Streamline Health Solutions Inc (STRM) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2006 Streamline Health Solutions Inc. earnings conference call. My name is Tawanda and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Paul Bridge, Chief Financial Officer. Please proceed, sir.

Good morning, everyone. I'm Paul Bridge, the Chief Financial Officer of Streamline Health Solutions. 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 questions during the question-and-answer session. We have 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 Streamline Health that are not historical facts are forward-looking statements that are subject to risks and uncertainties. The future financial performance could differ materially from expectations of management and the results reported now or in the past.

Factors that could cause the 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; the healthcare regulatory environment; fluctuations in operating results; and others detailed from time to time in Streamline Health's filings with the U.S. Securities and Exchange Commission.

Yesterday morning we released the second-quarter 2006 financial results. I would like to highlight the more significant aspects of our second-quarter and year-to-date results. For the quarter total revenues increased 13% to $4.6 million for the quarter compared to $4.1 million in the comparable prior quarter. For the first six months total revenues increased 25% to $8.4 million for the quarter for year-to-date compared to $6.8 million in the comparable prior period.

Of particular note, our system sales increased 70% during the first six months as we added new clients and expanded our presence and our existing clients. Our application hosting services revenues continue to grow and now exceed $3 million annually. The operating margins on our services, maintenance and support and our application hosting services continue to remain strong. Our operating profits for both the quarter and year-to-date declined as planned from the prior comparable period as we continued during the first six months to invest in the sales and marketing efforts and in other areas of operations to enable us to improve our operating results in the future.

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 staff to expand our direct sales capability and develop new products in order to grow our revenues in 2006 and beyond. As a result of our increased sales activities our current backlog increased 17% from approximately $4.7 million at the end of the first quarter to approximately $5.5 million currently with $3.1 million from our existing customers, $2.4 million from our resellers.

In addition, signed multiyear agreements for our application hosting are approximately $4.5 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 that they are on plan vis-a-vis our revenue. We have been able to reduce our long-term debt to the current $1 million which is due and payable in July 2007.

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

Thank you, Paul and good morning, everybody. This morning I will comment briefly on our financial results and then discuss significant milestones and contracts signed during our second quarter; our sales and marketing activities, including an update of our qualified sales pipeline; an update on our business development activity; and finally I will reiterate our guidance for the fiscal year. 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 more significant Q2 financial highlights. As Paul mentioned, our topline revenue was approximately $4.6 million which was in line with management's expectations for the quarter, 13% greater than Q2 revenues from last year and our highest Q2 revenue performance and third-highest revenue performance of any quarter in our history. Our topline revenue for the first half was $8.4 million, on target with management's expectations and 25% greater than the first-half revenues from last year.

Our operating profit for our second quarter was approximately $241,000 which was slightly ahead of our internal plan. Our operating profit for the first half was approximately $170,000, well ahead of our internal plan due to lower than anticipated expenses mostly as a result of certain hiring delays that have now been completed. Although our operating results were below the prior comparable periods we are still well ahead of our internal plan for which Bill Geers will provide further comment after my remarks.

Let me take a moment to highlight some significant milestones and performance indicators of our key market segments of our second quarter. First, a comment on the name change to Streamline Health on NASDAQ. During the quarter we finalized our corporate name change to Streamline Health solutions Inc. with the new trading symbol STRM on the NASDAQ capital market. We believe this name change was an important step in our continued evolution from a document management company to a leader in enterprise workflow and business process management.

Accordingly the name Streamline Health more accurately describes our capability and the depth and breadth of our solution that we provide to enable healthcare providers to streamline their document centric business and clinical processes.

Now I'd like to comment on the GE Healthcare distribution channel. During our second quarter we announced with GE Healthcare that the Nebraska Medical Center had selected our enterprise workflow and document management solution to integrate with its current GE Centricity enterprise solution, which prior to GE Healthcare's purchase of IDX was called Carecast.

This is a significant win for both GE Healthcare and Streamline Health for two reasons. First, the Nebraska Medical Center has been a longtime user any major showcase account for IDX and now GE Healthcare. As such they will be a valuable resource to both GE Healthcare and Streamline Health in promoting the benefits of our integrated enterprise solution.

Second, Nebraska Medical Center selected us because of the significance of our partnership with GE Healthcare and because of our tightly integrated solutions. The GE Healthcare distribution channel also produced another significant new client win during the quarter and we are working through a press release process to enable us to share additional information regarding this health system's upcoming implementation of our solutions across the enterprise.

I will comment further in a few moments about our expanding relationship with GE Healthcare. Next I'd like to comment on our direct sales channel. We had another notable win during our second quarter Thomas Hospital in Fairhope, Alabama. Thomas Hospital will implement our core health information management solutions including Access Anywhere, our document repository, complemented by our completion workflow, quoting workflow and release workflow modules. In addition, Thomas Hospital will implement our than eForms solution to obtain e-signatures at the point of patient registration while also standardizing forms to capture patient information.

