Streamline Health Solutions Inc (STRM) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the Streamline Health Solutions Fourth Quarter and Fiscal Year 2009 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Joe Diaz. Please go ahead, sir.

Thank you, Ryan and thank all of you for joining us today to review the financial results of Streamline Health Solutions for the fourth quarter of fiscal year 2009, which ended on January 31, 2010. As Ryan, the conference call operator indicated, my name is Joe Diaz. I'm with Lytham Partners, we're the financial relations consulting firm for Streamline Health.

With us on the call representing the company today are Mr. Brian Patsy, President and Chief Executive Officer and Mr. Don Vick, Interim Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it off the company's website at StreamlineHealth.net or numerous financial websites on the internet.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements.

The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements. The forward-looking statements contained herein are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward looking statements included herein.

These risks and uncertainties include, but are not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, key strategic alliances with vendors that resell the company's products, the ability of the company to control costs, availability of products produced from third party vendors, the healthcare regulatory environment, healthcare information systems budgets.

Availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems, fluctuation in operating results and other risks detailed from time to time in the Streamline Health Solutions filings with the US Securities and Exchange Commission.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that said, let me turn the call over to Brian Patsy, President and Chief Executive Officer of Streamline Health Solutions. Brian?

Thank you, Joe, and good afternoon, everybody. For today's call, Don Vick, our Interim Chief Financial Officer will summarize our financial results. After Don's summary, I'll discuss our fourth quarter results and then we will conduct our usual question-and-answer session.

At this point, I would like to turn the call over to Don Vick for his financial summary. Don?

Thanks, Brian. I would like to highlight the more significant aspects of the financial results of our fourth quarter of our fiscal year ended January 31st, 2010. Revenues for the three months ended January 31st, 2010 were a record $6.3 million compared with $3.4 million in the comparable quarter of 2008. The increase in revenues was primarily a result of the $2.4 million increase in system sales when compared with the prior fourth quarter.

The system sales growth was due to the revenue recognition of $1.7 million relating to the general availability status and associated delivery of our newest generation software platform called accessANYware 5.0 in the fourth quarter. System sales in the recent fourth quarter also included revenues of approximately $700,000 from the recently announced sale to Moses Cone Health System.

Brian will go into more details about the customer contracts signed in the fourth quarter, including the Moses Cone contract just discussed and our recently announced contract with St. Vincent Medical Center, which is a member of Ascension Health. He will also provide some additional information regarding two contracts signed since year end. They're Children's National Medical Center and East Orange Hospital.

As indicated in prior conference calls, it should come as no surprise that revenues from application hosting services also continued their growth in the fourth quarter. These revenues were up by approximately $260,000 or 44% over the comparable fourth quarter of fiscal 2008. This revenue came from the hosting backlog reported in earlier quarters.

Revenues from services, maintenance and support also increased by nearly 10% were $241,000 over the comparable prior quarter. This strong revenue growth in the fourth quarter generated record revenues for the full fiscal year ended January 31st, 2010. Fiscal 2009 revenues increased 12% to $18.2 million, compared with $16.3 million reported for fiscal year 2008.

Photo operating expenses for fiscal year 2009 were $16.9 million, compared with $17.6 million in fiscal 2008. This expense reduction was primarily due to effective cost management measures initiated in the third quarter of fiscal 2008. Photo operating expense for the fourth quarter ended January 31st, 2010 and 2009 were $4.6 million and $3.5 million respectively, which is primarily due to the cumulative effect of phased in staff increases and other investments made throughout 2009.

Expense levels were at their low point in the fourth quarter of 2008 immediately after the implementation of the cost management measures previously discussed. Fourth quarter 2009 expenses also increased due to additional amortization of capitalized software development costs, the impact of increased bonus and commissions, combined with the reduction in eligible capitalized software development costs.

The cost of system sales for the fourth quarter ended January 31st, 2010 was $901,000 compared with $705,000 in the comparable prior period. The increase in the cost of sales is primarily the result of increased system sales over the comparable period, which includes the direct cost of related third party components. It is worth noting that the cost of system sales includes capitalized software amortization expense, which increases as new products go into general release. For the fourth quarter of 2009, this amortization increased by over $100,000 to approximately $600,000.

