Streamline Health Solutions Inc (STRM) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2006 LanVision earnings conference call. My name is Enrique and I'll be your audio coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host, Mr. Paul Bridge. Please proceed, sir.

Thank you very much, operator. Good morning, everyone. I'm Paul Bridge the Chief Financial Officer of LanVision System, Inc. Thank you for joining us.

With me today to discuss the quarterly 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 your 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 the read the Safe Harbor statement. Statements made by LanVision that [inaudible] 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, our ability to develop new strategic partnerships, our ability to develop a pipeline of potential customers and our ability to attract new customers, the impact of competitive products and pricing, product development, reliance on strategic alliances, availability of products procured from third party vendors, and the healthcare regulatory environment, fluctuations in operating results and other risks detailed from time to time in LanVision's filings with the U.S. Securities and Exchange Commission.

Yesterday morning we released the first quarter 2006 financial results. I would like to highlight the more significant aspects of our first quarter results.

Total revenues increased 43% to $3.8 million for the quarter compared to $2.7 million in the comparable prior quarter. This was a record for our first quarter revenues. Of particular note, our system sales increased significantly as we added a new client and significantly expanded our presence in an existing client.

Our application hosting service's revenues continued to grow and now exceed $3 million annually. The gross margin on our system sales increased significantly as the ratio of our proprietary software versus hardware and third party software components increased significantly in the current quarter when compared with the prior comparable period.

The operating margins of 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, as we have noted in prior calls, because of the planned investment in sales and marketing and development staff to expand our direct sales capabilities and to develop new products in order to grow our revenues in 2006 and beyond.

The significant increase in software revenues dramatically improved our operations for the quarter notwithstanding the investments made in our selling, general, administrative, and research and development expenses.

Our current backlog stands at approximately $4.7 million with $2.8 million from our existing customers and $1.9 million from our resellers. In addition, signed multi-year agreements for our application hosting are approximately $4.1 million. Please note that our backlog does not include recurring maintenance revenues which exceeded $5.1 million last year.

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

Now I'd like to turn the call over to Brian Patsy who will discuss, in greater detail, some of the significant affecters that affected the quarter.

Thank you, Paul, and good morning, everybody. Today I will comment on our Q1 financial results and then very briefly discuss significant milestones achieved during our first quarter, our sales and marketing activities, including an update on our pipeline of qualified sales leads, and finally, an update on our business development activities.

After my remarks, Bill Geers, our Chief Operating Officer, will provide an update on our operations. After Bill completes his remarks, we will conduct our usual question and answer session.

Here are some of the Q1 financial highlights. As Paul mentioned, our top line revenue of approximately $3.8 million for our first quarter was a record for Q1 revenue. The record performance was 43% ahead of Q1 revenues of our prior year and ahead of management's revenue expectations. The record Q1 revenue was primarily due to two large system sales, one through our largest remarketing partner and one significant expansion with an existing customer.

Regarding the new large systems sale through our largest remarketing partner, this transaction was one that was delayed from Q4 of last year due to uncertainty related to the recent consolidation in the healthcare IT marketplace. I am not at liberty to share additional details at this time due to certain procedural matters with our remarketing partner regarding disclosure. If and when those procedural matters are addressed, we are hopeful of publicly announcing further details regarding the identity of the customer and the scope of the transaction.

As we have discussed in prior earnings calls, we are not always able to disclose the identity or scope of many of our large transactions in a timely manner or at all due to restrictions imposed by our customers or strategic partners. Under these circumstances, as is the case this quarter, we will attempt to provide information regarding the number and type of transactions such as whether direct or through our remarketing partners.

Since circumstances don't always permit us to disclose further details of certain large transactions, we would urge investors to look to growth in our quarterly revenue and qualified pipeline for indications of our success in delivering on our operating plan.

As provided in previous earnings call guidance, we anticipate approximately 25% revenue growth this year. Having exceeded management's expectations for Q1 revenue and earnings, we are on track to meet or exceed our operating plan for the year.

Let me take a moment to review our sales and marketing activities including comments on our pipeline of qualified sales leads. As planned, we have expanded our sales staff to take advantage of market opportunities and our significant growth in systems sales and our growing pipeline of qualified sales leads reflects that additional investment in sales infrastructure.