Also significant, we will be integrating our solutions with Thomas Hospital's information and patient care system from Computer Programs and Systems Inc., better known as CPSI. The combined solutions will allow physicians and medical record professionals to work within their CPSI system to seamlessly obtain otherwise unavailable documents critical for patient care, efficient chart coding, chart completion and other revenue cycle activities. We believe this integration, once completed and implemented, will open up new market opportunities for Streamline Health's enterprise document workflow solution in the middle sized hospital marketplace where CPSI has a significant presence.

Now I'd like to comment on our community hospital market segment and our approach via the ASP-hosted solution. During the second quarter we also announced that T.J. Samson Community Hospital in Glasgow, Kentucky has selected us to provide workflow solutions for their health information management business process initiative via our remote hosting application services. At the start of our fiscal year we implemented a targeted marketing program in order to capitalize on what we believe is a strategic advantage for us in the marketplace, our remote hosted solutions, particularly by aggressively pursuing hospitals that we categorize as small to midrange, in the 50 to 300 bed size.

This important win was a direct result of our efforts to focus on our hosting services in a smaller midrange hospital market as prospects look for cost-effective solutions to address their business process and efficiencies that do not require large upfront capital investment. This new win is significant for two reasons. One, it demonstrated the capability of our expanded direct sales force to identify opportunity in the small to midrange hospital market, leverage our remote hosting services and add to our growing list of hosted customers. Two, this was a win against a competitor that also offers remote hosting services. Our competitive advantage was our value proposition of superior functionality and enterprise capability as well as our impressive list of existing customers.

And finally, a comment on our competitive trade up program. In our second quarter we announced the signing of a contract with Nassau University Medical Center in East Meadow, New York. As a part of the implementation Nassau's current repository of document images will be migrated to our solution from a competitor's document management system. This is the second customer to migrate to our solution as a result of this program, which offered very attractive business incentives to implement our solutions. Of additional note, we will be seamlessly integrating our solution with Nassau University Medical Center's existing clinical information system Sunrise Clinical Manager from Eclipsys Corporation.

At this point I'd like to comment on a significant marketing activity that took place in our second quarter. Recently we attended and exhibited at the annual IDX National Users Conference hosted by GE Healthcare. During that event we had the opportunity to meet with senior GE leadership to discuss our mutual plans to drive revenue for enterprise document workflow and to expand our business relationship to other GE Healthcare divisions.

Also we are invited to participate in an executive sales planning meeting with the GE Healthcare sales team in order to leverage the relationship in their customer base and prospect opportunities. And finally, we hosted the entire GE Healthcare sales team at an event that allowed our sales executives to interact with their counterparts at GE Healthcare to discuss mutual pipeline opportunities.

Clearly GE Healthcare is an important distribution partner of Streamline Health. We have invested a significant amount of business development and sales resources in securing, developing and expanding this relationship. The results of our significant efforts are now producing dividend.

And now I will comment on our qualified sales pipeline. Currently our total qualified sales pipeline continues to be strong and is approximately the same as last quarter in the $70 million range. Also our software and maintenance pipeline is comparable to last quarter in the $51 million range. Included in our total qualified pipeline is our GE Healthcare pipeline. Currently we have 23 hospital organizations including both GE customers and new prospects in our GE pipeline.

Historically a large percentage of IDX's revenue and now GE Healthcare's Centricity enterprise revenue is achieved in the last quarter of their year. Streamline Health and GE have collaborated to implement mutual marketing programs and sales incentive plans for the remainder of our fiscal year to accelerate the sales of our enterprise document workflow solutions. Accordingly we anticipate closing additional GE transactions over the remainder of our fiscal year.

As a reminder, our qualified sales pipeline consists of all potential transactions that have an opportunity to close over the next 12 months. Again, 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 close all these opportunities. However, it is one of several indicators of our ability to achieve our revenue goals for the remainder of the fiscal year and beyond.

And now I'd like to take a moment to comment on our business development activities. As you know, our business development activities are focused on developing new strategic business relationships and expanding our existing partnerships. In our second quarter we announced two distribution partners -- Standard Register and HealthCare Resolution Services. Standard Register is a leading provider of document services with a significant healthcare customer base. The alliance brings together our electronic document repository with Standard Register's patient linkup enterprise and secure admission suite solution to streamline the process of collecting information at the point of patient registration.

This important new strategic alliance will allow us to expand our distribution capabilities, further leverage our remote hosting capabilities, and take advantage of our mutual installed base of customers. We are currently in the process of implementing our first mutual customer at a 309 bed hospital located in the northeast part of the United States.

Also in our second quarter we announced that HealthCare Resolution Services Inc., also known as HCRS, has turned into a strategic alliance with us to utilize our remote hosting services. HCRS is a preferred provider for health information management services which provides project management, data extraction, quality assurance, business process improvement and staffing services to public and private clients in the healthcare industry. We will provide our remotely hosted coding workflow solution for use by HCRS' team for their military and federal agency clients.

