Streamline Health Solutions Inc (STRM) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 and the Fiscal Year 2005 LanVision's Earnings Conference Call. My name is Tony and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I'd now like to turn the call over to Mr. Paul Bridge, Chief Financial Officer. Please proceed sir.

Thank you very much operator. Good morning everyone. I am Paul Bridge, the Chief Financial Officer of LanVision Systems Inc. thank you for joining us today.

With me to discuss the quarterly and annual operating results are Brian Patsy, President and Chief Executive Officer and Bill Geers, our Chief Operating Officer. Brian, Bill and I will be available to answer questions during the question and answer session.

LanVision has arranged for the webcast of this conference call to be recorded and will be available at our website listed in the quarterly press release for the next 30 days.

Before I begin our discussions I would like to read the Safe Harbor statement. Statements made by LanVision that are not historical facts are forward looking statements that are subject to risks and uncertainties. LanVision's future financial performance could differ materially from expectations of management and the results reported now or in the past.

Factors that could cause LanVision's financial performance to so differ include but are not limited to timing of the signing of expected contracts during any particular quarter, the impact of competitive products and pricing, product development, reliance on strategic alliances availability of products procured from third party vendors, the health care regulatory environment, fluctuations in operating results and other risks detailed from time to time in LanVision's filings with the US Securities and Exchange Commission.

Yesterday morning LanVision released the fourth quarter and fiscal year 2005 financial results. I would like to highlight the more significant aspects of our fourth quarter and fiscal year results.

Total revenues increased 24% to a record 6.2 million for the quarter and 26% to a record 16.1 million for the fiscal year.

Of particular note are system sales for the quarter and year to date increased significantly as we expanded and added in our presence in our existing client - our application hosting service revenues continued to grow and now exceed $3 million annually.

The gross margin on our system sales increases significantly as the ratio of our proprietary software versus hardware and third party software components increased significantly in the current quarter and fiscal year when compared to the prior comparable periods.

The operating margins on our services, maintenance and support and the application hosting services continue to remain strong.

Our selling, general and administrative and research and development expenses have increased because of the planned reinvestment of our current year operating margins back into the sales and development staffs to expand our direct sales capabilities and develop new products in order to grow our revenues in 2005, 2006 and beyond.

The significant increase in software revenues dramatically improved our operating profit for both the quarter and the fiscal year, not withstanding the significant investments made in our selling, general administrative and research and development expenses.

Our annual interest expense decreased significantly with the retirement of the very high interest rate in July 2004.

Our current backlog stands at approximately 4.2 million with 2.7 million from our existing customers and 1.4 million from our resellers.

In addition, signed multiyear agreements for our application hosting are approximately 4.8 million. Please note that our backlog does not include recurring maintenance revenues, which exceeded 5.1 million this year.

We continue to monitor our expenses, cash balances and receivables carefully to ensure that they are on plan vis-a-vis our revenues.

Now I would like to turn the call over to Brian Patsy who will discuss in greater detail some of the significant factors that effected the quarter and the fiscal year.

Thank you Paul and good morning everybody. This morning I will comment on our Q4 and fiscal year 2005 financial results and then briefly discuss significant events and milestones achieved in our fourth quarter and fiscal year 2005 and update on our sales, marketing and business development activities. Our 4 phase plans, position, stream line health as a leader in document work flow, business process management and systems integrations solutions and services and finally I will provide some guidance for our fiscal year 2006.

After my remarks, Bill Geers, our Chief Operations Officer will provide an update on our operational plans for the coming year.

After Bill completes his remarks we will conduct our question and answer session.

Here are some of the more significant Q4 and fiscal year 2005 financial highlights. I am pleased to report that it was a very good year for streamlined health. We exceeded our internal plans for revenue growth, operating profitability and net earnings.

As was recorded yesterday, we achieved record Q4 Chief Operating Officer will provide an update on our operational plans for the coming year.

After Bill completes his remarks we will conduct our question and answer session.

Here are some of the more significant Q4 and fiscal year 2005 financial highlights. I am pleased to report that it was a very good year for streamlined health. We exceeded our internal plans for revenue growth, operating profitability and net earnings.

As was recorded yesterday, we achieved record Q4 revenue of 6.2 million, record quarterly basic net earnings of $0.30 per share, record annual revenue of 16.1 million, record net earnings of 2.5 million and record annual basic net earnings of $0.28 per share.

In addition, the stock market responded favorably to our performance as our stock price increased 228% from $3.07 at the end of fiscal 2004 to $7 at the end of fiscal 2005.

Our revenues for the entire year were slightly ahead of our previous guidance while our operating profit and net earnings for the year exceeded our expectations, primarily due to higher than anticipated high margin software revenues in our fourth quarter.

We have now achieved operating profitability and net profit for 6 consecutive years. As a result of our strong performance in 2005, we have created a great deal of momentum and our prospects for our fiscal year 2006 are very encouraging.

In reviewing our revenue contribution for fiscal year 2005, system sales accounted for 38% of revenues, up from 23% last year, primarily due to a $3.6 million improvement, or 391% in software licensing revenues.

[Harris's] support and maintenance accounted for 43% of revues, down from 56% last year, primarily due to the large increase in software licensing and revenues I just discussed.

We anticipate that these new software licenses will increase our future maintenance revenues as these new software licenses are deployed.