For example, our high margin Q1 system sales were $1.2 million this quarter compared to $141,000.00 last year. Our pipeline of qualified sales leads has grown over four fold over the past 12 months and is currently running at approximately $51 million in software and maintenance revenue up from $48 million last quarter.

As a reminder, our qualified sales pipeline consists of potential transactions over the next year where Streamline Health is either a finalist, has been selected as vendor of choice, is currently in contract negotiations, or is awaiting contract signature. Our total qualified sales pipeline, which includes professional services and third party software and hardware, is over $70 million up from $60 million last quarter.

Please keep in mind that the qualified sales pipeline is only a gauge of the relative size of our market opportunity. We do not expect to win or close all the opportunities in the qualified sales pipeline.

At this point I would like to discuss our business development activities and priorities. As has been discussed in previous earnings calls, we have focused our efforts on a few very large potential strategic business partners that can optimally impact our distribution capabilities including a focus on significantly expanding our existing relationship with GE Healthcare.

Regarding GE Healthcare, we are continuing our joint product planning efforts to meet the needs of mutual current and prospective clients. Also, we are moving ahead with additional integration of our solutions with GE Centricity Enterprise Solutions Group and other GE business units. Because we are working closely with GE Healthcare, our mutual sales pipeline continues to grow. As to potential new strategic business partners, I am confident that within the next several weeks we will be announcing a new relationship that will help us expand our distribution capabilities to a broad range of hospital clients extending our solutions beyond our traditional areas.

As you know, this is an area of focus for the company and one where we look to strategic partners to assist us in marketing our solutions where we would otherwise not have the required sales infrastructure.

We also continue to make progress in building a very active strategic partnership with IBM. This past quarter, concurrent with the development of our IBM Webster portal technology, we have begun to work directly with the IBM account teams to assess specific opportunities in their client base.

As a result, in the second half of 2006, we expect to see the launch of specific cooperative marketing programs to articulate the benefits of our joint solutions to targeted market segments.

This concludes my formal remarks. I would like to turn the call over to Bill Geers, our Chief Operating Officer, for his update.

Good morning. It's my pleasure to be with you today to discuss an operations update. My comments will focus on the following topics: operating expenses, headcount, high profile R&D efforts, and finally, client satisfaction.

As announced in last quarter's earnings call, our planned increase in operating expenses this year will allow us to strengthen our infrastructure and enhance our ability to successfully deliver on the Streamline Health vision which is to provide enterprise wide business process improvement within healthcare through the implementation of solutions based on these five integrated technologies: document management, document workflow, portal connectivity, inter-operability, and finally, e-forms.

In keeping with our business priorities, here are three departments in which we will invest most heavily in 2006: product development, the consulting services group, which is the group that owns the successful implementation of our solutions and the timely resolution of all client support issues, and finally, sales and marketing.

With respect to our first quarter, we were under our expense budget which contributed to our improved operating results. We will continue to monitor our expenses very carefully throughout the year.

In terms of headcount, we ended the first quarter with 100 employees and we still expect to grow another 10 to 12% in the balance of the year. Of special significance was the addition of a very experienced product manager who owns the responsibility for the success of our integration efforts which I will address in more detail a little later in my comment.

With respect to our R&D efforts, there are three updates that I would like to share with you. To begin with, here is an updated status on the product release that I addressed in the March conference call. Once again, this is a major release that will introduce a variety of enhancements across our entire product line including extended inter-operability which will facilitate our efforts to integrate with additional clinical, financial, and administrative systems thereby strengthening our enterprise wide message. We now have finalized plans with two beta sites. The first site will begin its testing in July and the second will begin its testing in August.

I also announced in the last conference call that we expect to introduce another five to seven workflow solutions during 2006. Here is an update on these. Our financial screening workflow is successfully installed in production. Our referral order management workflow is scheduled to be completed by our next conference call. Our chart tracking and contract management workflows are scheduled to be completed by our third quarter conference call and there are two additional workflows that we expect to complete in our fourth quarter.