Let me now take a moment to reflect on our overall progress in our business development activities over the best year. You may recall last year during my earnings call I reported that we had a business development pipeline that included a significant number of potential new strategic partners. Here is a report card on our continuing progress in this area.

We have now established formal relationships with three of the potential business partners targeted last year. The three partners include GE Healthcare, Standard Register and HealthCare Resolution Services. Overall I am pleased with the progress we have made in business development over the past year, particularly as it relates to solidifying and expanding our relationship with GE Healthcare.

The significance of this relationship can't be overstated. As I mentioned in previous earnings calls, we made a strategic decision to focus our business development effort on our largest potential partners in order to best leverage our limited resources and ensure the optimum upside in terms of future potential revenues. GE Healthcare was our number one targeted new business partner last year. Even though it seemed fortunate that GE Healthcare purchased IDX earlier this year, our continuing relationship with GE was not necessarily secure yet the potential upside was substantial if the new relationship could be solidified and expanded.

Because we dedicated significant time and business development efforts to GE Healthcare we have been able to secure the continuation of the IDX relationship within the GE Healthcare organization. In addition, we are now making great progress in expanding the partnership beyond the Centricity enterprise division.

To further validate our progress with GE Healthcare over the past year and emphasize the opportunity for significant upside revenue potential, just look at the revenue contribution from IDX and now GE since the relationship with IDX began. For example, in 2002 IDX contributed $2.5 million or 19% of our total revenue. In 2003 they contributed $3.9 million or 31% of our total revenue. In 2004 IDX contributed $2.8 million or 22% of total revenue. Last year IDX contributed $2 million or only 12% of our total revenue.

What is remarkable about last year is that we achieved our targeted 25% revenue growth in spite of the shortfall from the IDX channel. Also, please note that the revenue contribution decline from the IDX channel in both 2004 and 2005 was directly related to IDX's difficulty in securing new system sales over the past two years which impacted our sales accordingly.

And now for the good news and a testament to our investment in the new GE Healthcare relationship. For the first half of 2006 GE Healthcare has already contributed over $2.6 million in revenue which is over 30% greater than all of last year and 33% ahead of the record pace of $3.9 million in 2003.

I'd like to make one final comment about the GE Healthcare relationship. As some of you may know, GE Healthcare recently announced the availability of their remote hosting capabilities for their Centricity enterprise solution. Prior to that announcement we did not have the opportunity to utilize the IDX or GE Healthcare channel to remarket our remotely hosted solution. I've also reiterated in our -- our stated goal of expanding our own remote hosting customer base in order to smooth out the lumpiness in our quarterly revenues, spread our revenues more evenly throughout the year, and help make our future revenues more visible. Toward that goal we are making great progress in adding GE Healthcare to our distribution capabilities for our remote hosting solutions.

We are especially excited about utilizing the extensive GE sales channel to greatly expand the sales of our remote hosting solutions, particularly for what we believe are extensive middle market opportunities. Our historical challenge has always been to find ways to leverage our limited sales resources through effective sales distribution channels. We believe that GE Healthcare's entry into the remote hosting business coupled with the opportunity for their sales force to market our remotely hosted solutions, whether from our hosting center or theirs, will go a long way toward enhancing our remote hosting revenues and future revenue visibility.

Let me conclude my remarks by providing some guidance regarding our expectations for our fiscal year. As mentioned previously, our revenues for Q2 and the first half were right in line with management's expectations while our operating results were ahead of our internal plan. We anticipated that through the first half of this year our earnings would lag behind last year because of our significant investments in infrastructure in the latter half of last year and the first half of these year. That investment in infrastructure is nearly complete so our expense growth should level off the remainder of the year.

In prior years we continued to expect approximately -- as in prior years, we continue to expect approximately 60% of our annual revenues in the second half of our year. Accordingly, we continue to believe that we will meet our target of 20 to 25% revenue growth as well as our target for increased operating profitability for the entire year. This concludes my formal remarks. I'd like to turn the call over to Bill Geers, our Chief Operating Officer, for his update.

Thank you, Brian. Good morning, everyone. It's my pleasure to be with you today to discuss an operations update. My comments will be brief and they'll focus on the following topics -- operating expenses, headcount and high-profile R&D effort. As Brian mentioned in his comments, our operating results for the first half of this year were below the prior comparable period.

However, it is important to note that these results were well ahead of our internal plan, a plan which called for additional investments in our infrastructure to enhance our ability to successfully deliver on our vision which is to provide enterprise wide business process improvement within healthcare through the implementation of solutions based on these six integrated technologies -- document workflow, document management, portal connectivity, interoperability, eForms, and finally OCR or optical character recognition.

As a reminder, we grew our staff by nearly 40% in 2005, many of whom were added in the second half of the year. We have now successfully assimilated that growth in personnel and most of these individuals are now contributing in a meaningful way to the execution of our vision and growth plans.