And finally, our highly profitable recurring ASPeN, remote hosting services grew by 18% over fiscal year 2004 and accounted for 19% of revenues, approximately the same as last year.

We consider approximately 10 million or 62% of our fiscal year 2005 revenues as recurring revenues, which includes professional services, support maintenance and ASPeN remote application hosting services.

Now I'd like to briefly review significant events and milestones achieved over the fourth quarter and fiscal year 2005.

As announced this morning, in our fourth quarter, Streamline Health signed and recognized revenue on a significant enterprise wide license expansion agreement for flagship document work flow and document management systems software to 11 additional facilities of Texas health resources. They are one of the largest faith based, non profit health care systems in the US comprising 13 hospitals with more than 2400 beds, 18,000 employees and 3600 physicians serving 6.2 million people in the greater Dallas/Fort Worth area. The planned expansion of our solution throughout their enterprise will compliment their implementation of the EpicCare clinical information system from metric systems.

Texas health resources goal is to establish a comprehensive, integrated electronic health record for patients in all of its hospitals. Currently streamlined health solutions are installed and in productions in 2 of their hospital facilities.

In addition to the significant expansion of our software within Texas health resources, in our fourth quarter we also signed and recognized revenue for an additional noteworthy expansion of our solutions within another existing customers multifacility operation. This agreement called for expansion into 6 additional facilities from their currently installed 2 facilities.

Also in 2005 we signed 3 new customers and announced 2 of them. Sarasota Memorial Hospital and Oregon Health and Science University. The third new customer, which has not yet been announced, will sign through our relationship with IDX, which is now GE Healthcare.

As a result of signing the 3 new customers and expansion of our solutions to 17 new facilities within our existing customer base, as mentioned previously, we achieved a 391% increase in high margin software licensing revenues or $3.6 million improvement.

In achieving 26% revenue growth, we exceeded our goal of 25% growth. As a result of this significant revenue growth, we achieved an 86% increase in operating profitability. We accomplished this even though we grew our expenses by 22% in order to make the necessary investment in our infrastructure to position the company for sustainable double-digit revenue growth.

For example, in 2005 we grew our staff by approximately 40%. And finally, last month we attended a highly successful health information management system society conference in San Diego where we conducted numerous with existing and potential new strategic business partners in order to greatly expand our distribution capabilities. I'll comment more about our business development activities a bit later.

At the conference we also met with several our existing customers and sales prospects.

At this point I would like to further discuss our sales, marketing and business development activities. Our current pipeline of qualified prospects remains very strong. As discussed in our last earnings call, qualified sales leads have grown 4 fold and currently stand at approximately 48 million in potential software revenue and 60 million in total revenue.

With regard to our business development activities, our goal is to expand existing relationships and develop potential new strategic business partners in order to greatly enhance our current distribution capabilities and compliment our investments in our own direct sales staff.

With our record fourth quarter revenue, strong fiscal year 2005 performance and a continued robust qualified sales pipeline we're in a position where we can be much more focused on our larger new potential business partners.

Accordingly, our focus in 2006 will be on establishing strategic relationships with potential partners that can provide us the optimum impact in terms of large-scale distribution and market penetration capabilities and therefore enhance future revenues.

We are pursing relationships with these larger potential partners that best align with our focus and our mission to eliminate process friction points that impede the efficient flow of document centric information throughout the healthcare enterprise.

Although it may take a little longer to consummate relationships with some of these large-scale partners, the impact on our growth could be substantial as a result.

With GE Healthcare's announcement and subsequent January 2006 closing of their acquisition of IDX, our single largest distribution partner, we have focused our business development resources on making sure that appropriate stakeholders throughout GE Healthcare understand the value that we add to their solution portfolio.

While GE Healthcare has reaffirmed our existing partnership with the Carecast business unit, now renamed Centricity Enterprise Solutions Group, we are continuing to work to achieve additional integration in sales opportunities in our mutual client base within other business units across GE Healthcare.

In addition to GE Healthcare we continue to pursue business development opportunities that leverage our workflow, document management and integration capabilities with other leading clinical and financial information system providers in the healthcare marketplace.

In 2006 we expect to deliver on previously announced client agreements that include integration of streamlined health solutions with Epic Systems, Siemens, Eclipsys, QuadraMed and others. We anticipate this will provide us with a competitive advantage and open doors to additional sales opportunities with hospitals that rely on these vendor systems and have the need for our complimentary enterprise document workflow capabilities.

In concluding my remarks on our business development activities I want to update you on the progress we've made with our previously announced development and marketing partnership with IBM.

As an IBM premiere partner under the IBM ISB advantage program, our efforts over the past 9 months have mainly centered on the porting of our flagship access anywhere product portfolio to run as a secure web based solution in the IBM WebSphere portal environment.

I am pleased to report that the IBM WebSphere environment will be included as a part of our next major release of access anywhere, which we expect to deliver for beta testing at select client sites in our second quarter. We are now starting to accelerate our joint marketing and sales planning efforts with IBM to coincide with our products availability in the IBM WebSphere environment, which included our participation in the IBM partner world conference last month.

We expect to see a meaningful impact on our pipeline and revenue over the second half of our current fiscal year.

Now, let me take a moment to discuss our 4 phase plan for continued double digit growth in order to position streamlined health as a leader in document workflow, business process management and systems integration solutions and services.

