Streamline Health Solutions Inc (STRM) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Streamline Health Solutions, Inc. earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now to turn our presentation over to your host for today's call, Mr. Paul Bridge, Chief Financial Officer. Please proceed, sir.

Thank you very much, operator. 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 third quarter 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 the 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. 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 the impact of competitive products and pricing, product development, reliance on strategic alliances, available of products procured from third party vendors, the healthcare regulatory environment, fluctuations in operating results and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission.

Yesterday, we released our third quarter financial results. I would like to highlight the more significant aspects of our quarter and year-to-date results. Total revenues increased 14% during the third quarter, primarily from increased services and support revenues and 21% year to date with increases in all three revenue categories. This represents the eight consecutive quarterly increase in revenues over the comparable prior quarter. System sales declined 10% for the quarter compared to the comparable prior period, but are 49% ahead of last year. The decline in the third quarter system sales resulted from the delay in closing new business in the third quarter, which Brian will discuss later.

Service, maintenance and support increased 25% for the quarter and 50% year to date when compared to the prior comparable period. And our hosting services increased more than 6% for both periods. Cost of system sales increased because of the higher hardware and third party software components included in both the quarter and year-to-date revenue mix. Our operating loss for the quarter declined 36% and 25% year to date and is in line with our operating plan for the first nine months.

Our SG&A 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 capabilities. Research and development expenses declined during the quarter because of increased capitalized development costs this quarter relating to our new products under current development. As a result of our increased sales activities, our current backlog increased to approximately $9.9 million with $2.9 million from our existing customers, $2.2 million from our resellers. In addition, signed multiyear agreements for our application hosting are approximately $4.8 million. Please note that our backlog does not include recurring maintenance revenues, which exceeded $5.1 million last year. We continue to monitor our expenses, cash balances and receivables carefully to ensure they are on plan vis-à-vis our revenues.

Now, I would like to turn the call over to Brian Patsy, who will discuss in greater detail some of the significant factors that affected the quarter and the prospects for the remainder of the year.

Thank you, Paul, and good morning. Today I will comment on our Q3 financial results and then discuss milestones achieved during our third quarter, our sales and marketing activities, including our pipeline of qualified sales leads, an update on our business development activities, a preliminary overview of our focus and plans for growth next year and, finally, guidance for the remainder of our 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 question-and-answer session.

Here are some of the Q3 financial highlights. As Paul discussed, our top-line revenue of $3.6 million for our third quarter was 14% ahead of Q3 revenues of our prior year, but below management's revenue expectations for the quarter. Our year-to-date revenue was $12 million or approximately 21% ahead of last year's nine month performance. The revenue shortfall was primarily due to delays in obtaining two large system sale agreements in the quarter, the first of which has subsequently closed. We anticipate the second large system sale to also close in Q4 along with other anticipated additional Q4 system sales.

As Paul mentioned, we have now achieved eight straight quarters of revenue growth over the prior comparable quarter and our high margin system sales are $1.1 million or 49% ahead of last year. Our 21% year-to-date revenue growth, coupled with expense controls such as delaying certain headcount additions, resulted in actual expenses running below our budgeted expense plan. These factors led to our operating results being in line with management's expectations. I will provide additional guidance regarding the remainder of our year and discuss our goals for next year at the conclusion of my remarks.

Let me take a moment to discuss some noteworthy events that occurred during our third quarter. First of all, yesterday we announced an agreement completed in our third quarter relating to a major expansion of our remote hosting services at Children's Medical Center of Columbus. Children's Medical Center has utilized our remote hosting services on a relatively small scale since 2002. They recently made a commitment to implementing the Epic clinical information and solicited proposals for an enterprise document management and workflow system to integrate with their Epic system in addition to other applications.

Streamline Health was selected because of our capabilities in seamlessly integrating with Epic at other sites. Children's Medical Center will implement the following workflows -- completion workflow, coding workflow, release of information workflow, chart tracking workflow and registration signature capture -- in addition to expansion of our document centric repository, AccessANYware. As you may know, our remotely hosted services contracts generate recurring monthly revenues on a subscription basis. As we continue to grow our remote hosting revenues, we gain additional visibility regarding future revenues, which contribute approximately 65% to our margin contribution.

This month we also announced that Forbes Magazine named Streamline Health to its 2006 list of the 200 Best Small Companies, appearing in the October 30, 2006 issue with a ranking of 56. To qualify for this list, we had to demonstrate positive growth over the past five years, net profit margins greater than 5% and a share price of more than $5. We are honored to be included on such a select list.

And finally this month, we announced expansion of our corporate governance with the appointment of Andrew L. Turner ad a fifth board member. Mr. Turner provides knowledge of the healthcare information technology field, extensive experience in growing healthcare related companies and he sits on the board of several large healthcare companies such as Watson Pharmaceuticals and EnduraCare Therapy Management. We are honored that Mr. Turner joined our board and we believe he will be an invaluable resource to Streamline Health as we execute on our vision for continued growth, whether organically or through potential acquisitions.