In light of the importance of our integration efforts to the successful execution of the Streamline Health vision, it is important to note that we have successfully delivered four integration projects thus far in 2006 including integration with Epic Systems, EpicCare Clinical Systems, one of the most popular clinical systems available today. In addition, we have an additional four to six integration projects that will be delivered by the end of 2006.

Client satisfaction continues to be our number one business priority. As Brian indicated in his comments, included in our $3.8 million first quarter revenue was another system expansion by an existing client which is further validation that the addition of several client managers and our focus on client satisfaction are generating additional revenue.

In closing, we have high confidence in our vision and we continue to work together to ensure the efficient and effective execution of our operating plan.

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

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

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Tom Carpenter from [inaudible] Lyons.

Good morning, everyone.

Good morning, Tom.

Brian, can you discuss your plans to grow revenue for the ASPeN, the ASP product? With a gross margin of 66% it seems like it would be very accretive to earnings if you guys can expand the distribution or add another sales person to this product.

That's exactly right, Tom, and part of our operating plan this year is to grow our hosted revenues. Now, our plans to do that are two fold. One is, and probably most importantly, is through significant new distribution partners. As we mentioned in our comments, we're confident that we'll have a new partner announced within the next several weeks and that new partner has a broad range of existing hospital clients. We'd like to leverage that penetration of the healthcare marketplace to drive our ASP revenues and particularly our ASP revenues.

This would be more in the -- well it's really across the spectrum of hospitals, but also departmental solutions that lend itself to our ASP approach.

Okay.

Secondly, we are adding additional direct sales staff and that process is underway this year and they will be focusing on targeted accounts primarily at the high end of the market for ASP opportunities. We see ASP growing because of the additional distribution, expanded distribution, but also we believe that it's a nice entry point to get into a new hospital organization at a departmental level without spending a lot of capital dollars.

Okay. You talked about adding additional direct sales staff. Can you quantify perhaps a number between now and the end of the year that you're going to add?

Well, we're in the process now of interviewing and hiring two additional people and we have a business plan that allows us to expand that further as we achieve our revenue goals over the first and second quarter.

Okay. That's great. In 2005 the smallest year over year revenue increase for ASP was 16%. This quarter seems like it was kind of an anomaly at 7%. Was there anything quarter specific or can you give us some insight into why it wasn't double digit like the last foreseeable quarter?

There was no anomaly this quarter. I think what you'll find is that we didn't add a new ASP customer this quarter although we believe that over the second half of the year we'll be doing just that. At the end of the year we still plan to be ahead of our traditional growth path in terms of ASP revenue.

Okay. And I think Bill might have touched on this in the remarks but I was so busy writing everything down he was saying that I might have missed something. Can you update us on the consulting services group plans for this year and where you are and where you see that going maybe over the next year, year and a half?

Yes, Tom. I'll go ahead and take that. This is Bill. We absolutely have plans to expand the infrastructure, if you will, of our consulting services group. Some of that has already taken place in terms of added headcount and there is more plan for 2006, or the balance of 2006, if you will. What we're doing is we're watching our business very carefully. The timing of that additional headcount is very important. We don't want to get ahead of ourselves but at the same time we want to make sure that these individuals are ready when we need them.

Okay.

Tom, let me jump -- this is Brian, and one other point to make is that as a part of our four phase plan for future growth, phase 2 was, in our long term plan, is to build a consulting practice for business process management and we are underway in terms of setting that practice up and putting the initial plans together.

That will contribute to revenues in future quarters, perhaps even this year, but certainly next year. We're going to be going back into our installed base to begin and looking for opportunities to help some of our existing customers improve their operation through business process management and building additional workflows for them.

Okay. And just so we can chart the success of this endeavor later this year and next year, do you plan on breaking out the revenue from the consulting services area from the traditional services maintenance and support?

We do ultimately, but again I want to set the expectations that we're hopeful of some contribution this year but primarily next year.

Okay. Just two more questions. I have a question for Paul. Paul, the first quarter revenue climbed 43% while your operating expense was 31%. If you guys grow revenue by 43% every quarter I don't think anyone will complain about the OpEx growth, but as we make it through the year, do you see expense growth moderating?