We are currently successfully executing on our first phase of our plan, which is to position streamlined health as the enterprise solution for 5 key integrated tools and technologies, document workflow, document management, portal connectivity, interoperability and finally eforms.

Applying these tools across the healthcare enterprise helps hospitals eliminate process friction points that impede the efficient flow of document centric information, thereby streamlining key clinical financial or administrative processes.

We do this by integrating these 5 tools and technologies with existing transaction centric systems installed in the clinical, financial and administrative areas of healthcare enterprises.

In phase 2 of our 4 phase growth plan, our business plan calls for expanding our business process management service or BPM capabilities over the next 12 to 18 months in order to take advantage of business process reengineering opportunities as healthcare costs continue to spiral.

We believe that by offering competent BPM services we will create an effective balance between our software solutions and complimentary custom consulting services, thereby creating synergies that will drive new software sales while greatly expanding our consulting services revenues.

In phase 3 of our growth plan we intend to leverage our investment in portal technology and our relationship with IBM to drive new software and services opportunities in the expanding portal connectivity marketplace. Building our consulting practice in phase 2 of our growth plan is crucial to position ourselves in the portal marketplace.

We believe and essential component of implementing enterprise portal connectivity is providing the customer consulting services that are necessary to effectively implement portal technology.

And finally, in phase 4 of our growth plan we intend to leverage our previous investments and market penetration in the first 3 phases of our growth plan to address the large-scale systems integration needs within the healthcare marketplace.

We believe the market opportunity for document workflow, document management, BPM services, portal connectivity and large sale systems integration is in excess of 16 billion with very little market penetration rate and tremendous upside growth potential for Streamline Health.

I would like to close my remarks by providing some guidance for our fiscal year 2006. Our 2006 business plan was developed with a goal to continue to achieve top line revenue growth in the range of 20 to 25% with operating profit growth anticipated to be equal to or greater than revenue growth.

As in prior years, we anticipate that we will again experience quarter-to-quarter revenue growth with our first quarter being the most challenging. We anticipate our quarterly revenues as a percent of annual revenue will track similar to those in fiscal year 2005 and again we expect approximately 60% of our annual revenues in the second half of our fiscal year. Because historically revenues from our largest distribution partner are greatest in the fourth quarter.

In addition, we anticipate approximately 43% of our total revenues from system sales, approximately 41% from services maintenance and support and approximately from application hosting services. This concludes my formal remarks.

Now I'd like to turn the call over to Bill Geers for his comments on our plans to expand our infrastructure to support our growth plan. Bill?

Good morning. It's my pleasure to be with you today to discuss and operations update. My comments will be brief and they focus on the following topic, final 2005 operating plan highlights and secondly a preview of 2006 in 4 key areas, operating expenses, headcount, high profile R&D efforts and client satisfaction.

First the final 2005 operating plan highlights. With respect to overall headcount, we grew our organization from 70 to 98 people. It is important to note that we are encouraged by the high quality personnel that joined our organization throughout the year.

Our most significant head count growth was in the area of our product development group where we grew from 25 to 43 employees an increase of over 70%. This expansion will facilitate our efforts to deliver on existing opportunities and the vision that Brian articulated in his comments, which is to provide business process improvement within healthcare through the implementation of solutions based on these 5 integrated technologies, document workflow, document management, portal connectivity, interoperability and finally eforms.

We are pleased with the execution and results in the area of our business priorities. Our progress in the area of client satisfaction which is our number business priority throughout 2005 is undeniable. There is no greater proof of this progress than the 2 enterprise wide license agreements with existing clients that Brian discussed in his comments.

I will now provide some insight as it relates to our 2006 operating plan. To begin with, we expect our operating expenses to increase in the range of 20 to 25% while our headcount will grow approximately 15% as we continue to invest in our infrastructure to ensure our ability to successfully deliver on existing opportunities, and execute on the streamlined health vision.

We will continue to invest significant in the expansion of our infrastructure in 3 primary areas, sales and marketing, research and development and finally consulting services, which is the group that owns successful implementation of our solutions and the timely resolution of all client support issues.

With respect to our R&D efforts there are 2 updates that I would like to share with you. We have a major release to our product portfolio that is scheduled for beta availability in our second quarter and we are on schedule to meet this commitment. While this release introduces a variety of product enhancements. One of the more noteworthy enhancements is extended interoperability, which will facilitate our efforts to integrate with additional clinical financial and administrative systems.

In addition, we expect to introduce another 5 to 7 workflows during 2006.

On a company wide basis we will also continue to stress the following business priorities throughout 2006, client satisfaction, product quality to be market driven and growth oriented and finally, to achieve our financial plan.

We sincerely believe that the satisfaction of our clients is fundamental to our short term and long-term success. With that in mind, here are some of the ways in which we expect to achieve further progress in this area in 2006.

First of all, we have added additional client managers to our sales team. Their sole focus is our existing client and their compensation is tied directly to the satisfaction of the clients that they manage and their ability to expand our presence within these accounts.

Secondly senior management will continue its direct involvement with our client base on an ongoing basis.

The standard streamlined health bonus program has a client satisfaction component, which motivates all employees to do their part to ensure the satisfaction of all Streamline Health clients.

And finally, we continue to invest in tools, process improvement initiatives and personnel to ensure that we are delivering high quality solutions to our clients that address their business needs.

In summary, our vision and 2006 business priorities have been clearly defined and communicated throughout streamlined health. We will continue to work together to ensure the efficiency and effectiveness of our execution in these areas.