Now, I'd like to discuss our sales, marketing and business development activity. Our pipeline of qualified sales leads continues to remain strong at levels similar to last quarter. Regarding our business development focus and activities, over the past quarter, we added another highly experienced business development employee to assist in developing additional strategic business partners while we continue to focus on expanding our existing relationship with GE Healthcare and other partners. Over the last nine months, we have added two new strategic partners -- Standard Register and Healthcare Resolution Services. Both should be instrumental in growing our recurring revenues in 2007 and beyond to our remote hosting services.

At this point, I'd like to expand further on the progress of our relationship with GE Healthcare. As you know, we are the enterprise document management and workflow solution for the GE Centricity Enterprise Group. We have a solid relationship with both GE's business development organization and their enterprise sales team. We were an active participant in the GE Centricity Enterprise Group's national users conference and we have a robust GE pipeline of qualified sales opportunities. Our business development organization is also working collaboratively with the GE Centricity Business Group, formerly the IDX Flowcast Group, to implement our integrated solutions at a large academic medical center which is a mutual customer.

That implementation, on schedule to be completed in January 2007, will mark a significant milestone for both organizations and an opportunity for Streamline Health to expand its distribution capabilities beyond the GE Centricity Enterprise Group. We believe that having the showcase account at this large academic medical center will enhance future sales opportunities and create another significant distribution channel through GE for our departmental solutions.

Another area of focus over the past several months has been the expansion of our remote hosting services through the GE channel. As a matter of clarification, our original agreement with IDX contemplated utilizing a remote hosting distribution model. However, IDX, which is now GE Healthcare, did not have remote hosting capabilities for their enterprise software. And therefore, all of our IDX and GE Healthcare deals to date have been perpetual software licenses installed in the healthcare organization's data center. Earlier this fall, GE Healthcare announced the availability of their remote hosting model for their GE Centricity Enterprise software. Accordingly, we have been very active in working with GE to jointly market our remote hosting capabilities for our enterprise document management and workflow solutions.

I am pleased to report that we just recently closed our first joint remote hosting deal, the details of which we hope to announce in the very near future. This first GE Streamline Health remote hosting customer will use Streamline Health's remote hosting facilities. However, in the future, our software may be delivered either from the GE hosting center or our own, depending on the specific circumstances. This important milestone is significant in several regards.

First of all, it allows our company to greatly expand our healthcare market reach for remote hosting services through the GE sales channel. Secondly, the enhanced distribution of our hosted software services and ensuing recurring revenue through our subscription service model will greatly improve our revenue visibility in the future. And finally, we believe that remote hosting provides significant growth opportunities as healthcare providers struggle to upgrade their technology in an environment of scarce capital, limited information technology resources and finally, severe cost pressures.

Now, I would like to finish my comments regarding our business development activities by discussing our recent activities with IBM. Recently, our respective marketing organizations launched a joint marketing program that will culminate in a web broadcast in December entitled, An Enterprise Approach to Document Management, in which one of our showcase accounts, Parkview Health, will be featured. The market response has exceeded our expectations with numerous customers and potential prospects planning to participate.

At this point, I would like to comment briefly on our progress toward one of our strategic initiatives -- our integration efforts with major clinical, billing and administrative information systems. Integration of our solutions with third part information systems is a key element of our growth strategy and an essential building block toward our goal of entering the portal connectivity marketplace. As you would expect, we are dedicating numerous resources toward our integration efforts with GE Healthcare. We will continue to focus on further integration to GE Healthcare solutions, as GE is our largest and most significant strategic business partner.

Bill Geers will elaborate on our integration efforts with GE Healthcare and others during his remarks. Let me conclude by providing some guidance regarding our expectations for the remainder of our fiscal year. As provided in previous earnings calls, we anticipate approximately 20% to 25% revenue growth this year. Upon the expected signing of the large Q4 systems sale mentioned earlier, along with other anticipated sales, we are still on track for that accomplishment. As I have commented on previous occasions, we traditionally book approximately 60% of our annual revenues in the second half of our fiscal year.

Two primary factors contributed to this trend. One, our strategic distribution partner, GE Healthcare, traditionally books approximately 40% of their revenue in the last quarter of our fiscal year. And two, software sales organizations generally book a high percentage of their software revenue in their last quarter due to revenue growth achievement incentives inherent in most sales compensation plans. Accordingly, last year we booked approximately 58% of our revenue in our second half and approximately 38% of our revenue in our last quarter. We anticipate similar revenue patterns again this year. As a result, we expect record Q4 revenues and we believe that we will be in light with our revenue and operating income expectations for the entire year.

In our next earnings call to discuss our year-end results, I will provide details regarding our business plan and guidance for fiscal year 2007. Our goal is to continue our organic growth in the range similar to the past two years in terms of revenue.

This concludes my formal remarks. I would like to turn the call over now 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 results, headcount and, finally, high profile R&D efforts. As was previously mentioned, despite the delay in the closing of two large system sales, our operating results for the third quarter of this fiscal year improved by more than $160,000 over the prior comparable period. In addition, it is important to note that these results were in line with our internal plan, a plan which called for additional investments in the Streamline Health 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.

With respect to headcount, in anticipation of the delay of the two large transactions from the third to fourth quarter, we deferred several budgeted new hires to minimize the impact of the Q3 revenue shortfall on our operating results. We will continue to monitor our expenses very closely and assuming favorable financial conditions, we'll proceed with the hiring of the budgeted headcount sometime during our fourth quarter. So, on a year-to-date basis, we anticipate an overall headcount increase in the range of 12% to 15%, which is consistent with the guidance we provided during our March of 2006 conference call.