Yes. And we only add expenses as we see our revenue coming in. We're just not hiring and expanding our expenses without a very close look at the revenue potential for the next three quarters.

Okay. Just a quick question on IDX and GE. I think before your all's relationship with IDX runs through the end of 2006. GE bought IDX. I think the deal closed in January of this year. You guys talked on the call about you're kind of deepening your integration with combined companies. Can you just give us a little more color on do you see a new contract coming out or the relationship expanding beyond this year into the next couple of years just because that is fairly important to your all's revenue base?

To answer to the extent that I can, Tom. It's business as usual with GE Healthcare. We have an existing contract. That contract has automatic renewals and the more we integrate with their solution, the more secure we are in our future opportunities with them, clearly. And we are expanding our integration efforts with GE Healthcare.

As you know, currently our traditional business with GE Healthcare has been with their business unit which is now called Centricity Enterprise Business Solutions, which is the former Carecast Division.

Our intent is to expand -- first of all that relationship is solid, it's moving forward full speed, and we're doing additional integration efforts with that solution, but our intent is to expand our integration efforts with other business units as well. That's probably as far as I can provide color commentary at this point.

Okay and I fibbed slightly. I have one final question. The last call you talked about some of your portal efforts and IBM and it going to beta testing soon. I think you touched on that also on the call. Can you update us, maybe on the progress and when you expect a hard launch?

Yes. We have completed our architectural changes to the product line to what we call portlets to integrate portlets into our accessANYware solution. Our next step is to now go out and collaborate with IBM and their sales team, as I mentioned, to identify mutual clients within their installed base and frankly within ours as well.

We're also synchronizing that with some joint marketing programs which we're getting some financial assistance from IBM in terms of those marketing programs. We expect to have that process bear fruit the second half of the year, primarily rear end loaded, but stay tuned in terms of that.

In terms of our operating plan this year, we did not consider incremental revenues in our operating plan for the sale of portal technology, so anything that we do this year will be of an additional benefit.

Okay. I know it's still early and you guys will know more in the next couple of quarters, but maybe on the next call you can give us an idea of the revenue opportunity there, maybe what the average customer deal would look like.

Well, clearly we'll have more visibility in the next earnings call. To the extent I can, I will comment on it.

Okay. Thanks guys.

Thank you, Tom.

Sir, your next question comes from the line of Bill Bunn from Ford Washington Investment Management.

Hi. Bill Bunn.

Good morning, Bill.

How are you guys?

Just fine.

I have a hypothetical question for you that would help me get some handle on the pipeline and then I've got a couple of accounting related things. I know that you can't announce the name of the large system sales that you had in the quarter, but with regard to how that affects pipeline, let's say hypothetically it's a system with a numerous hospitals, 10, 20, 30, whatever number, it doesn't matter. When do those -- I assume that the initial sales for one or two hospitals. When do the other hospitals enter the pipeline as far as the way you report it?

Well, hypothetically that may not be the way to look at this. Let me try to reframe your question and give you as accurate an answer as I can. Anytime we have a large system sale it could be one hospital or a chain of hospitals, as you can imagine, the size of the transaction dictates. I think it's a pretty direct correlation the size of the transaction in terms of the number of facilities involved.

When it's an enterprise license, it's based on -- our pricing model is based on the operating expense of the hospital, so it really isn't related to number of facilities but it's really the operating budget of the hospital.

In terms of timing when we close what I would describe as an enterprise sale, whether in our installed base or a net new customer, we, because this is an off the shelf solution for a majority of the software, we can ship it and recognize that revenue in the quarter that we signed the contract.

As it relates to other revenue that would be a part of that contract, and by the way the software in a traditional large scale is typically around 40 to 50% of the total size of the deal, there is also some other components as you can imagine. There's implementation services -- consulting and implementation services. That generally runs around 25 to 30% of the total size of the deal. That's recognized as the services are delivered and that would depend on when the project kicks off. Typically it kicks off within three to six months after contract signing, sometimes immediately, and then it takes approximately six to nine months to get to full implementation of the software.