I would now like to turn the call over to Paul Bridge for the question and answer session.

Thank you Brian and Bill. Operator, may we please have the first question.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Mr. Tom Carpenter with Hilliard Lyons. Please proceed sir.

Hey good morning everyone.

Good morning Tom.

First I'll start with congratulations on the strong results that hopefully bodes well for 2006.

Thank you.

Lets look at the, maybe a big picture perspective. Can you give us an update on the electronic medical records initiatives in the private and public sector including some of the government talk about a national database and the potential impact it could have on LanVision over the next couple of year?

Yes, we have our eye on that initiative and we are participating directly and through some of our relationships, particularly with IDX, which is now GE Healthcare.

In fact we attended what was then an IDX executive management conference for some of the leaders in that initiative were present and presented. And we believe that we are positioned very well in the heart of that initiative and namely, obviously the electronic medical record is at the forefront of everyone's consciousness and we offer several technologies that I think play very well in that initiative. Clearly, business process improvement is a key fundamental need in terms of making healthcare processes more efficient.

Secondly, we also offer under the hood of our technology a repository that might play very well in terms of the national healthcare initiative to store patient information on a global basis. So those 2 fit very well with our mission and our view of our growth in the future.

And finally, we believe that document management and portal connectivity are fundamental technologies that will facilitate the movement to an electronic medical records. As we stated on numerous occasions there are some very large vendors who offer what we believe are mostly transactional based systems to handle clinical, financial and administrative information. And our vision is that we can provide an enterprise approach to the 5 technologies that we mentioned earlier, document workflow, document management, interoperability, portal and eforms. And basically fill in the blanks around and among those transactional vendors to really provide all the health care information to the user.

Okay. Excellent. When I'm looking at the results for 2005, you guys delivered an 11% operating margin versus 7% in 2004 with the top line growth you guys are talking about of 20, 25% and roughly similar OpEx, should we think of 11% as the floor for operating margins in 2006?

Well, as I mentioned in my comments Tom, wee have a goal of 20, 25% revenue growth and operating profit growth equal to or in excess of that and that's what we'd like to set as an expectation.

Okay, well that's good enough for me. I can draw some conclusions there.

Looking at - can you go over the pipeline again, I wasn't sure if I got those exact numbers, you started with the number, then you broke it down by software and maybe some other areas?

Well, there's a pipeline and I also shared with you our goals in terms of different revenue streams. If you talk about the pipeline, now lets be careful of semantics here, what I'm talking about when I talk about a qualified sales pipeline is all the opportunities that our sales force and our partners are pursuing where we have an opportunity that we're either in the finals, or vendor of choice, or contract negotiations. That number has grown from the start of fiscal year 2005 four fold. In the last earnings call I shared with you it was approximately 40 million, it is now currently 48 million.

Okay.

Now that's in sales, basically software license opportunities and if you add in the maintenance and the other revenue streams it's approximately 60 million.

Now, I also shared some guidance which was looking forward into 2006 in terms of the breakdown of some of our revenue streams and again we said that - or I said that 43% of our total revenues would come from system sales, approximately 41% from services, maintenance and support and approximately 16% from our hosting services.

Okay great. I'll let some other people ask some questions and I'll jump in the queue. Thank you.

Your next question comes from the line of Bill [Bun] with [Forward Watching Investments], please proceed sir.

Good morning.

Good morning Bill.

I'd like to ask a little bit of a follow up on the Texas deal that you announced this morning.

Sure.

I understood that was a fourth quarter transaction.

That's correct Bill.

To what degree does revenue from that fall into subsequent quarters?

Well, first of all, we recognize the expansion of the software licenses in Q4 and some -- to some minor extent we may have shipped some small amounts of third party software and/or hardware, very small amounts.

Now, what we see moving forward is the implementation services, the professional services if you will, to install and train the client on that software in the additional hospitals and so that is recognized rightably as its delivered, those services are delivered. And that's the eventually we'll see maintenance revenues increase as a result of those expanded licenses.

So does more than half fall in the fourth quarter and less at half, subsequent quarters?

Well that depends. I don't have the numbers in front of me in terms of the specific break down, but a large portion of that opportunity was software licenses, which hit in the fourth quarter.

On a typical deal, software is typically around 50, 40 to 50% of a deal and services, implementation services generally run around 25% of the deal and then the remainder would be third party components and integration in terms of interfacing to some third party system.

In this case, I believe, actually the percent of software might have been a little higher. So what you would see is less than 50%, maybe as low as 25% of the total value of the deal flowing in the next year or so.

Now you had indicated earlier that you thought that recurring revenue for this year represented about $10 million.

That's correct.

Now, some of those numbers from the Texas transaction is embedded in that 10 million, or is that in addition?

Well, there is a small component in the 10 million, which is the professional services that are going to be recognized rightably as we implement.

Okay.

Which is a small percent. But most of that is contributed by our hosting services, which last year were 3 million and growing and our maintenance services, which is a very large number and then the remainder of that 10 million is our, what we call virtual recurring revenue which is our professional services, which we very accurately predict every year.

On the income statement, in the category of revenues and services, maintenance and support. The numbers - first time that I can remember, the actual revenue numbers were down from previous years and in addition if you do a little arithmetic and you look at cost of service for maintenance and support you come up with a rough gross margin for that category, looks like there was a bit of margin erosion there. Was that a temporary situation or is that something that we can expect going forward.