With respect to our R&D efforts, there are three topics that I would like to address today. To begin with, as I mentioned in the last conference call, we have successfully moved the next generation of our product portfolio to beta testing. This is a major relief that introduces a variety of enhancements across our entire product line, including extended interoperability, which will facilitate our efforts to integrate with additional clinical, financial and administrative systems, thereby strengthening our enterprise-wide message. We had this release installed in two beta sites where the feedback that we have received thus far has been positive. Prior to their go live, which is planned for early in the second quarter of 2007, both sites will have our IBM portal support.

My second R&D update focuses on our latest workflow solutions. We are pleased that we have two new workflows, referral order and contract management, which will be installed on our beta sites by our next conference call. In addition, our cash management workflow is also under development. This workflow streamlines the cash posting, research and follow-up functions within the business office by providing a mechanism for the scanning and indexing of paper explanation of benefits documents.

My final R&D update addresses our integration efforts with clinical, administrative and financial applications from other vendors. There is no component of the Streamline Health vision that has generated more interest among our clients and prospects throughout 2006 than this initiative. We have responded to this growing interest by allocating additional development resources to our growing list of integration projects. The following facts are provided to more effectively convey the significance of the momentum that we have built in this area.

Thus far in 2006, we have successfully delivered on four integration projects including the initial phase of our seamless integration with GE Centricity Enterprise, which was formerly known as the IDX Carecast application. We have another six integration projects that are currently in beta testing, including the initial phase of our seamless integration with Epic -- with the Epic clinical care system, the initial phase of our seamless integration with GE Centricity business, which was formerly know as the IDX Flowcast application, and finally, Phase II of our integration with GE Centricity Enterprise. We expect most of these six projects to be in production by our next conference call.

We have another three integration projects under development, which we expect to be in beta testing by our next conference call, including the initial phase of our seamless integration with the Eclipsys clinical information system known as Sunrise Clinical Manager. And finally, as of today, we have an additional 10 integration efforts that are being considered as part of our 2007 product plan, including integration with a number of PeopleSoft and Lawson applications.

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 resources necessary to successfully implement our vision and deliver on our new and anticipated contracts. We also continue to monitor our expenses very closely to ensure we meet or exceed our operating plan. We anticipate that our investments and our infrastructure will continue to product industry-leading solutions and 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]

Our first question is from the line of Tom Carpenter of Hilliard Lyons. Please proceed.

Good morning, Brian, Paul and Bill.

Good morning, Tom.

Can you give us some color on the direct sales force with the total number of reps and break that down by the number of reps focusing on new accounts versus those servicing existing accounts and maybe trying to sell add-ons?

Sure. This is Brian. I'll comment on that. First of all, we have two, what we call national account executives. These are the hunters -- one covering the East Coast, one covering the West Coast, dividing approximately along the Mississippi. Just as an aside, we did anticipate hiring a third account executive in Q3 and we've deferred that to Q4. So, those are the hunters that go after the large new system sales. They also support our channels in terms of opportunities through GE and others.

We also have some specialists -- one, in particular, that focuses on our patient financial services solutions. So, she happens to be a subject matter expert that kind of layers on top of the other account executives in terms of jointly selling into our entire marketplace. Then we have some solution specialists that go out and work with our sales team in terms of preparation and demonstration. I think we have two of those. And finally, we have three client managers that focus on add-on opportunities within our install base. We also have a technical person who does configuration and works with our sales team in terms of design and pricing for our solutions.

Okay. Excellent. You said the pipeline was roughly the same as last quarter, which was similar, I think, to what it was in the prior quarter. Going into what should be your all seasonally strongest quarter, I would have expected it maybe to go up.

Well, it was -- it's been holding steady all year. I think there's a couple of factors. First of all, the pipeline, and in particular with GE Healthcare, has remained steady and when we expect to do is deliver on many of those contracts in Q4. So, that didn't necessarily grow. Although, actually the numbers I have here -- the GE segment has grown slightly. What we really need to do is really take advantage of some of the joint marketing programs that we're going to be implementing with IBM and GE Healthcare to start to grow that pipeline again as well as adding additional account executives. So, I think that's how we're going to be able to grow that next year.

Okay. Excellent. This was a light revenue quarter, due to some deal slippage. Would you characterize the overall healthcare IT environment as slow or is it -- are you seeing a difference at big or small hospitals or is there -- or is it just hospital specific?

Well, I'm not sure I can comment on the market in general. I think that the demand for document management and document workflow continues to be good and we're seeing a lot of request for proposal. I think the phenomena that we experienced in Q3 of this year, which was similar to Q3 of last year and Q3 the year before, is a general slowdown in decision making due to the summer months. And so, I think we're suffering from that. But keep in mind that a large system sale that delays a couple of weeks into the following quarter can have a significant impact on our results for that quarter and I think that's what happened this particular quarter. So we, accordingly, expect another record Q4 in terms of revenue.

Sure. So, it sounds like you had strong visibility for Q4 if you close the large deal that slipped and some other deals with GE.