Then there's third party components. Sometimes that can be very large. Those third party components are third party tools that we integrate into our solution and some of those we can ship in the quarter that the contract is signed in. Others are delayed until implementation, so that kind of depends on what particular third party solutions they are deploying.

Finally, there's some integration effort that is required and that's typically recognized once the integration is completed and tested.

So in this particular case you've reported the software, now the implementation and the third party components come in subsequent quarters?

That's correct.

Okay. And is there any future volume based or growth based revenues that might come out of a contract like that? For example, maintenance or --?

Well, it depends on the type of contract. In this example it was an enterprise license which means they have unlimited use of the software modules they licensed. Now, the growth comes in licensing additional software modules. They did not like our entire product portfolio, so that creates additional revenue opportunities.

I might also add that it's based on our contract for the number of facilities they have today, so to the extent they expand into new facilities or acquire new facilities, then our licensing revenue would go up as a result. Also maintenance goes up year to year.

Okay. Because one of the things that puzzles me, has for the last few quarters, is that the services, maintenance, and support revenue line seems to be almost flattish. Just very slow growth at best.

That's true, but I'd like you to consider that more of an anomaly.

Okay.

And the reason is is that our professional services organization who does the implementations are very much tied to the schedules of our clients. The reason I say this is an anomaly, is that over the last several quarters there have been delays by our clients in terms of their ability to kick off some of these projects, so therefore, we have delayed some of the implementations and therefore some of the revenues have not shown up. You haven't seen the growth that you would typically see.

What would you think would be realistic growth expectations over a couple year period for that revenue line?

I think it should effectively follow our revenue growth over time.

That would be along the 20 to 25% top line guidance as you've given in the past?

Bill, would you like to comment.

Yes. I would say yes. I think that's a reasonable estimate.

Okay. Cash, there's a cast burn of about $1.4 million or something like that as I recall for the quarter. That's typical cash burn for first quarter? Do you expect to be generating cash for the rest of the year?

That was an unusual amount of cash but that included the payment of all of the year end bonuses during the first quarter, so a large chunk of that was bonus payments and we had some large payments for the end of the year, our hardware sales which we booked and we didn't pay them until February.

Okay. Alright, thanks very much.

Sir, your next question comes from the line of Mark Cahill.

Good morning, gentlemen. Nice start to the year.

Thank you, Mark. Good morning.

I'd like to go back to the backlog numbers. When Paul gives these breakdowns, I don't hear the implementation number. Is that not included in backlog?

It's included in the backlog but I give the backlog as one large number. It includes software, hardware, and third party software, any custom software, and any implementation services. We don't break them out individually.

Right. Okay. Is 2006 going to be a year of new clients as opposed to last year where you had mostly existing client expansion?

That's correct. I anticipate this year will be a balance of new and existing clients. I've said in previous earnings calls that we, as a part of our new message, I had the opportunity to go out and visit with a lot of our existing clients and get them re-energized in terms of our vision and our message. You saw the results of that last year and of course that will continue this year, but there also were some delays in terms of net new clients as a result of the uncertainty in the healthcare marketplace with the recent consolidation. There were some delays in some of our net new sales through our remarketing partner.

We're also adding additional account executive staff so we expect this year that we'll have a much better balance of net new and existing customers.

Due to the GE merger with IDX, did they lose any deals?

As it relates to our participation in their sales opportunities, I am not aware of any losses. There were two delays as a result of the consolidation, but I'm not aware of any losses.

Okay. The expense line -- I know that you have your internal plans and the new hires are predicted to go up about 10 to 15%. Does that mean a lot of the increase is going into hardware? Where's it being concentrated if it's not so much people?

Let me address that, Mark, if I could. This is Bill. When we had talked about 10 to 15% growth in the area of personnel, we really meant that in terms of bodies. So, in other words, if in fact we're at 100 today, we still expect to add another 10 to 15 people. That's what we were really expecting with that information.

Alright.

And, Mark, this is Brian. To the extent that we've given guidance that our expenses will grow in the 20% range, you've got to think about the type of people we're hiring. We're hiring people that are a little higher on the compensation ladder because of these significant opportunities that we have in terms of integration and etcetera, so that wouldn't push the overall average up in terms of it might be 10 to 15% personnel, but it has a higher impact on the growth of our operations.