At the start of this fiscal year we provided guidance that we anticipated growing our staff by an additional 15% in 2006, most of which was planned for three areas -- sales and marketing, research and development and consulting services. I'm pleased to report that we have nearly completed this planned growth. Accordingly we expect that personnel expenses, which are approximately 70% of our overall expense budget, will begin to level off in the remainder of the year. To ensure that we stay on target with respect to our operating results we continue to monitor our expenses very closely.

With respect to our R&D efforts there are three topics that I would like to address today. To begin with, since our last conference call as planned we have successfully moved the 107 release of our product portfolio to beta. This is a major release that introduces a variety of enhancements across our productline including extended interoperability which will facilitate our efforts to integrate with additional clinical, financial and administrative systems thereby strengthening our enterprise wide message.

My second R&D update focuses on our workflow solutions, an area in which we continue to show progress. You may recall our goal was to deliver five to seven workflow solutions during 2006 and we believe that we are on target to meet this objective. Here are the particulars. First, as I mentioned on our last call, our financial screening workflow is successfully installed in production. Secondly, we expect to finalize beta plans for our referral order workflow by the end of this month. And finally, we have three additional workflows that are currently under development which, as I mentioned, we expect to have completed by the end of the year.

My final R&D update has to do with our integration efforts. More specifically, our integration with applications from other vendors as this continues to be an important part of the Streamline Health strategy. As I mentioned on our last call, we have successfully delivered on four integration projects thus far in 2006 including integration with Epic Systems Epic Care clinical systems which is one of the most popular clinical systems available today. The beta testing of this product is going well and we expect it to be in production before the end of our third quarter. Furthermore, we have another five integration projects that are in various stages of development, all of which we expect to deliver by the end of the year.

In closing, we have made significant investments in personnel in the area of sales and marketing, research and development and consulting services to ensure that we have the necessary resources to successfully implement our vision and implement our many new contracts. We also continue to monitor our expenses very closely to ensure that we meet or exceed our operating plans.

We have now hired most of the planned new positions for 2006 and we anticipate that our investments in our infrastructure will continue to bear fruit by producing relevant new solutions and producing additional revenue opportunities for the remainder of this year and beyond. 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?

(OPERATOR INSTRUCTIONS). Bill [Bunn], Fort Washington Investments.

Good morning. Before I begin, I've got a fairly long list, but I should note that you paid your debt down by 50% over the course of the quarter which I thought was also something you should -- probably should have highlighted because I think that's fairly dramatic.

Well put.

I have a series of questions about application hosting that I missed -- I couldn't write fast enough at the beginning. But where does that stand? Paul was making some comments about them and I think he addressed backlog also. Could you paraphrase that again? I'm not sure what you were trying to get across?

The question is for Paul?

Yes. Because ultimately I want to get into growth and margins and things but I'm not sure what he said about the backlog there.

The backlog is growing overall. For example, when we signed T.J. Samson in this quarter for multiyear contracts, that would add to the backlog for that particular division of the Company.

Has Sampson at this point actually contributed revenue?

No, it just was signed recently.

Okay. So in this case it looks like margins are beginning to squeak up in the application hosting. Do you have a sense as to where margins could go in the future?

They're rather steady right now. They will go up as we add additional revenues without having to increase additional costs.

Well, for the first six months it looks like they were at about -- cost of application hosting was --

The gross margin for the first six months was about 64%.

Okay. Is that about where you see that stabilizing?

For now, yes, but as we add new clients it should go up because we won't have a corresponding incremental increase in expenses.

All right. You talked about the IDX relationship and it was mentioned that -- and Brian touched on the this -- that you had solidified and expanded the relationship. Was that only within what we used to call the Carecast division? Does that include Flowcast?

This is Brian. The relationship was solidified with the former Carecast division which is now called Centricity Enterprise. It was also expanded within that division in that we weren't really firing on all cylinders in prior years with the IDX channel. There were just a few number of their senior account executives that had Streamline Health fever, so to speak. And as a result of our very extensive efforts in really introducing ourselves to the entire account executive sales team, I'm very pleased to say they all have Streamline Health fever now and I think that will bode well for us for the remainder of the year and beyond. That's within one division.

We've also, as I describe it, have made great traction in expanding to some of the other divisions including the former Flowcast division. There's nothing to report at this point other than we are in discussions with other divisions.

Later you mentioned that GE had itself announced that it had remote hosting capabilities and that you looked forward to them being a distribution partner in that realm. Does that mean they're developing their own or they're just simply going to offer what others and resell other remote hosting capabilities?

The answer is yes to both. The significance is on several fronts. First of all, when we signed our distribution relationship with IDX four or five years ago it did include the opportunity for them to remarket our hosting services. At the time they did not have their own remote hosting capabilities; therefore they did not sell or remarket our remote hosting capabilities. What's significant about the GE announcement is that now GE Healthcare will have remote hosting capabilities for their own solutions, specifically Centricity Enterprise which, again, was formerly Carecast.