That is correct. Another factor that I didn't mention in my prepared comments is that the deal that did close, which we hope to announce in the near future -- I don't want to get into too much detail on that -- was originally expected to be a locally installed perpetual license. And at the end of that negotiation, the customer decided to go with the recurring revenue model or the hosted model. So, that's good news in terms of the visibility of our future revenues. But it would certainly impact what we can book in any particular quarter. So, the deal that did close was the hosted deal that was originally anticipated to be a purchase deal.

Okay. Great. Will we see recurring ASP revenue from T. J. Samson, which is the Glasgow, Kentucky hospital that you won in the second quarter? Will we see the recurring revenue from that in the fourth quarter of this year or the first quarter of '07?

You might have to ask Bill what's the timing of that implementation. Because we start seeing revenues -- do you recall, Bill, when -- I think that's underway, but I'm not sure where we are in terms of recognizing revenue, simply because it has to be in test, ready for production before we can recognize the revenue on the software.

Yes, realistically, Tom, look for that in Q1.

Okay. Great. Switching gears to some of the newer initiatives. In the past, you've talked about starting a true consulting services group this year, Brian. Can you update us on the status of this initiative and your revenue expectations for '07?

Yes, we have that new line of business underway. We actually have made -- had several calls, if you will, with some of our install base and we've gotten some traction. We're very pleased with the results. We have two specific opportunities where we're in dialogue and will be hopefully getting involved in some consulting services yet in our fiscal year. Our goal originally was to get the business process management consulting group off the ground. We're still on track for that this year. And with a breakeven in terms of the revenues we generate, we'll cover our expenses this year. And we do anticipate to have margin contribution next year for that endeavor.

Okay. So, could this be a million dollar business in '07 or is it too early to tell?

I'd rather not comment on specific numbers as is our custom here, but we do anticipate margin contribution and revenue contribution next year.

Okay. And Bill and you both talked about the portal that you're working on with IBM. And I think, in the past, you mentioned that it's beta testing the second half of this year and you're actually going to do, I guess, some maybe launches in the second quarter if I heard correctly. Can you give us an idea of the feedback that you've received from existing customers and if you have any, I guess, wide leads out there as far as customers that would like to install it in '07?

Well, I'll comment on the sales prospects and I'll let Bill comment on the progress of that integration effort. First of all, we have wrapped in the IBM WebSphere portal integration into our release of our product line. And so, that effort is completed and it's in beta test now with a couple of customers. Regarding the future opportunities, that is a significant step for us. It's -- I want to clarify that our portal endeavors over the next several years involve several steps. The first step is to provide integration of our existing software within the IBM WebSphere portal technology architecture itself. And that step is completed, as Bill will elaborate. That technology is implemented within our software and in beta right now. So, that allows our software to basically interoperate in the WebSphere environment.

Our next step, which will start next year, is to start marketing our consulting services and that's why it's so important to have our business process management endeavor off the ground this year. That we'll go out and start marketing our portal solutions within the healthcare marketplace, primarily within our install base next year. And that expands our capabilities beyond integration just to our software, but allowing us to interoperate with other vendors applications, basically, to establish a dashboard that will allow a physician or administrator or even a patient to log into a portal and get a view of multiple sources of information from one dashboard. My goal -- or our goal next year is to get that endeavor off the ground and in a breakeven approach such that our revenues cover our expenses and then with margin contribution in 2008 as we establish that new line of business.

Did you have anything to add, Bill?

I think, really, Brian hit on the high points. As far as the feedback that we have received from this next generation product portfolio, again, has been very encouraging. Although, Tom, frankly, the way in which the testing has been prioritized, it's too early, really, to get feedback on the portal side of things. So, I'm sure that we'll have a lot more for you in the next call. That's all I really have to add.

Okay. And two final questions and I'll jump back in the queue. You've got a lot of integration projects going on and I assume you're talking at some of the companies where you're working on the -- integrating their IT systems or their software with your own, is that a potential for distribution relationships with some of these companies, maybe a Epic, Eclipsys, Dairyland, HMS?

Well, I'll take that. This is Brian. First of all, I'd rather not comment on specific opportunities with potential distribution partners. But in general, we have, really, two approaches to our integration, which, as we've commented on several times is a key component of our growth strategy, and that is interoperability. Clearly, our largest distribution partner, which is GE Healthcare, that is an essential element of our growth strategy so that we can start -- or have an opportunity to market beyond the Centricity Enterprise group into some of the other groups. And we're well underway in terms of integration to the other -- another division of GE Healthcare. So, that's first and foremost.

Secondly, we're very active in integrating to the Eclipsys Sunrise Clinical Manager, as Bill commented, as well as Epic. And although Epic has taken kind of a neutral approach to working with multiple vendors that provide document management and document workflow, we think it's essential and it's a strategic advantage for us to have that integration capability. And indeed, we have closed several large system sales as a result of our capabilities of integrating in the Epic environment. And then, with Sunrise Clinical Manager, all I can say is that Eclipsys does have their own homegrown solution.

However, we believe there's significant market opportunity because of the integration that we will be implementing with Eclipsys Sunrise Clinical Manager for Streamline Health to focus on those opportunities in the Eclipsys install base. Beyond that, we've clearly had integration projects with other vendors, some of which I would rather not comment on, but, as Bill mentioned, next year, we do plan integrations with Lawson and PeopleSoft, so, again, that will create market opportunity for us simply because of the integration.