Good observation, particularly as it relates to professional services. There was some margin erosion in 2005 that we anticipate will not occur in 2006. So we're very pleased with our results considering that there was margin erosion on professional services.

The reason for that Bill is that, as you can imagine, we 're trying to invest in the infrastructure to deliver on this large expansion in software licenses and new customers so we had to go out and hire additional people to be able to meet that demand and obviously there's a ramp up time and some of those new employees are effectively inefficient in the first 6 months of their tour of duty with us.

All right, that's what I wondered if the 40 additional people were affecting that more than some of the other areas.

In fact, Bill, you want to comment further?

No, I think you hit the nail on the head. I think that's exactly right. We - without question we expect our margin to improve significantly in the area of our implementation services in 2006.

Now, going forward, I know that you intend to continue to add key people, as you need them to conduct your affairs. Will you be adding as many going forward as you have in the past, or is that 40 additional people, that one big step function increase, is that behind us at this point?

I'll go ahead and take that one. In - if you look at the growth that we saw from a head count perspective in 2005 again, it was 40%. We do not anticipate that kind of growth in 2006. We see it being more in the 15% range.

Okay.

That was a pretty big gulp Bill and it takes time to absorb that one.

Right.

I don't believe we could sustain that kind of personnel growth year to year so we're trying to be very prudent in our additional hires this year.

And it's with the support higher margins going forward then because you wont be adding quite --

Exactly.

-- the magnitude that you had in the past.

Exactly that that ties back to your previous question about professional services.

I have another income statement question. This ones involve system sales for the fourth quarter, the cost of system sales. I mean system revenues were up strong. The cost was very much less than what we've seen in past quarters, in other words the margin on that particular block of system sales seemed to have been unusually large, was there anything special about that, anything going on that we should know about.

This is Paul Bridge. Yes, in 2005, the system sales included an enormous third party hardware cost.

Okay.

And this year we did not have that. This year is was a very large increase in system sales, or LanVision software, which has a very high margin.

All right. Thanks. With regard to tax - to a degree the numbers that you reported were probably as a result of what I would call a non-recurring tax benefit. That somehow flowed out of how you account for net operating losses, is that right?

Yes.

Is that something that we would expect every December? You've got a large block of NOLs that are still out there, is that some that that you could take advantage of every year or is that behind us at this point?

The valuation allowance on the deferred tax asset is reviewed every quarter.

Okay.

And because we're so weighted towards the far end of the year, we review it in much greater detail then. But assuming that we can continue the profitability and that we can continue the revenue increases we are going to probably have additional income tax benefits.

All right. So last number that I saw, NOLs were at about a $27 million level.

That's about right.

And it's down from that now?

Yes, we made money this year.

Okay. And do you know offhand what that level is at this point?

I think its somewhere between 27 and 28 million.

All right, so still almost at that level then?

Yes. It was at like 29 last year.

All right. This is my last 2 questions then and this question goes back to the queue of the October comment where there was a comment in there about how you might need additional capital in the current fiscal year. Do you still think that you may need to go out and raise additional capital?

No, obviously the current fiscal year is completed. We didn't feel a need to raise capital based on our excellent finish to the year.

Okay.

Moving forward, with the kind of growth we're having, we're pursuing all options at our disposal and that may be one of them.

Are you not going to be internally funded this year or do you have something additional or special that you're looking at?

No I think we - cash flow wise we're in pretty good shape this year but we want - we have some plans to expand into some other markets. And that may require additional funding.

All right. And my last question, at least for now, is that I think in your comments you'd mentioned that you started to talk about some opportunities in 2006 to work with third party -- parties. You mentioned Epic and some Siemens customers and things like that. But you mentioned the name Eclipsys which has not appeared in the past, is this a new relationship for you?

Well, first of all, it's not a relationship; it's more of an indirect opportunity. We, as you know, signed Sarasota Memorial Hospital, a very large hospital, 8, 900 bed hospital. And they have, as an incumbent vendor Eclipsys. In addition to that opportunity we have several others that I can't address at this point, that are Epic installations including some of our installed base.

What we're in the process of doing is seamlessly integrating our technology into their existing environment so that a physician or a user, when they are in the Eclipsys system can seamlessly view documents within our system.

Okay.

So that creates a market opportunity for us, as you can imagine in the - excuse me, in the Eclipsys marketplace.

So you're not working with them so much as you're actually going after them, in a sense.

Yes. We're going after the market, we're not going after Eclipsys of course. But there may be some potential opportunities to collaborate down the road, one never knows.

All right. Well that's it for me for now. Thank you.

Your next question comes from the line of Dan Veru with Palisade Capital Management. Please proceed.

Morning Brian.

Morning Dan.

Nice work on the quarter and great finish to the year.

Thank you.

I'm wondering if you could get a little bit more - just a little bit more color on the new relationship you have with GE, obviously its an enormous organization, there's pluses and minuses to accompany its size. Do they understand the value proposition that LanVision provided to IDX and what's the nature of the ongoing dialogue and working relationship that you fostered with them?

Great question Dan and there are some things I can comment on and others I can't. I can say this, that as a result of the acquisition of IDX by GE Healthcare, they did reaffirm the value proposition of streamlined health as it relates to our enterprise approach to document workflow integrated into what was formerly into the Carecast environment. And that's great news for us. So it's basically to quote them, business as usual.