The costs of services, maintenance and support for the three months ended January 31st, 2010 was $1.3 million compared with $1.0 million in the prior period. This increase is due to increased professional services staffing costs and third party maintenance costs associated with supporting and increased customer base over the past two fiscal years and the start up costs of the business process management or BPM services initiatives.

The cost of application hosting services for the three months ended January 31st, 2010 was $438,000 compared with $324,000 in the prior period. The increase is primarily attributable to increased depreciation and third party license and maintenance fees as a result of the growing hosting center operations from the increased hosting customer base over the past two years.

Selling, general and administrative expenses for the three months ended January 31st, 2010 and 2009 were $1.5 million and $1.3 million respectively. This increase over the comparable prior period is primarily due to the timing of the significant cost cutting measures taken in the third quarter of 2008 and the subsequent phased and incremental investments in staff made during 2009. Additionally, discretionary bonuses were granted in the fourth quarter of fiscal 2009 based upon company results.

During the fourth quarter of fiscal 2009, research and development expenses increased approximately $316,000 to $486,000 when compared with the comparable prior quarter of fiscal 2008. This increase is primarily attributable to the final stage development efforts of the re-architecture and internationalization of the company's flagship product, accessANYware in preparation of its general release in the fourth quarter of 2009.

The company capitalized approximately $789,000 and $1.52 million of product research and development costs in the fourth quarter of fiscal 2009 and 2008 respectively. As such, some of the expense increase shown in research and development expense was offset with reduced capitalized software development costs, based upon the status for the various productions under development.

As a result of revenue and expense items noted above, previously discussed, the operating profit for the fourth quarter of fiscal 2009 was $1.6 million compared to an operating loss of $132,000 in the fourth quarter of fiscal 2008. The operating income for full fiscal 2009 was $1.4 million compared with an operating loss of $1.3 million for the full fiscal 2008. This represents a significant improvement of approximately $2.7 million over the comparable prior period. That income for the quarter was $1.6 million or $0.17 per share, compared to a net loss of $146,000 or $0.02 per share in the fourth quarter of 2008.

Fiscal 2009 net income improved by $2.7 million to a profit of $1.3 million or $0.14 per share, compared to a net loss of $1.4 million or $0.15 per share for fiscal 2008. Total backlog at the end of the quarter was $19.9 million compared with $26.2 million backlog of a year ago. The bulk of our backlog continues to come from hosting services contracts versus software licensing sales.

The recent growth in hosting revenues was primarily generated out of previously reported backlog. As discussed in our last conference call, we paid down $1 million on our line of credit from excess cash generated during the fourth quarter. Our cash at January 31st, 2010 was approximately $1 million with $900,000 drawn under our line of credit.

Our cash cycles are still very much dependent upon the seasonal patterns of prepaid annual maintenance billing to our clients. We are currently evaluating all of our longer term funding options, both debt and equity to supplement our current AR baseline of credit. We continue to monitor our expenses, cash balances and receivables carefully to insure they are on plan.

That concludes my review of the numbers for the quarter. Let me now turn the call back to Brian Patsy. Brian?

Thank you, Don. This afternoon, I would like to briefly discuss the following four topics -- an update on our sales implementation and product development activities over the past quarter, some general comments and observations about our recently ended fiscal year, a discussion of our progress and the implications of our strategic shift to the software as a service or hosted delivery model, and finally, I'll provide some preliminary guidance for fiscal year 2010. After my remarks, we will conduct our usual question-and-answer session.

Let me start by reviewing our sales implementation and product development activities over the past quarter. Regarding sales, we signed four new customer contracts since our last earnings call, two of which were signed in Q4 and two that were signed so far in our Q1. Three of the four new contracts were hosted, which is consistent with our focus on hosted delivery model.

In Q4, we signed a very large systems sale with Moses Cone Healthcare System in Greensboro, North Carolina through our partnership with GE Healthcare. This was a licensed based contract valued at well over $1 million. Implementation of our enterprise workflow solutions at Moses Cone is well underway with go live planned for the third quarter of 2010.