But I guess the point I was trying to make -- I can see how some of the HCIT companies might not like it when you're out there marketing your service to enhance their product. On the other hand, some of them that may see the value in the product and see how it enhances their solution, that they might have an interest in co-marketing the product if they can increase their sales.

Understood. And clearly, we would be hopeful that, at some point, some of the clinical, billing and administrative information system companies would see it that way as well. I'd rather not speculate at this early date. But to be candid, we've had a very cooperative relationship with both Epic and Eclipsys in terms of working with us collaboratively to do that integration. So, we're very pleased with that.

Okay. And one final question. I'm sure that you guys saw that 3M purchased SoftMed, who -- I know you guys have worked with 3M in the past. Can -- are you seeing an uptick in the M&A activity in the space and maybe talk about the impact it has on you guys and if you're looking to add any solutions, maybe, on the patient financial services side?

Well, first of all, I'm not qualified to comment on the M&A activity in the space. Certainly, I can comment, from our perspective, on the 3M SoftMed acquisition. And I'll say this that, relative to our relationship with 3M, candidly, in the initial stages, it did generate some sales leads. Remember, our relationship with them was simply a referral relationship, but also one where we have tightly integrated our coding workflow solution with their encoder and abstract product. So, there were some nice sales leads that came over the wall to us and we subsequently closed a couple of deals as a result. But over the last several quarters, the impact, in terms of qualified sales leads has been minimal. So, therefore, the impact of the acquisition of SoftMed, who is a competitor of ours, frankly, is minimal.

Another comment regarding that is that it's my understanding that 3M is highly focused on the health information management or medical records space and the acquisition of SoftMed, I will assume, will continue to focus on that space. Our approach is much more of an enterprise approach across multiple departments, including patient financial services and supply chain management and human resources. So, to that regard, I think that our vision of an enterprise approach will create a differentiation for us against 3M/SoftMed.

Okay. Great. Thank you.

Our next question is from the line of Alan Shore of ASA Financial Group.

Good morning, gentlemen.

Good morning, Alan.

Good morning.

I'll start with the easy questions. I notice on your balance sheet that you have no more long-term debt for this deferent portion. Is that correct?

Yes, we have $1 million of long-term debt, which has to be repaid by July of next year.

And I assume that, at that point, you have a line of credit that will be available to you for whatever you need for capital purposes, et cetera?

We are working on that.

Okay. The enhancements that you mentioned, as you make these enhancements to your systems, roll those out next year, your existing customer base -- will this generate additional revenue or is this something that you're giving on a gratis basis just as part of the service contract?

This is Brian. First of all, we are hopeful that, as we roll out new workflows off our assembly line, as well as new integration, that will create upselling opportunities within our install base. That's a part of our strategy, clearly. So, we're looking forward to that opportunity.

All right. And I guess, really, the other question I had is your new board member -- Andrew Turner -- can you kind of give us some, I guess, color is the best word on the value added that you think he may bring to the company, how that could shift the focus of the company or will it shift the focus of the company as far as growth is concerned, acquisitions. What do you expect his impact to be on a corporate level?

Well, first of all, adding a fifth board member, I think, is an important step to have an odd number in case there would be a tie. So, that's one obvious impact. Secondly, Mr. Turner has a wealth of experience in the healthcare IT space. I can't emphasize that enough. He's been there and done that. He's started some healthcare related information technology companies and taken them to be very large organizations through organic growth and through acquisition. So, I think that experience will add a lot of value to our board in terms of helping us expand our company in multiple ways.

And finally, I believe that he'll add a lot of value in the area of services. As you know, one of our strategic initiatives is to add a new line of business, which is business process management, which ultimately will grow into our opportunities in the portal marketplace, which we believe has a high percentage of consulting attached to it. And Mr. Turner, again, has started companies that were service oriented in the healthcare space. So, I think that will add a lot of value to our board as we move forward.

All right. And finally, I know -- I mean, it's pretty obvious that there's a strong variability, quarter by quarter. I mean, you even brought it up in your -- I think you probably bring it up every time in the conference call as far as fourth quarter being the biggest quarter followed by the third. How -- is there any way to mitigate that variability so that from an investor perspective we have a better handle on where the company is, say, in June as opposed to waiting until December or January?

And I appreciate your comments, Alan, and believe me, we would love to level out the burstiness, as I call it, in our revenue stream and make it less rear end loaded. A couple of ways we can mitigate that as we move forward and that's to grow our hosting services. I think it's very significant that -- this fall -- that GE Healthcare announced the capability of hosting services for the GE Enterprise group. As you know, as a small company with a limited number of sales resources, it has been challenging for us to grow the hosted model significantly with limited resources.

We believe our strategy going forward is to leverage our distribution partners. That's why we added Standard Register and HCRS because they will focus on the hosted revenue stream for us. But adding GE Healthcare to that opportunity is significant. So, we are hopeful that next year we can grow the hosting services and the resulting subscription recurring revenue significantly next year to help mitigate that.