However, there are a lot of other divisions and business units of GE Healthcare, as you know. And certainly because the former product known as Carecast was an enterprise clinical information system and our solution as an enterprise document workflow solution those 2 fit very well. GE has several other products that in essence are more departmental and also prior to the GE acquisition of IDX we were very active in pursuing opportunities within what was formerly IDX in their flow cast division, which is the large physician practice segment, business segment of IDX. And we were getting some traction in that regard.

So, to answer your question as high as I can, it is an opportunity for us clearly to spread horizontally within GE Healthcare. And we are pursuing those opportunities. Stay tuned.

And then thinking about your target hospital size on a per bed basis. It sounds like your product works better in a larger bed hospital and system versus a smaller bed hospital and system.

Well Dan, I would challenge that comment and say this, historically our success has been at the high end of the market, but in terms of the utility of the product, we believe that it creates great value from the high end all the way down to the low end and indeed our ASPeN hosting services allow us to take that technology and make it very affordable down to even a small physician practice.

Our challenge as a company has not been the utility of a product in the various segments of the marketplace, its been distribution and clearly with the former IDX as a distribution partner at the high end, that created a great revenue opportunities for us. That's why we are excited about trying to get traction, if you will, with the former flow cast division which would allow us to port the product down to the small to medium sized hospitals and physician group practice and now with the acquisition by GE Healthcare, you can imagine that would be a distribution juggernaut for us to go after the middle market and even down to the low end of the market. So to us, the product has a value all the way down the food chain to small group practices. The challenge for us is distribution and we'd like to try to solve that in a very big way by gaining new distribution relationships within GE Healthcare.

Okay. And then just to further clarify Bill Geers comments. If you could put it - bring it back in terms of free cash flow generation for LanVision, 2005 was a year where you invested heavily back in the business, the rate of reinvestment in 2006 seems like it will be nominally less. So you should, you should see - we should expect an expansion in free cash flow generation year over year. Is that a correct statement?

We would hope to do that.

Okay.

Now, let me comment further. Exclusive of potential new lines of business. If we decide to expand into a new line of business that would be another investment. But the traditional business that is a correct assumption.

Okay. And then in the past you have talked about 20 to 25% revenue growth. But really this market is growing - the opportunities for you are growing significantly faster. What are the constraints, obviously you've been prudent in the way you've grown the business and don't want to take on more than you can handle. But if - is it - what is the limiting factor, is it access to people, is it capital. If you started with a clean sheet of paper, put all of your revenue opportunities, business opportunities down and there were no constraints, what are - I guess what is the limiting factor in your growth at this point?

That's a very good question. First of all, number one, there is an enormous upside opportunity clearly. Is it greater than 25%? Probably.

Our limiting factors are several. Number 1 is distribution. Our growth and our opportunity for significant growth is in the middle to low end of the market and obviously we'd have to hire an army of sales people in order to attack the 5000 hospitals in the United States, which over half of them are in a bed size of 300 or less. Not counting the ambulatory sector in the physician - large physician group practice on down to small group practice. We just simply couldn't hire enough people and have enough funding to go after that market. It's not the way to attack the market.

I think we want to stay focused where we've been successful in the past on the high end and our direct sales force is going after those large transactions that we have traditionally been very successful and then our sales force is also compensated to partner with business partners that have the leverage, have the relationships, have the large number of sales people on the street, calling on the middle to low end of the market.

Now there our direct sales people get a basically some override in terms of the success of those partnered. So they are participating by assisting those partners.

So the limiting factor is clearly distribution and we'd like to solve that by expanding our distribution relationships.

And then 1 final question on operating margins. If you look at other companies like computer program systems and other players within the space, different aspects of it. They've achieved operating margins significantly higher than you have. If you fast forward a couple years and with the continued success, is there any reason why LanVision could not be a 20% operating margin type of company.

A great question. Over time that is our goal to get our operating margin in the range of 15 to 20% to be inline with the sector. And obviously with the kind of growth we're experiencing now and the kind of investments we need to make, I don't want to restrict our future growth. So we're making those investments now.

But over time, as I said earlier, we want our operating profits to exceed the percentage growth in our top line revenue so that we will catch up over time and get in that range. Correct.

And just 1 clarification, just one final clarification. You did not sell 1.1 million shares of LanVision in common as is shown on [inaudible]. Is that correct?

That is absolutely correct. Thank you. That was a - simply a transfer to my wife for estate planning purposes.

Okay. So we should expect in the proxy statement her showing up as an owner of these shares?

That is correct.

And one final clarification. Blue Chip Capital still shows as an owner of 8.1% of the company. Do they continue to be an investor in LanVision?

They do not. They have exited their position and no longer own a position in LanVision.

Thank you.

Your next question comes from the line of Mark [Kahill]. Please proceed sir.

Good morning gentlemen. You earned your bonuses this year.

Thank you Mark. We're pleased with that.

Spend it well. I'm going to continue on Dan's line of questioning regarding partnerships. In the past you said you'd been working on 8 partnerships. It sounds like the HIMS provides some new opportunities. Is that list of 8 now larger?

No, actually as I mentioned in my remarks, the list of 8 is still there and you're going to see some news over the coming quarters but what we decided to do is to prioritize and focus on the larger ones.

