablement center.

Just remind us if you could please how many physicians in your current installed base are currently on a Misys EMR solution?

How many are currently on a Misys EMR?

How many are eligible so to speak to work through the upgrade enablement center?

Well, we think -- the entire Misys space should convert and what we've said all along is that's over a hundred thousand physicians, that said it's in the thousands and I don't think we've given a specific number.

Let me comment. It's somewhere -- in terms of the direct audience of being on a Misys EMR, you're talking somewhere in the kind of 15,000 to 20,000 range, Corey, but so that's one opportunity but really the point Glen was making earlier was that we see this ability to convert these customers in a very efficient manner to ultimately be applicable to net new opportunities as well so this isn't just about taking existing customers and converting them. We see the ability to leverage the underlying infrastructure and the know how in a much broader sense and that's what we're most excited about.

Great. Thanks.

Your next question comes from the line of Sandy Draper from Raymond James. Your line is now open.

Thank you very much. My question and I'll try not to bundle too many together, is for Bill. On the gross margins, Bill, I want to be sure I'm clear. You said the second half of the year you're expecting mid 50s gross margin?

Yes, Sandy, I am mindful. We absolutely benefited in the quarter in terms of the mix of the revenues less hardware, more license revenue and so that's a dynamic that will fluctuate from period to period. Number two is that as I mentioned with the shift going to smaller practices, there is some prospect of a little bit of tension being created by that shift to smaller practices and the associated margin and then just the ongoing dynamics of the shift to software as a service in the near term that has the implication of recognizing all the costs of deployment up front in those revenues all the costs of deployment up front in those revenues being recognized over time, so again I just want to be cautious for people not to get ahead of us from a specific gross margin point of view. With that being said, just want to reemphasize the operating leverage that we have demonstrated and how that translates into the earnings year-to-date and the guidance that we've given for the year so we aren't going to take our eye off the ball in terms of overall profit performance but I just want to call out the prospect of some variability there.

That's really helpful and I guess all of those comments. One thing I was a little bit surprised there was more volatility around the support and maintenance and transaction processing margin sequentially. One was up, one was down. Can you just help me understand what are the things that drive support maintenance gross margins to be that volatile and same thing for transaction processing if generally they're pretty high recurring revenue business lines and that will be my last question.

Yes, I think that there's typically should not be much in the way of variability other than the fact that we are from a resource planning perspective in both areas attempting get our resource plan right and so it's ebbing and flowing a little bit just as we work through that, so I would just tell you in both instances it is largely motivated by resource plan. Specific to the EDI front, I made reference on the headcount that we actually in the quarter transitioned about 100 heads to an outsourced relationship specific to our field support individuals and there actually was some cost implications associated with that. You're seeing a little bit of that kind of working through the results, but outside of it, I would expect both of them in the normal sense to be fairly consistent.

Okay, thanks.

Your next question comes from the line of Atif Rahim JPMorgan Chase. Your line is now open.

Thanks, Bill. Most of my questions have been answered but in terms of the initiative that Bill talked about could you give us any idea of what the expenses are like and how they might trend from now through the end of the year?

Yes, Atif, you were a little muffled. I think you asked in terms of the relation to the investments that we talked about kind of how that translates into cost. I would just say that there's some variability there. I think that if you build, if you take our first half performance and kind of correlate to what that would mean in terms of hitting our revenue and our profit guidance for the second half, you're talking about upwards of a couple million dollars a quarter in terms of what it could translate into in terms of overall cost spend.

Okay, got it, thank you.

Okay, your next question comes from the line of Greg Bowlan, Wells Fargo Securities.

Thanks for taking the questions. Just as a follow-up to an earlier question on North Shore, are you seeing a preference for the Professional EHR over My Way by the non-employed physicians?

I think it's too early to tell. We have distributors who are doing well using My Way and we see strong interest in Professional. The biggest benefit of Professional is simply that with so many years of experience built into the product and with all of the functionality, it just has more, it's more comprehensive than the My Way offering which is a newer offering, so from that perspective, we're probably seeing it lean a little bit more that way but of course we want to do what's best for our clients so whatever decisions they make we're happy to accommodate them. All of it will be connected to North Shore.

Sure, and actually on that note, can you talk about the progress you're seeing with the distribution agreements with Cardinal and Henry Schein? And is there any way to quantify or even just qualify their impact to second quarter bookings?

I believe we seen very solid progress with both Henry Schein where we have a very tight strategic relationship and I think you'll see continued progress and activity together. Cardinal has just done some reorganization and brought on some additional sales capability that was recently changed so we'll see some activity there as well but we're very very pleased with both of the partnerships. The one thing I'd say about Schein which is the primary jist of that relationship is lead generation and we are close to our full year target already which I think demonstrates both the interest in the market and Schein's ability to and relationship with ability to market their customers and close relationship with their customers.

Helpful. Thanks and congrats on a nice quarter.

Thank you. We'll take one more question because the market is now open so we want to be sensitive to that.

Okay, your final question comes from the line of Don Hooker. Your line is now open.

Great. Good morning, so with respect to your bookings, how much of that is selling into that Misys space and when those Misys physicians are choosing an EHR, what is your win rate there?

Well, I think some great news. One of the surveys out there recently said they had actually surveyed the Misys space and above 80% of that base said that when they make a decision about an Electronic Health Record they had already intended to select an Allscripts product of one kind or another so we think we're in very good shape relative to the Misys space. The good news is that there's no disproportionate amount as you can see from some of the new sales announcements, it's not like some great percentages all coming from the Misys space or vice versa so we've got great runway in that base and what we've done is we've made it easy from them from the standpoint of saying you don't have to convert tomorrow. You convert when you're ready to convert. We will support you until that time. On the other hand, some of those products are going to need to be upgraded, some of the older Misys products and they are going to need to convert to qualify for meaningful use. That's why we built the upgrade enablement center to make sure those are simple to use, simple to upgrade, and don't take a lot of time.

So overall, I think that we're in very good shape. We're right on our projections relative to what we thought would happen in the Misys space and now with the upgrade enablement center we have the capability to actually accelerate.

Thank you.

Well again let me just close the call. Thanks very much. We tried to accommodate a variety of market situations and conferences and the like in doing this first thing in the morning. We appreciate folks across-the-board getting up to join the call and we continue to see a very bright outlook for this market and we continue to be committed to be the leader in Electronic Health Records, Practice Management and the variety of other products we provide to hospitals and connectivity and payment processing and the like, so thanks. We'll look forward to keeping you updated and talking to you next quarter. Thanks, everyone.

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