Secondly, as we add new distribution partners, that will help leverage and disburse our revenue streams over multiple sources. And I think that will help. And thirdly, I'd like to grow our direct sales organization to go after deals that we're probably not getting to, particularly in the middle market. And I think all of those will help. But I still think that we'll probably continue to see Q4 as our largest quarter. I'd just like to spread it out a little more in terms of the other quarters.

All right. Thanks, guys.

[OPERATOR INSTRUCTIONS]

Our next question is from the line of [Mark Kale], private company analyst. Please proceed.

Good morning, gentlemen.

Good morning, Mark.

Good luck to you Buckeyes.

Go, Bucks.

Right. I was hoping to get some more meat on the GE discussion with respect to Centricity business. I know you've been in Virginia for the University of Virginia deal for awhile. Is that going to be a -- what type of products are you going to push there?

Well, let me talk about the University of Virginia and please understand that there are certain comments that I'm precluded from making simply because of some confidentiality agreements that we have in place with both GE and the University of Virginia. So, I'll speak to what I can speak to. The University of Virginia is a customer that we were fortunate to earn through our relationship with IDX and now GE Healthcare. We are the enterprise document management/document workflow provider at the University of Virginia.

The original arrangement was for us to be installed on an enterprise basis, primarily in the area of health information management and creating the document centric repository to complement what was formerly the Carecast product and now GE Centricity Enterprise. Coincidentally, the University of Virginia also has installed what was formerly the Flowcast product, which is now the GE Centricity Business Solution. And because we are the enterprise document management solution at the University of Virginia, they requested that both GE and Streamline Health collaborate to integrate our document management solution into the Flowcast and now GE Centricity Business environment. And that's what we've been talking about all along. And I think that's a significant step for us. I don't think it, I know it is a significant step for us because it allows us to open up new marketing opportunities in the GE Centricity Business Office marketplace.

I also need to caution that that group has their own homegrown document management solution. So, when I talk about market opportunities, I'm talking about Streamline Health direct sales force marketing opportunities to go into GE Centricity Business account and elaborate on our integration capabilities with that product as opposed to the GE Centricity Business Office sales rep. Although they do collaborate with us, we have to keep in mind they have other options including a homegrown solution.

Well, I'm assuming Virginia saw both solutions. They chose yours. So, that's going to tell the people at Centricity Business that ...

Well, I'd not -- rather not speculate on what certain customers are thinking. I will say, though, that with respect to our solutions being installed in the enterprise, that bodes well for us in terms of specific departmental solutions. Obviously, many CIOs see the strategic advantages of having one enterprise document management, document workflow solution across all departments.

Right.

And that's the card that we're going to play clearly.

Can you give us an idea of the size of the Centricity Business division relative to Centricity Enterprise?

Well, I can't specifically say. It's my best guess that that group, in terms of revenue, is larger, in terms of revenue, than the Centricity Enterprise group. I don't know what percentages, but my belief is that it is actually larger in terms of revenue contribution with GE Healthcare.

What type -- will you sell the same type of product that you do through the enterprise into the business solution?

Well, as I mentioned a few minutes ago, our approach is enterprise, so we're selling this enterprise document, workflow document management solution, but we also have departmental workflows and this is where ...

Right. Okay.

... we leverage the enterprise, but we have specific solutions for departments that integrate into our entire multi-departmental solutions.

Just out of curiosity, GE is a huge organization. Are there any other divisions besides Centricity Enterprise or business that you are looking at?

Yes, there are, but Centricity business group is the greater of the other opportunities, simply because of what I've just explained.

Okay. Here's a tough question for you. I know you've discussed the -- GE's hosting services, its new hosting services out of Chicago in the past. Hypothetical question -- if I were a GE salesperson, why would I sell Streamline's hosting product when GE, my own company, has its own hosting product in Chicago?

Well, it's a great question and I don't want to put myself in the head of a GE salesperson, first of all, but I think the answer is whatever the market requires. And there will be some circumstances where they may prefer our hosting center to the GE hosting center. We are totally neutral. Streamline Health is totally neutral to either approach. From a compensation point of view, we'd like to make it neutral to the consecutive for GE as well. So, that's our goal.

There is a comment I'd like to make. First of all, GE just announced those capabilities and therefore they are currently focused on establishing their market presence with their own enterprise solutions. So, once they have established a market presence for their enterprise solutions, that opens the door to other third party solutions such as ours. So, again, in this example, there may be a timing factor, but as we move forward, we want to make it totally neutral, both to the customer and to the account executive from a commission structure that they could sell either one.

It took you guys years to establish your presence. They're just announcing it. They could be years away also then.

Well, I'd rather not speculate on terms of their timing. But I think they're moving very aggressively into that market space. And we're thrilled -- we're absolutely thrilled because it solves one of our distribution challenges for our hosting model.

Are the hosting centers geared toward different products or the same?

Again, I'm not qualified speculate as to what their overall strategy is. I do know that they are currently focused on the GE Centricity Enterprise. But my presumption would be that that would include their entire product suite.

Right. Okay. Switching to the IBM business. You mentioned that you're going to be working with the IBM sales force in January if there was a webcast?

In December.

In December. I'm sorry. Is that going to be open to the public?