Now we are in discussions with them to allow them to, under our existing umbrella contract, to remarket our remote hosting services. The hosting center will be in Chicago and it's in the process of being built out if you will. They do have customers that they will be delivering contracts on. So there will be a process, if you will, for us to have an opportunity to either remarket our remote hosting services in our hosting center or co-locate our solution in their hosting center, either or both depending on specific needs of the customers.

Thank you. Good quarter, gentlemen.

Thank you.

Mark Cahill.

Good morning, gentlemen. I was hoping you could give us an update on the structure of the sales and marketing group. The last I had heard it was kind of divided between the East Coast and the West Coast.

We've added an additional top line account executive since then, so now we have three as opposed to two -- primarily because, frankly, they're overwhelmed with opportunities and --. So we've added a third senior account executive and we've divided the country up into three segments. So those three individuals will split up the Company into three parts.

Do you anticipate hiring more account executives?

Not the remainder of this year. What our strategy is for the remainder of this year, frankly, is to leverage the significant number of account executives we have engaged with through the GE Healthcare channel and other channels. We'll watch it closely and then next year we may expand it again further.

We've also added some sales support people to assist in really doing the demos and the configurations and all the behind the scenes work in terms of answering our fees, etc., and I think we've added two additional people in that area, as well as one individual to focus on our current installed base which is growing significantly. So we needed more resources to follow-up on opportunities to expand our software within our existing customer base, particularly in the GE Healthcare space.

Right. The deals that were announced in June, July and August, can you give us an idea of the timing with respect to when they hit in the quarters -- in the past quarter? Were they 2005 deals or 2006?

First of all, Nebraska I believe -- Paul, help me -- hit in Q1. Or was that --?

There's some in Q2 and there will be more beyond.

Thomas Hospital hit in Q2.

But there will be additional, again, follow on in the next two quarters.

What Paul's referring to is when it's a deal that's installed in their local data center we ship the software and we can recognize a portion of the software. Then there's a trail in terms of professional services and other components that we ship subsequently. Nassau University Medical Center is really a win from a former partner of ours. And so that one is mostly implementation and maintenance services as we convert them from their old system to our current technology. And so that will hit over a period of time.

T.J. Samson is a hosted opportunity, so that's really forward-looking. We recognize the revenue as that gets implemented on a monthly basis over the life of the contract. And there's one other large one that we haven't really unannounced yet that hit in second quarter that you'll be hearing about -- hopefully, if we can work through the press release process in the near-term.

Right. I noted T.J. Samson, they have Siemens as a clinical provider -- application provider. That's not part of your old amnesty program?

No, it's not. That was just a net new win due to our superior functionality and value proposition. It was just a coincidence that they happened to have Siemens. Siemens actually is installed in a lot of hospitals particularly on the billing side. So we'll be seeing them as we move forward and win new deals.

Given all these announcements and even in last year's, 2005's deals, you seem to have a lot of implementation in 2006 to finish. And my guess is that your maintenance and services revenues for 2007 are going to grow considerably, maybe even faster than your 25% revenue growth estimate. Am I in the right line of thinking there?

Mark, this is Bill. I'll take that one. That is certainly the plan, and what I would say is that as this year continues to unfold we will know more. But there's no question about the fact that we would certainly hope that in 2007 that we would grow beyond the 25%.

It seems like if you race to get these implementations done for all of these or the majority, that the rest of the revenue just falls right into the maintenance and service and that would all hit in 2007 really.

Right. And what happens is that if you look at these implementations, there are a lot of variables. And clearly they take place over a number of quarters, if you will. So as we look at the business that we're closing this year, there's no question that we will experience some of that revenue in 2006, much of the revenue will fall into 2000.

And as additional deals are closed in the second half of the year they will also contain services which, again, will probably fall into 2007.

And Mark, just to clarify something, on some of these larger deals that are being closed we'll actually look at services revenue over a period of years, if you will.

And Mark, this is Brian. For modeling purposes I can give you some insight in terms of how these deals hit the P&L. First of all, if it's a locally installed opportunity through our direct sales force -- let's use an example of a $1 million transaction. About half of that is software which we typically ship upfront and recognize the revenue because it's an off the shelf solution. The remainder of it is a mixture of professional services and third party components. The professional services typically hit over about three quarters, it takes between six and nine months to do an implementation. Sometimes they're longer depending on our resource availability.

And so the professional services which range for a $1 million deal 300,000 to 350,000, sometimes as much as 400,000 of that, but typically 300,000 to 350,000. And that would hit, once it's announced, over the next three quarters.

And then you have the third party components, which we ship as needed, and those are recognized as they're shipped which can be 100,000 to $200,000. And then that's basically the bucket of $1 million. And then of course we enjoy the maintenance revenue and that typically runs about 18 to 20% of the software purchase price so let's say in this case $0.5 million. And that typically hits one year after the contract is signed, sometimes sooner, sometimes it takes up to a year to recognize the maintenance revenue.

So that kind of gives you should the model. Obviously on the ASP side it's a monthly recurring fee that we get once the project goes into production and that's when we start recognizing revenue. So that's typically six months out. Sometimes it's sooner, but no later typically than six months out we start seeing the revenues.