Also in Q4, we signed a significant new hosting contract with St. Vincent's Medical Center in Bridgeport, Connecticut. St. Vincent's is a part of Ascension Health, one of the largest not-for-profit hospital organizations in the country, comprising 38 hospitals, covering 500 locations in 19 states and the District of Columbia.

The contract calls for implementation of our contractor management workflow solution. St. Vincent's use of our solution will insure compliance with government regulations regarding management of their vendor contracts and their contract approval process. This contract is significant because it is a part of a trial program that provides an opportunity for Streamline Health to expand its business process optimization solution across all of Ascension Health.

Early in Q1 of our fiscal year 2010, we signed another important hosting contract with Children's National Medical Center in Washington DC. This contract is strategically important because we have partnered with Children's National to implement our first enterprise audit compliance solution utilizing our workflow tools and methodologies, but our solution will support Children's National in audits required for all pediatric hospitals, including those by third party payers and the federal and state government agencies.

We were in the -- we were the only compliance solution that had the flexibility to meet the requirements for these three separate state Medicaid audit compliance needs. We believe that our enterprise compliance solution will be one of the highest growth areas as the federal government and local state governments focus on Medicare, Medicaid, and third party payer reimbursement accuracy, fraud or abuse. The Obama administration recently passed Patient Protection and Affordable Care Act includes key measures to insure audit compliance to avoid reimbursement, fraud and abuse.

And finally, earlier this morning, we announced the signing of another hosted contract with an approximate value of $900,000 with East Orange Medical Center in New Jersey through our relationship with GE Healthcare. This is an important win for both Streamline Health and GE Healthcare as it represents the growing trend for both companies to provide their solution on a hosted basis over a multiyear initial contract period.

Regarding our implementation and development activities, I'm very pleased to report that during Q4, our fifth generation architectural platform accessANYware 5.0 was successfully installed and is in full production at the University of Montreal Health Centers in Montreal, Canada.

This milestone is the culmination of an 18-month and $11 million R&D effort to re-architect our entire software platform to an advanced service oriented architecture that provides many strategic benefits to our customers as well as to the company, including an open architecture that allows to more easily interoperate with any third party healthcare application, advanced integrated workflow technology, single sign on for multiple applications, multi-language and multi time zone capability, and finally build in trouble shooting diagnostics.

Our new accessANYware 5.0 solution is now supporting a master patient index of over 4 million patients across multiple facilities in Canada. As implementation continues, it is anticipated that our solution will be installed in 30 facilities across the Montreal region.

Now, let me take a moment on our overall performance in fiscal year 2009. First of all, it is important to understand that most of our new deals were hosting contracts that deliver recurring revenue, typically over a five-year initial contract period. As a result, our positive momentum and the total contract value for these new contracts or bookings were not reflected in our financial results.

That is because we can only recognize the subscription fees from these hosting contracts after our system is installed, which typically takes approximately six months and our monthly subscription fees are subsequently billed. However, our positive momentum is exemplified in our year-over-year comparisons that Don highlighted earlier.

Briefly, I would like to reiterate key highlights regarding our progress and our momentum. We enjoyed record revenues of $18.2 million, a 12% increase over the prior fiscal year and a profit of $1.6 million in Q4. We increased our systems software sales by 13% over the prior fiscal year. Application hosting revenues were up 44% over the prior comparable quarter. Services, maintenance and support increased by 10% over the prior comparable quarter and we had an annual operating income of $1.4 million, which was a $2.7 million operating income improvement over last year.

At this point, I'd like to discuss our progress and the implications of our strategic shift to the hosted deliver recurring revenue model. As has been mentioned in prior earnings calls, we are experiencing a fundamental market shift to the software as a service or hosted delivery model. While our contracts were predominantly license based in fiscal year 2007 and earlier, in 2008 and again in 2009, approximately 75% to 80% of our new contracts were hosted. We anticipate that this trend will continue in 2010 and beyond and we have built our operating plans and budgets around these expectations.