We have limited business development resources and if you have an opportunity to spend your time on a smaller business partner versus a larger one, we decided that the return for investing our time in the larger opportunities made sense for the stakeholders of LanVision and Streamline Health. So the list is still there, but we're really focusing on the top 2 or 3 that are very large and will create significant opportunity for us to penetrate the middle market.

Okay. Going to the income statement. The system sales was 3.8 as I recall, in the third quarter conference call, you had expected some IDX deals, but from the press release it sounds like a lot of this 3.8 was from existing customers.

That's a correct statement.

Can you give us kind of an idea of the percentage between new clients and existing customers there?

In Q4 that was predominantly existing customer expansion however the GE Healthcare pipeline has not changed. Which bodes well for us.

Does that mean - the deals, the IDX/GE deals split into 2006?

Let me just answer this way. With our direct sales force selling on direct new prospects and into the existing installed base, we have much more control of the timing of those transactions through our relationship with a partner; we have less control of the timing. So --

Right.

-- so we cant directly impact when a particular opportunity signs.

Yes. I saw the announcements for St. Vincent's Wake Forrest in early January. Those are IDX and you guys made an announcement regarding those too, were fourth quarter deals?

They - one of them was. One of them was last year and one of them was the previous year. It takes a long time to get approval for those releases unfortunately.

Yes, I saw an Intermountain deal now that GE Healthcare. That was announced in February though.

That's correct.

Can you give us any --

I can't comment on that.

Right. Okay. Going to the pipeline, can you give us an idea - are you winning a significant percentage of the pipeline?

We're winning a much greater percentage than in the past with our new vision, our new story and our new focus. Our close rate is much higher. I don't have the numbers in front of me Mark, but it is at or above the norm for our sector.

Right.

We're enjoying great success and that pipeline is a mixture of direct and indirect deals. And it's growing.

Are you keeping a separate GE pipeline?

Yes, well what was formerly IDX is now designated as GE Healthcare pipeline.

Right.

And it is growing.

Okay. Regarding the NOLs. It seems to me that Bill referred to them as a non-recurring item, but it's going to be a recurring item until they're gone. Until something can make money.

Well put. To the extent that we make money it can be a recurring item. Subject to auditors and all the other processes that we go through in order to take advantage of those tax benefits.

Right. Okay, my last comment is really a request for Mr. Geers and Mr. Bridge. Make sure the boss takes a vacation this year.

You can count on it.

Thank you gentlemen.

Okay, Mark. Thanks.

Your next question comes from the line of [Jeremy Helmen] with [Thompson]. Please proceed sir.

Hey good morning everyone.

Morning Jeremy.

I wanted to go back into some of the income statement items and first off, the cost of system sales and Paul you referenced that the prior year's quarter there was a big hardware component that wasn't present this year to account for the significant margin expansion. Is it safe to say then that the prior year's quarter was the out-lier, or this year's quarter was the out-lier or somewhere in the middle would be the norm in terms of margin on that piece?

Its difficult to predict because every deal has a different mix of software, hardware, third party and somewhere in the middle is probably a better.

Okay. In the middle, okay. Looking at the margin on the hosting business, that's improved a little bit year over year, is there a plateau level in terms of where the gross margin can be on that piece? And if so are we getting there.

You add new customers or you add increased usage by existing customers, you don't have a one to one ratio of expense.

Right.

Have a data center and you have x number of data center operators. So the more revenue that you can put in there, the higher the margin is but its not going to increase in huge leaps in bounds, but it will keep up. Yes.

So okay. That's what I would have thought. And then looking at the growth and operating expenses. I think Bill you commented that - I'll make sure I quote you right, you're expecting them to be up 20 to 25% in '06. Would that be about the same breakdown between SG&A and R&D as we saw in '05?

Yes.

Okay. And then, 2 final things. Just starting to look kind of go into the out years. In terms of your growth potential, at the top line, it sounds like 20 to 25% is going to be a conservative number going forward. Some of these opportunities such as with IBM might give us some optimism that '07 over '06 could be even better. Is that - am I correct in maybe thinking that?

Let me just say this, I'd rather under promise and over deliver. And through experience I've learned that if you grow too fast you can lose control of the ship and so we're going to leave it with our goal as 20 to 25% growth year to year and we'd love to delight you with a delivery that exceeds that.

Right.

But I don't want to get growth fever here. Lets keep this under control.

Fair enough, fair enough. And then lastly, just kind of a general question. Do you guys have anything scheduled in so far as trade shows or anything where you're going to be out having a booth or anything like that for people to kind of meet and greet and that kind of thing?

Yes, we're actually increasing our budget for marketing opportunities and trade shows as we mentioned in my remarks we recently attended the - what's called the HIMSS show, Health Information Management Systems Society in San Diego. That's the big IT healthcare show if you will where chief information officers attend. Very large show. We've attended that for many years.

Previously we attended by basically participating in some of the centrally located hotels and doing private meetings with key senior representatives from hospitals and it's always been primarily a business development opportunity. The smoke filled room with CEO to CEO to develop new business partnerships. This year we decided to very affordably put together a booth, a small booth, mainly so that we could have our name in the register and have people find us that weren't having direct one on one meetings and it was very successful for a very low incremental cost we were able to get a lot of visibility with potential new partners who sought us out that we hadn't contemplated and obviously with existing customers and potential new customers.

So we're going to continue to follow that formula in future years. Again that show is in February.