I saw on the balance sheet that the account receivable number jumped up more than double. Will that turn into cash over the next 90 days?

I certainly hope so.

Good.

A lot of that is because we've closed a lot of these deals in the third month of the quarter and it takes people 30 to 60 days to pay their bills.

Okay. But that will improve your cash position considerably three months down the road?

Yes, it should.

Switching to the partnerships that you had talked about, the Standard Register. I was hoping you could give us a little bit more color there. Is there a revenue sharing agreement a la GE? How long will it take to educate the Standard Register sales force?

First of all, we're excited about that relationship simply because Standard Register has a very large installed base of hospital customers that use their documents services and their form services. And secondly, they're right up the road about 45 minutes away so it really facilitates our interaction. The deal is this, Standard Register as a very excellent solution across the board, but in particular in the patient registration area. It's called Patient LinkUp Enterprise. It allows for the capture of various documents and automation of the process of registration including driver's license, insurance cards, photographs of the patient, etc.

They also had a product roadmap that down the road they intended to build if you will a document repository to retain that information. Well, when we hooked up with Standard Register due to our business development efforts they realized that rather than investing in the building of that solution they would utilize our Access Anywhere product as their document repository. So basically we're doing the integration that allows them to capture documents at the registration area and store them in our repository. And there will be a remuneration to us for those services and it's mostly going to be ASP based.

Rarely we may find one that will want to install it locally, but it's basically utilizing our ASP services where they scan with their product, throw it over the wall and install it in our repository to be retained for future reference. So that's the deal. Now in return we're going to be also doing what we call referral marketing where they will refer opportunities in their installed base to us for other applications that we may want to install.

So we're going to get in the door with the repository and then hopefully upsell these customers to some of our other solutions. And in return we'll be referring some business back to Standard Register where they might be able to install their Patient LinkUp Enterprise and other solutions. They also are a partner in terms of some of the services we provide in terms of forms review and forms upgrade to put bar-codes on documents so that when we can scan they can be automatically identified. So there are a lot of synergies there between the two organizations; most importantly is their large installed base of hospital customers.

Are those hospital customers middle market or large customers?

It's across the board, but what's exciting is that we can get started with an affordable solution via our ASP to create a repository of these documents and then hopefully upsell them toward an electronic medical record.

Should we expect a time delay to get these guys educated over at Standard Register?

Actually we've invested quite a few cycles in business development in educating their sales force. There have been many, many meetings so we believe they're pretty much up to speed now and there are some marketing programs under way. So by the end of this year we should be off and running.

Okay. With respect to healthcare resolution, they have quiet a list of military clients. Do you anticipate doing anything else beyond coding there? Would ASPeN fit in there?

Initially it's exclusively for coding, but as you know, once you get in the door with the ability to scan documents, code them online and then retain them, it's an opportunity to upsell to some other services and some other solutions that we have. Initially this is to use our Coding Anywhere product to make the HCRS staff more efficient in delivering coding services to the military and federal agencies. So there will be some revenue contribution this year and as that ramps up we hope that that will grow significantly next year and give us an opportunity to upsell to the federal government.

Right. Just as a general question with respect to business development, I noted you said you spent a lot of time on GE Healthcare. It sounds like your business development guys are really busy. Do you need more?

It's funny you should mention that. Part of our growth in personnel this year was to budget an additional business development resource. And we were very pleased to get a top notch person that joined us recently to help in those efforts. Frankly the bandwidth that we had prior to adding this individual was pretty well stretched with what we've got going on.

As I mentioned in my remarks, really more than half and probably more like 70% of our cycles were devoted to cementing the GE Healthcare relationship and that's now paying significant dividends based on the numbers I shared with you. But we have a lot of other opportunities that we're focusing on now as we expand within GE Healthcare and go after some other larger potential partners. I do want to caution though that there's no assurance that any of these can be reeled in, but we certainly have an opportunity to expand our relationship beyond GE Healthcare.

I would hope that whatever the new name for the -- I just think of the old smoke half of it and that's your middle market customers.

It's high on our list of targeted opportunities.

Right. Okay, that's it for me. Thank you.

Tom Carpenter, Hilliard Lyons.

Good morning, everyone. I was pleased to see you guys reiterate your 25% topline growth forecast for '06. And you also mentioned on the call that similar to prior years you expected a 40/60 split between one half of '06 and the second half of the year. If you do the math, a straight 25% revenue increase for the year gets you a little bit over $20 million; if you do the 40/60 I think it gets you to around about $1 million more at $21 million. Are you comfortable with that range?

I'm comfortable with the range of 20 to 21, yes.

Okay, great. And I think on the fourth-quarter call where you talked about the new distribution of your agreements you had talked about ones like Standard Register and HCRS that might impact more on the ASP side. You also mentioned you were talking to several larger scale distribution partners. One of those I guess would be GE, you talked a lot about those guys on this call. Are there any others that you're in talks with that you might think come to fruition over the next year?