Okay. Will your quarterly break even; fluctuate between 3.5 to $4 million then going forward?

Yes. It's in the range of 3.5 to $4 million. As you can see this quarter it was a little over -- close to $3.9, but that all depends quarter to quarter. It should continue in that range given what I call the octane mix of high margin software sales to other revenue streams and so it could go down and it could go up quarter to quarter depending on how much of the high margin stuff we sell on that quarter.

Right. My impression is that the expansions that you have announced in the past, they happen fairly quickly as opposed to a new sale, implementation wise. Is that true?

In terms of new sales, if you look at sales to our installed base where they expanded their license, some of that maintenance revenue hits pretty quickly because we're expanding licenses of existing customers. If it's an existing customer that's moving into new facilities or new software, then it kind of tracks similar to a net new sale where it takes time to get the project off and running and then we recognize a revenue as the services are delivered.

It's a little slower for net new customers and net new software modules to existing customers.

Okay. The implantation schedule for Sarasota and Oregon, that seems to be on track. Am I right?

Yes. That is correct, Mark. Both of those implementations are proceeding well.

Would we have seen it in this quarter? Were some of the revenues for implementation revenues?

You would have, yes.

Okay. What's the implementation schedule for Texas Health?

We are actually -- that's a multi-hospital network, as you probably know, and actually you will see revenue -- we will see revenue, I guess I should say, from Texas Health over the balance of the year and quite frankly into 2008.

Oh, okay. So it's a long term expansion.

Right. No, no. I meant 2008. So the bottom line is that we have a total of four hospitals that we will complete this year. We have another seven or eight that we'll complete next year and there's one that actually goes into 2008.

Okay.

Okay?

With respect to this new deal announced this quarter through the remarketing partner, how does that implementation work through GE?

I didn't mention specifically who the remarketing partner was, but the plans are that that implementation will begin this year, the second half of the year.

Right. Absolutely. We will --

And LanVision does that, not the remarketing partner.

That's correct, so we actually will begin working on that particular implementation late Q2. So, late this quarter.

Okay. Two more questions. With respect to IBM, I know you've discussed the revenue model in the past, but I've never heard anything regarding service or maintenance revenues connected to the product. Is that built into your model?

Again, my comment earlier was that relative to IBM WebSphere Portal technology that is integrated into our accessANYware solution, our business model this year did not consider any incremental revenue from that opportunity, so anything that we do this year will be an additional benefit.

Now, as it relates to that particular focus, if you remember last quarter I talked about our plans for growth and our enterprise message would be that phase 1 of our growth that we're in right now, phase 2 is to expand our business process management consulting services and there's a reason for that. It's because phase 3 is to go after the portal connectivity marketplace and in order to do so we need to have more business process management consulting competency. Why? Portal technology implementation is, in our view of this, a more than 50% of that is actually custom consulting and design and less than 50% of the revenue would be in the tools that we develop.

It's very important that we build that competency and then launch our very active efforts to go after the portal connectivity marketplace next year. To make a long story short, when you see revenues from selling portals, you're going to see some software revenue, if you will, from the tools that we use to design those custom portals, whether it be a physician portal or an administrative portal, but over half of that revenue will actually be consulting services, which means we'll recognize it ratably over the period of the implementation

So, you'll have an up front payment and then an ongoing servicing revenue stream?

Well, when you say ongoing it's a one time that's spread over the period of implementation and then, of course, there's always maintenance, which is ongoing.

Right. A typical contract would get renewed every two or three years. Would that be the --?

Well, the maintenance would get renewed every -- think of a portal as just selling our flagship product accessANYware. There's going to be some up front software shift. There's going to be -- in this case though it's not an off the shelf product, it's an off the shelf tool, but we go in and we actually build a custom portal to the likeness of that hospital organization. You're going to see a much higher mix of services to software in those examples. More than 50% of the revenue will be services.

Okay. I noted your comment that you may expect news in the next several weeks regarding a new partner. Sounds like you're doing well with GE and you're definitely progressing with IBM. If you get a new partner, are you guys going to be stretched for man power to deal with these new partners?