The financial ramifications to the shift to a hosted delivery model in the short term, revenues and operating profits will be constrained as expenses are incurred upfront and revenues are elongated. However, when considering an extended five-year or greater performance horizon, both revenues and profits accelerate in the hosted mile and we believe the value of the company and accordingly shareholder value will be maximized under the hosted delivery approach.

The trade off in focusing on the hosted delivery model is giving up short term revenue recognition in return for achieving long term revenue visibility, leading to sustained predictable and accelerated growth. An extremely important fact to consider is that since we began offering hosted contracts in 1998, our percentage of renewals after the initial contract period is 100%. In fact, our renewal percentages after multiple renewal periods to date is 90%.

Clearly, we believe that our hosted delivery model focus provides a distinct long term advantage to our shareholders for the following reasons. It provides much greater visibility into our future revenue streams and operating income. It provides greater protection from economic downturns that could negatively impact our financial stability.

We believe it creates higher market valuations as a result of the great visibility for future revenue streams. It offers a strategic advantage in the competitive marketplace due to faster implementation and lower capital requirements and finally, our renewal track record indicates that we will retain customers after the initial contract term and therefore, enjoy the equivalent of an additional new systems sale once renewed.

Let me conclude my remarks by setting expectations for our fiscal year 2010. First of all, because of our focus on the hosted delivery model, we believe it is important for our true growth to be evaluated based on two criteria. One, reported P&L revenue, and two, net new contract values or bookings.

Our expectation for reported P&L revenue growth in 2010 is in the 5% to 8% range. Our expectation for booking growth from new contracts is in the 25% to 30% range, or $5 million to $6 million, including professional services revenue. In other words, we believe the measure of our success in growing our business is a function of both reported recognized revenue and new bookings as a result of new hosted contracts. Our true growth should be evaluated on the sum of both, which provides the total revenue impact of our new contracts.

For future earnings calls, we will report both so that investors can get a true sense of our progress. We will also report on hosting contract renewals once the initial terms expire. Given these parameters, I'll now provide some guidance regarding management's expectation for 2010 based on our operating plans which anticipates continued growth in hosting services.

Our expected recurring hosting revenues in 2010 for current signed contracts, factoring in the anticipated implementation timing during the year should be in the range of $3.5 million. Recurring maintenance services revenue should be in the $8 million range, therefore our anticipated total recurring revenue exclusive of new contracts should be in the $11.5 million range.

Professional services, including associated recoverable expenses is anticipated to be in the $4 million to $5 million, contingent on the timing of system implementations and potential project delays. As a result, our expected total revenue based on existing signed contracts is anticipated to be in the $17 million range.

On the operating expense side, given the current three-year estimated life for amortization purposes, we anticipate approximately $1.4 million of incremental software amortization expense due to the general availability status of our accessANYware 5.0 solution. This additional software amortization expense burden will have a negative impact on anticipated earnings in fiscal year 2010.

Given our shift towards the longer term hosting model, we are considering extending the estimated life of our capitalized software assets to more closely match the longer term of these new hosting contracts. As I mentioned, we amortized these assets over a three-year period. A typical hosting contact is between five and seven years.

Total operating expense for the year are expected to be in the $20 million range, including the additional burden from the capitalized software amortization just described. The increase is mostly for additional sales and implementation resources as well as the software amortization expense. Our anticipated total revenue in 2010 is expected to be in the $19 million to $20 million range, including anticipated new hosting contracts that have a nominal impact on 2010 revenues and earnings, but are anticipated to provide significant contribution to backlog in the $5 million to $6 million range, including professional services revenue.

In terms of hosting transactions, over the next year, we expect to expand our hosting customer base by approximately 10 net new hosting contracts at an average total hosting contract value in the $400,000 range, exclusive of one time implementation services and third party component revenue. The equivalent value of these 10 new contracts over the life of the contracts is expected to be about $4 million. And finally, we anticipate license based revenue in the $2 million to $3 million range, primarily from our installed base of licensed customers and Canadian transactions.

This concludes my formal remarks. I would like to turn the call over to Joe for the question-and-answer session.

Thanks, Brian. Ryan, if you would give instructions?

We will now begin the question-and-answer session. (Operator Instructions).

And our first question comes from Tom Carpenter of Hilliard Lyons.