We are in discussions -- I'm not at liberty to discuss the particulars and it's hard to speculate as to whether we can reel them in. But our plan is to hopefully bring in one or more in the next year, again, with some variables that are out of our control that might affect whether we can do that or not. But the idea is to diversify our revenue streams across multiple partners, that is our stated goal.

Okay. One of the things you guys touched on this call but perhaps didn't elaborate like you had in the last couple calls was your efforts to start a consulting business that would work hand-in-hand with your solutions and maybe create some -- a viral relationship over time. Can you give us an update of the status of that?

Sure, sure. Actually we hired an individual with an extensive background in professional services and consulting services to come in on a contracted basis and assist us in analyzing the market opportunity, helping us develop an extensive business plan and now we're in the phase of actually going out and visiting with our installed base to get that endeavor off the ground.

So the homework is done, the message is developed, the pieces are in place to go out and visit with customers. In fact, we're going to be doing that within the next 30 to 60 days and hopefully we'll get some traction for the remainder of the year and get our business process management consulting services off the ground. So stay tuned on that front.

I guess this is maybe a little bit of revenue this year but picking up steam in '07. This is still an integral part of your business plan?

It is and I want to qualify -- this year we do expect some revenue but it's going to be budget neutral. We're basically trying to just recover our expenses to get this endeavor off the ground and then next year we would expect margin contribution.

Okay, got it. One of the other things you also talked about in the last couple of calls was a healthcare Web portal with IBM that you were working on. You might have mentioned that it was in beta or it's close to beta. Can you update us on the status of that and the timing for a full-scale launch?

This is Bill, I'll go ahead and take that one. That is a part of our development plan. The portal development is underway. Realistically in terms of revenue from that, that will not be this year, that would be in 2007.

And Tom, I might add -- this is Brian -- that as a part of the business process management endeavor for the rest of the year we will be looking for partners, customer base partners to implement our portal strategy. So that's kind of folded into the business process management initiative.

But it's still something you're working with IBM, correct?

That's correct.

Okay, great. And a final question for Paul then I'll let some other people ask. The deferred revenue rose 51% quarter-over-quarter, is that mostly maintenance, Paul, or ASP?

It's mostly prepaid maintenance.

Okay, great. Thank you, guys.

[Alan Shore], AFA Financial Group.

Good morning, gentlemen. One of the nice things about going last is everybody has already asked all the questions that I had with the exception of one, so that's cool. This is basically for Bill and Brian. Where do you see your biggest challenge over the next six months to a year either operationally or from a marketing standpoint?

I'll start and then I'll turn it over to Bill. I'll address the marketing front because Bill is responsible for operations. But from a marketing front our biggest challenge is really to manage the pipeline. We have a significant pipeline and we've added some resources to help us mine that. So our biggest challenge is basically keeping on top of that so some of these deals don't get stale. And I think our biggest opportunity in contrast is to leverage the relationship with GE to the extent that we can be successful in expanding our opportunities within the Centricity enterprise division which I believe we're well underway of accomplishing that goal, and then expanding horizontally to the other division will go a long way toward accelerating our growth for next year.

All right, Alan, this is Bill. First of all, it is very, very exciting when we look at the success that we have experienced on the sales front, if you will, with the additional contracts that have been closed, etc. Having said that, that does translate into a challenge on the operations side of things, especially in the area of product development and consulting services as it relates to talented people.

We are very, very, very happy with the people that we have added over the last whatever -- four or five quarters, if you will. But that continues to be our biggest challenge and we continually look to establish the proper balance between client satisfaction, which translates into how quickly we're able to deliver and implement our solutions, if you will, and our desire to ensure success as it relates to our operating results.

All right. Well, based upon the number of employees that you currently have and the overhead structure that you're supporting, how much more can you grow your revenues before you have to go to that next level of hiring and increasing expense? What level of revenue can this support?

This is Brian. We're very comfortable where we are right now with the caveat that we're going to be just adding a few more employees between now and the end of the year -- we're mostly built out -- to handle our current growth projections for the foreseeable future. So the revenue we believe we can organically grown in the 20 to 25% range with the employees we have. And primarily because we intend to leverage our distribution partners.

On the operating side -- on the delivery side as this sales effort grows and we get more and more clients Bill clearly will have to add personnel. But we're trying to be very diligent and add those personnel subsequent to the contracts or in anticipation of some contracts so I don't anticipate that we're going to grow 15% next year. I think it will be somewhat less and primarily in the areas that Bill is responsible for. (multiple speakers) help our earnings as we move forward.

You're talking about growth as far as expense and employees at a 15% --?

Correct. About 70% of our expense exposure and, again, I think that bodes well for our earnings in future years that we now have made the investments in infrastructure, now we're going to start seeing the benefits of that and (inaudible) and into next year.

All right, that's it. Thanks, gentlemen. Great quarter.

Jeremy Hellman, Thomson Davis.