No, it's not. We used co-marketing dollars in our relationship with IBM and IBM is sponsoring this and they're doing a lot of the heavy lifting in terms of going out and soliciting participants. Those would be existing and potential new healthcare customers that would participate. I'm really not sure -- I don't believe it's open to the public.

Okay. Did the -- is the IBM purchase of FileNet affecting your partnership?

I don't believe it is. Let me elaborate a little further on why. First of all, a little history. Streamline Health supports the FineNet document management platform. We have our own, but we have a couple of customers that actually have our applications installed on top of the FileNet document management platform. So, that just needs to be said. We looked at that as an opportunity for IBM to actually promote their services organization. And one group of competitors to Streamline Health are what we call the document management or content management engine or tools companies, FileNet being one of them. But we really don't run into them that often because that's kind of a different market space where a large healthcare organization wants to build a solution rather than buy a solution off the shelf. We're in the category of solution off the shelf. So, rarely do we run into them. And so, I see the impact as being minimal.

Okay. What's driving this portal market? Is it the hospitals? What's behind it? Who's driving it?

Well, first of all, I think the industry consultant -- I think it's going to be an enormous market opportunity in the range of six billion or greater. I think what's driving it, frankly, is interoperability. So, the ability to provide access seamlessly to multiple vendors applications in a cohesive way. I mean, clearly, we vendors could integrate one product to another. It's very expensive to do so and as one version of a product changes, then you have to go back and make changes in terms of how you integrate with the other product. With the portal as a front end dashboard, it creates opportunities, assuming that you're consistent with a portal standard to interoperate with multiple vendors with a common look and feel, a common logon.

And also, open it up to access beyond just vendors applications, but to collaboration, to medical dictionaries, to online chat and e-mail and video chats, et cetera. So, I think it's an exciting opportunity and there's several ways to approach these portals. You could have a physician portal because today, as you may well know, physicians have to go in and log into multiple systems to get all the information they need to do their job. You could have administrative portals that log into multiple administrative systems to see a snapshot of what's going on in their healthcare organization. And then, you may have a patient portal where patients like to get in and log on and see what's going on in terms of their scheduling and their medical record. So, it's an exciting opportunity for us -- one that we're moving into with great excitement in stages, as I discussed earlier.

I understand there's different kinds of portals. What is Streamline going to go after? What type of portal?

Well, there are different kinds of portals. We're going to focus on niche opportunities where some of the major clinical information system companies haven't ventured. And because of our small size and the fact that we're entering -- we're going to try to find low barriers to entry in areas that are more hospital focused. There are some major players out there that have a physician portal. We're going to focus on some other opportunities, initially. If we can get some traction, get some size, then we may open it up to other opportunities as well.

Right. From Bill's comments earlier, you have two beta sites -- portal beta sites -- that hopefully will be finalized going into the alpha phase in the second quarter of next year. Am I correct in saying that you'll have two portal showcase clients, if all goes well?

Well, let me clarify, first of all, and I'll let Bill comment. The portal sites we have are AccessANYware sites with portal integration to our existing software. Bill?

Right. And just to be clear, what we are expecting from both of those sites is that they will actually be in production in our second quarter. Actually, early in our second quarter.

Will they be considered portal clients or -- I guess I'm a little confused on the semantics here.

Well, I mean, we are -- we're working with them in that particular area. I mean, we absolutely have had discussions with them about that. They're interested in looking at it in more detail. But quite frankly, they've not really been in a position to complete their analysis in that particular area. Okay? They'll absolutely have the functionality from us and we're going to do everything that we can to make sure that they take advantage of that.

Okay.

Let me just add one final clarification. They have the capability to interoperate with our software in a portal -- an IBM WebSphere portal environment. What we would hope to steer toward next year is to expand that beyond our applications to other third party applications. That's where we're swimming. That's where we're heading. That commitment has not yet been made to open it up beyond our applications. But that's where we'd like to be.

At this point, do you think is the IBM sales force going to be leading the effort in that sales area?

I think the IBM sales force will be collaborating with our sales force in that effort. And obviously, there are significant distribution channel opportunity for us.

Okay. Switching gears here. Standard Register -- why haven't they affected the pipeline yet?

Well, they are starting to affect the pipeline and we had one mutual customer. And I think what you've seen over the last several months is a ramp up in terms of training their sales force and getting the compensation plans in place. There's been a lot of activity behind the scenes between our two organizations. And frankly, I'd like to see us invest more time up front in getting the channel off to a very excellent start as opposed to rushing to market without all the pieces in place. I'm talking about compensation plans. I'm talking about training the mutual sales forces and talking to existing customers in getting a showcase mutual account into production. I think those are essential elements in having a successful channel. We've done all that, so I think you'll see the rewards from that in terms of our hosting revenues next year.

What's the status of the implementation of the mutual clients that you have in process now?

I believe it's underway. I'm not exactly sure, Bill.

It's in beta.

It's in beta?

Right.

Due in file form early next year?

Yes. In our next conference call, we -- by our next conference call, we would expect that particular client to be live in production.

Okay. Switching gears again. Healthcare resolution. Are you off to a good start there?

Yes, we are. We're excited about that, particularly in the government sector. You know we had a relationship prior with an organization that was an 8(a) firm and that didn't deliver on the opportunity we had hoped for. This one, I think we have -- we're much more optimistic. And again, this is recurring revenue through our hosted model.