No. Part of our operating plan, part of our growth in headcount is to anticipate some of the new business partners that we'll be signing. I'll let Bill comment further.

Right. We had as a part of our operating plan with the additional headcount that I alluded to earlier. To a large extent, what we do in that particular area will depend upon the success of these partners. We are positioned to add people as that's appropriate.

Does the burden fall onto the sales and marketing or consulting services or equally both?

Yes. I would say that if you look at the immediate pressure, it would be on our sales organization. Once we're successful in closing business through these partnerships, then it clearly falls on the shoulder of our consulting services group.

And, Mark, one of the comments I'd like to make on that is that relative to the sales organization, the way we've organized sales and the way the comp plan works is that we're hiring high end account executives that are comfortable having dialogue with senior management in the hospital organization. That's why it costs a little more than the average.

Right.

In addition to that we've set up the comp plans so that they get compensated for direct deals and also they get compensated for channel deals. We're trying to leverage our talent and leverage our investments so that they're really managing a business and that business is to drive revenue. There's no channel conflict whatsoever in our organization. They will assist the channel partner sales team in trying to close deals. That's the best use of our investment dollars as we see it.

Right. Alright. Thank you. That's all for me.

Sir, your next question comes from the line of Jeremy Hellman from Thompson Davis.

Hi. Good morning, everybody.

Good morning, Jeremy.

The question I had, in terms of the potential new distribution agreement that you're talking about, how is that going to, if at all, impact the qualified sales leads that you guys have in place? Do you think that that is going to give you an ability to really go in and really push some of these people through or is it going to probably feed more at the back end of the pipe into more sales leads, but not give you the leverage into the ones that you already have? If that makes sense.

Well, first of all our sales pipeline has grown quarter to quarter but there's diminishing returns there in terms of the infrastructure we have today. You've seen it start to table off. It's still growing, but it's not growing in orders of magnitude anymore. The reason for that is that we wanted to be very diligent in terms of not hiring too many account executives and trying to leverage the ones we do hire.

The way we'd like to drive top line revenue growth is clearly through strategic partnerships with partners that have a large presence in the healthcare marketplace. That's our goal this year is to focus on a few large ones that can give us that leverage that we need to expand our sales capabilities beyond the hiring of direct sales reps. The new partner will give us that opportunity because they have a large number of healthcare customers today. By having an arrangement with them, we will have, clearly, we anticipate growth in our sales pipeline through that channel.

Right, but then with the pipeline that you have in place, does it give you -- is it going to give you a leg up to be able to close any of the deals that you're working on currently?

It's possible. We do have some mutual customers. Our client list is much smaller than theirs, but there are mutual customers that we are focusing on initially, but I think what you're going to find is that this is a win-win for both sides. We're going to be able to help them in their efforts and they're clearly going to add additional leads to our efforts.

Okay. Good. Kind of circling back to some of the discussion about the implementation and so forth. I'm just trying to layer that over the modeling question and I guess the background to that is last year you guys were negative, positive, negative, positive in terms of earnings added to net income level. Is some of this installations stuff that we have to look forward to, do you think that that's going to -- I don't know if you can comment to this level, but be able to give the rest of the quarters this year all in positive territory?

Well, I'd rather not speculate on quarter to quarter and as we've said in many earnings calls prior to this is, we want you to grade us on a year to year performance. We're still in the real small numbers in terms of our relative size, so clearly our goal is to have more visibility, more recurring revenue so that we have more -- we can eliminate the lumpiness in our business. From one quarter to the next I wouldn't want to speculate.

Okay. Got you. Actually, I guess that wraps me up for now. Thanks.

Sir, at this time you have no more additional questions. I'll turn the call back to you for closing remarks.

Thank you very much. I thank everyone for joining us and wish to advise you that the second quarter earnings release is currently scheduled for release on Monday, August 21, 2006 and the corresponding conference call is currently scheduled for Tuesday, August 22, 2006 at 10:00 a.m. eastern time.

I would also like to remind everyone that the 2006 annual meeting will be held tomorrow beginning at 9:30 a.m. at the offices of the company and 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, sir. Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Have a good day.