And the October time frame we participate in a big way in the American Health Information Management Conference that's held in various cities. That's the large medical records conference. We have a very large booth and it always plays very well for us. In fact our opportunity in Sarasota was developed as a result of that show.

In addition to those 2 shows, we'll be attending some financial management shows to show off our revenue cycle work flow module and in addition to that we're going to be attending some selective state shows where we'll be actually presenting and giving presentations regarding our view of the marketplace etc. so we're going to be very active in that regard.

You're also going to see, in the next year, published articles relative to the success of some of our implementation.

Okay that's great. Yes, I'll definitely be looking for those. And actually 1 last thing that pops into mind before I let -- before I jump out.

Going back to the commentary about the 4 phases of the growth plan, just wanted to make sure I had gotten my notes right in terms of the discussion about phase 4, you said that the market for that was $16 billion, was that right?

That's correct.

And then how much of that do you think is your immediately addressable market when you get to that?

Well, let me break it down for you and again these are our estimates. Although they -- many of these track with some of the industry consultants.

We mentioned the 5 technologies that we integrate and offer on an enterprise basis, which is think is positioning us uniquely in the marketplace. The first one is document management and our best guess is that's about 15% penetration. The average sale for a document, an enterprises document management system is between 1 and 1.5 million, so that's approximately a $6 billion market.

Document workflow we'd like to call that business process management. And the average sale for those types of technologies, basically workflow is about a $500,000 sale in software and services. We believe its less than 5% penetrated so that's about a $2.5 billion upside market.

Portals is an emerging market opportunity. Again, a portal could range in the neighborhood of 500,000 or more. Its -- we believe less than 5% penetrated and it's a $2.5 billion market.

Systems integration is a huge market. That can be a $1 million sale per deal. Again, very low market penetration. $5 billion market.

And eforms, although 50% penetrated, and the average size of a deal is about 100,000, that's still a significant upside for us, about a $0.5 billion market.

You add all those up its over $16 billion. And our real penetration is only really been in the document management area so the rest of those are upside opportunities for us for penetration assuming we can obtain adequate distribution.

Okay. So in essence really that 16 billion is really fully addressable for you then?

It is.

Okay. Okay. Great guys, I appreciate it. Good luck.

Your next question comes from the line of [Russell Enmuth]. Please proceed sir.

Great quarter guys.

Thank you Russell.

I was really going to ask if there was any way you could kind of characterize or quantify the pipeline of opportunities that you're looking at but I know you touched that on some prior questions. So unless there's anything kind of to add I'm okay.

Yes, the only thing I'd like to say about that is when we designate that number, that $48 million number, it's the sum of all the opportunities that are qualified and we have a specific definition of qualified. Those are opportunities that, where we are 1 of a short list of finalists or better. And we break it down by basic revenue streams, which is direct deals through our direct sales force, add on business to our existing client base through our client manager or sales program and then partner relationships. For example GE Healthcare and then finally our recurring revenue streams of the hosting, the maintenance etc. and there's another final component which is third party software and hardware and professional services. So those are the revenue streams.

The $48 million relates to the software opportunity exclusive of maintenance and professional services. So the $50 million number includes those. And I'd rather not get into the specifics because I'd rather keep it at a global level. I will say that our pipeline continues to grow although at incrementally smaller percentages now that we've kind of leveled off in terms of our new staff hires, we expect it to continue grow this year for our organic business. However our opportunity on the upside is to sign significant new distribution partnerships in which case we could see dramatic growth in that pipeline.

Okay. Thank you very much. Very complete answer. Thank you. Great quarter again guys.

Thank you.

Thanks.

Now have a follow up question from the line of Dan Veru. Please proceed.

I forgot to ask you Brian, I noticed that Tom, an old friend of the company, Tom Perazzo, put Perazzo's name in some of your press releases, is he going to be working on financial PR for you guys which as I've articulated to you privately I think a sorely needed function at LanVision.

Well actually Dan, I don't believe we mentioned Tom Perazzo's name in any press releases. Obviously --

Well, I see him as a contact on your press release today regarding your offer to the win you had in Texas.

Oh, I'm not aware of that. Let me have a look here. Oh no, I think that's Melissa Vincent is the contact on that. Clearly, yes, I have the press release in front of me, its Melissa Vincent.

Okay.

Clearly Tom Perazzo is a former employee of LanVision and former CFO and we have a personal relationship and we meet from time to time but that's about it.

Okay. And then getting back to it with you running here, there and everywhere to run the business. I think it would be useful to have some body who could speak to the company. Because you still are not very well followed or known within the financial community.

Well we understand that and we're working very hard to improve that with various alternatives and certainly as we grow we would consider the opportunity to bring in a consultant from time to time to assist us on a particular matter. But I'll leave it at that.

Okay. Thank you.

There are no further questions in queue. Thank you.

I'd like to thank everyone for joining us and wish to advise you that the first quarter earnings release is currently scheduled for release on Monday, May the 22nd and a corresponding conference call is currently scheduled for Tuesday, May the 23rd at 10:00 am eastern time.

I would like to also remind everyone that the 2006 annual meeting will be held on Wednesday, May the 24th beginning at 9:30 am at the offices of the company.

We look forward to seeing you if you are able to attend the annual meeting.

We thank you for joining us and we look forward to the next call.

Operator, this concludes our conference call.

Thank you for your attendance in today's conference. This concludes the presentation. You may now disconnect. Good day.