Okay. I know Bill has mentioned client satisfaction in the past and you guys constantly use that word interoperability. Is that the number one positive response from clients when you go back to your surveys?

It's very important, but I would not go so far as to say that it is the number one factor driving client satisfaction with Streamline Health. I really think that that spans a number of areas. Clearly, product satisfaction scores are very high. We're very pleased, but our support organization continues to score very high marks. Our implementation services, our client management. So, at this particular point, I believe that our customers are satisfied with us because they really see the -- that the entire organization is performing well.

Yes, and I would also add that Bill has been very active in going and interviewing each of our existing customers on a frequent basis and we take those surveys very seriously. In fact, we tie the results to bonusing our employees. And I think there's two aspects of that survey. One is how are we doing with our existing products? And there's where I think you'll find, as Bill mentioned, a whole host of items that are of interest in terms of our response times, our product quality, et cetera. And then there's another bucket which is where are we going? Kind of where are we headed? And in that group, I think interoperability is number one on their list, followed closely by portal integration.

All right. The Columbus deal that you announced yesterday, when is that implementation scheduled for?

Okay. That will be in the first quarter, Mark.

Okay. A couple balance sheet questions. I'll give you the easiest one first. I saw the account receivables went from $4 million down to $2 million roughly and I was expecting cash to go up. Where -- I'm missing about $2 million. Where did the $2 million go that didn't go in with cash?

Well, if you've got the press release in front of you, it has the statement of cash flows in it.

I haven't looked at that.

Capitalized software was $1.3 million. The receivables, we paid off $1 million in our long-term debt.

I'm going from -- not this past quarter, though, you haven't.

No, that's for the nine months.

Right. I haven't looked at that statement. I'll look at it closer.

Okay.

The last one's a tough one. I've read note four in the 10-K regarding the income tax benefit and valuation allowance. Could you give me a layman's explanation of this valuation allowance and how it relates to the NOLs? I just don't get it.

Accounting 101, if I can, for the layman. Very quickly, you take the net operating loss and you say, okay, that's going to be applied against our pretax income. Take roughly 30% of that and that represents that asset that you can put on your balance sheet. Assuming that you can use all of the net operating loss in future years before it expires, you then say how much of an allowance against the full 30% do I have to lower it by, in a sense. So, what's on the balance sheet now is the anticipated benefits over the next several years and we look at that each quarter. But in the fourth quarter, when we have our better analysis of what the next fiscal year is going to be and the fiscal year after that, we adjust it. So, it represents an asset that isn't on the balance sheet -- that valuation allowance -- if we were to be able to use all the net operating loss.

So, this is purely a non-cash transaction?

Yes.

All right. Hypothetical question. If Streamline recorded net operating income of roughly $8.3 million, which is the valuation allowance back in the last 10-K, what happens going forward to that NOL?

The -- you're confusing the valuation allowance with the net operating loss. The net -- if we recorded $8 million of pretax income against the $29 million net operating loss carry forward, that's how we would not have any taxes to pay.

Right.

The valuation allowance is against the potential asset of the full NOL. So, 30% of $29 million or whatever it is. Then you say how much of that is reasonably probable that we will use in the foreseeable future. And we say that's the amount that's on the balance sheet. The difference between 30% of the $29 million is the allowance we have against that. So, there's basically an $8 million unrecorded asset until such time as we use it.

Kind of like a net present value of the NOL? Would that be a good analogy?

Maybe, yes. That's the closest that I can think of in laymen's terms.

All right. Now, that works for me then. All right. That takes care of me. Thank you.

We also have a question from the line of Jeremy Hellman of Thompson Davis.

Hi. Good morning, everyone. Thorough call -- a very thorough call so far, guys. I appreciate it.

Thank you.

One thing that I had that I think hasn't been covered is just talking about the deal that you closed this quarter that slipped out of last quarter, which was supposed to have been an install deal and then became a hosted deal. Just kind of looking at the GE business, how much, if any, do you see migration from deals that, in your mind, you had pegged to be install systems that may be migrating to hosted type deals?

I think that that phenomena will be rare. Normally, we know early on in the sales cycle which direction it's headed and our forecast that I have in front of me generally gets it right almost all the time. This was a bit of a surprise. And I'd rather not go into the details, but it was kind of a last minute change in terms of that approach. And frankly, it had to do with budgets and cash flow that caused that switch. And that's a typical expectation when you have tight budgets and tight cash flow and lack of capital resources. We just -- it just caught us by surprise from one quarter to the next.

Right. So, but, just generally speaking then, there really will be very little cannibalization, so to speak.

That's correct. Very little. This is probably a rare one-time occurrence that it flipped at such a late state in the sales cycle.

Okay. I think that's all for me. Thanks, everyone else, who asked questions ahead.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to return the call to Mr. Bridge for final remarks.

Thank you, everyone, for joining us and I wish to advise you that the year-end fiscal 2006 earnings release is currently scheduled for release on Wednesday, March the 28th, 2007. And the corresponding conference call is currently scheduled for Thursday, March the 29th, 2007 at 10:00 a.m., Eastern Time. Thank you and have a nice day.

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