It looks like I'm in the back of the line. Very thorough up to this point. I appreciate all the granularity. A couple questions I had -- just going back to some of the discussion about GE. And I guess the sense I got was that you're really making some efforts to try -- GE can be lumpy in Q4 -- to try and smooth that out a little bit. Was I right in perceiving that?

Our goal is to smooth out the lumpiness, but remember, GE just acquired IDX this year. So we're not exactly sure how that will translate and how lumpy it will be at the end of the year. Frankly, there are a couple of conflicting forces at play. I think GE over time will, because of their size and influence in the market, smooth out some of their traditional lumpiness which is always rear end loaded to the fourth quarter which infects us.

But we have mutually implemented some sales incentive plans for their account executive sales force that gives them an opportunity to get some added value from a compensation point of view between now and the end of the year. So that will have an opposite effect in terms of helping us close additional business in Q4.

As long as we're where we need to be at the end of year I'm happy, but clearly let's say next year is probably the year I had hoped to try to -- through the growth of our ASP services -- level out that rear end loading and the lumpiness of the quarters. This year unfortunately I think we're still in that position of having a little bit of lumpiness.

Right, okay. And then I was looking at Q1 and Q2 this year versus Q1 and Q2 last year and they were a lot closer in terms of system sales in terms of dollar value than the same quarters last year. And just wondering if the same thought could have applied to Q3 and Q4 this year. But it sounds like that's going out on a limb a bit to make that sort of assumption. Is that correct?

It's a little premature to do that. I think again, the GE influence will carry forward into next year. Our real opportunity to level this out and make it a little more balanced between the first and second half of the year is directly proportionate to our ability to accelerate our hosting services. And as I said, GE is just now getting into that business. So I think next year we'll have a much smoother pattern than we do this year.

Right. Okay, thanks. And you mentioned that there was another contract win where you're still working on the press release. Is that in the numbers at this point?

They are.

Okay. And just to kind of confirm some of the other commentary in terms of -- investment in SG&A and the like for Paul. And I don't know if this is trying to pin you down too much. But for '07 operating margin, is midteens a realistic level to be looking?

Well, we haven't even started projecting our 2007 revenues and expenses at this point. That usually takes place beginning in the end of the third quarter and the fourth quarter. But we would look to improve our operating margins.

Okay. And then just going back to Standard Register -- I had an interruption. I just wanted to check and see, you had mentioned I think it was 23 hospitals you had in the GE pipeline. And did you have any numbers regarding Standard Register at this point or is that really waiting until they're really keyed up and ready to go before you can start putting a number on that?

We have some preliminary numbers but I'm not in a position to share them. If I did I'd have to get permission from Standard Register (inaudible) I'd rather not go there at this point. Hopefully by the next call we'll be able to share some of that information with you.

Okay, I think that covers it for me. Thanks, guys. Great quarter.

Bill Bunn, Fort Washington Investment Advisors.

Given the 25% growth and recognizing the cash flow sounds like it will pick up in the second half, are you able to internally fund growth at this pace or will you need to go (indiscernible) at some point for some outside capital?

Let me jump in, Bill. I believe we are comfortable with internally handling the growth at this point primarily because we're trying to leverage our distribution channels. But if something significant occurs with a new partner or we have a nice hockey stick ramp up of our professional services organization for business process management that may change. And clearly if there were an opportunity down the road to maybe acquire some synergistic companies that also might change the mix. But right now we're comfortable that we can handle the growth with internally generated funds.

I have one last big picture question. Clearly the industry has to go to electronic records. Is the industry slow at achieving this? Are they behind the curve in general?

Way behind the curve and they better have a wake-up call considering the spiraling cost of healthcare and the GDP. So again, I think traditionally healthcare has lagged behind the other industries in terms of deploying automation. And I think we're in just an absolute sweet spot in terms of the types of automated tools we provide that handle the document centric flows as opposed to the transactional flow, primarily because healthcare is primarily document centric with the medical records. So I just can't wait for the dollars to flow into this market to try to solve some of these enormous process flow problems that they have because they're relying a great deal on paper.

Is it possible to come up with some sort of a growth projection for the industry? Will they need to grow at at least 25% for them to keep pace and make up the gap or will they have to grow even faster than that?

Well, we do have some statistics from various consulting organizations that say that the document work flow, document management space is growing 25%. Our goal is to continue to match that and hopefully down the road accelerate it with these new lines of business, these new endeavors in the area of some of these technologies that we offer namely business process management, portal connectivity and integration. Down the road in future years we want to layer on to that growth with new lines of business opportunity.

All right, thank you.

(OPERATOR INSTRUCTIONS). At this time there are no further questions in queue. I would now like to turn the call over to Mr. Paul Bridge for closing remarks.

I thank everyone for joining us. I wish to advise you that the third-quarter earnings release is currently scheduled for release on Monday, November 27, 2006 and the corresponding conference call is currently scheduled for Tuesday, November 28, 2006 at 10 AM Eastern Time. We thank you for joining us and we look forward to the next call. Operator, this concludes our conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.