Good afternoon, Brian and Don, how are you?

Good, how are you?

Hi, Tom.

I'm doing well. Congratulations on the solid results and hope to see it continue in 2010.

Thank you.

Thanks.

Brian, I want to make sure I heard you correctly, when you were talking about operating expenses, I may have heard you say $20 million. I'm sure that's not right, on 2010?

Well, that is correct. We're -- first of all, we have the additional amortization expense burden of approximately $1.4 million which was greater than what we endured last year, so we're starting with an additional expense of $1.4 million. Plus, we're investing significantly in sales and marketing this year to kind of expand our reach in focusing on hosted solutions and primarily departmental solutions. So, we're spending quite a bit more money in sales and marketing and marketing programs this year.

Okay, you guy -- okay, I think I understand what the discrepancy is. You guys include stuff in operating expenses other people might include as cost of sales --

Right --

-- that's where the confusion is.

Yes.

Our operating expenses include cost of sales, Tom.

All right, okay. That makes sense. And Don, I'm glad you chimed in because I have some questions for you.

All right.

I want to know if there's just a one quarter phenomenon here, but it looks like ASP revenue actually declined quarter-over-quarter. You had a nice -- very nice increase year-over-year, but quarter-over-quarter, it fell from 930 to 856 was --

Yes, and that was kind of a one time thing. In the third quarter, I don't know if you remember us discussing but one of the things that happened in the third quarter, we -- for Catholic Healthcare West, we had some revenues that we -- basically the contract had acceptance type criteria. We had to defer those and they were deferred for more than a quarter before we could revenue those.

So, in the third quarter, it had some catch up revenue if you will just because that third quarter is when the acceptance criteria was met. And as a result of that, the third quarter revenues actually had more than three months worth of revenue relating to the hosting fee. So, now when you come to fourth quarter, we're back to a more than normal run rate.

Okay, and that also explains the margin decrease for that area. The gross margin?

Yes, that's right.

Can you help me understand the services maintenance and support gross margins in the fourth quarter of '08 were very robust, 60% and the third quarter of '09, 56.2%, and then in the fourth quarter of this year, 50.7%. That's a pretty big drop both year-over-year and quarter-over-quarter.

Yes, a lot of that on our -- on the professional services side of the house, to a certain degree it's almost -- it can be like a purchase contract, meaning that it can be lumpy from the perspective of our revenue recognition on those are dependent on customer billing points and customer milestones.

And acceptance, too.

And acceptance. So, what can happen from quarter to quarter there is we can get some of that lumpiness in terms of we either hit a milestone or didn't and that can cause the margins to shrink or expand. We did have some new hires during the year in the professional services group just in anticipation of future growth, so that's some of what you're seeing is there was some expense increases there, too.

What do you see -- just because it was so variable over the past year, what do you see as the blended rate in '010 in that area?

Take a look at it, let's see. Pardon my -- second while I pull the number here. Yes, if we -- so, we basically -- we're looking at a blended margin of right around -- looks like right around 40% or so, 35%, 40%, somewhere around there.

You're not talking about services, you're talking about overall?

No, that was services. Is that what you were asking me? Maybe I misunderstood your question.

Yes. So, the way I would calculate gross margin you guys, and services, maintenance and support.

Okay, if you're looking -- if you're looking at that level, then we are actually going to be at down here. Yes.

Should be somewhere mid 50s.

We look like -- yes, we look like we're right. It actually looks -- on the forecast that I'm looking at right now, we look like we're just under 50.

On services, maintenance and support?

Yes.

Okay, I'll talk to you guys about that post call, just to make sure that we're using --

Yes, we've -- make sure --

-- same numbers.

-- we're comparing the same line items there.

Right, right. Two numbers and I'll jump back into queue. Brian, it looks like GE is starting to produce again in the last two quarters with Moses Cone and the new deal you guys announced today. I think they revamped their software. Can you talk about that relationship and GE's ability to produce? Are they going to produce deals on a quarterly basis, is there going to be more of a seasonal factor like it was a couple of years ago?

We see a definite uptick in GE activity, no question it started about two quarters ago and Moses Cone of course was a large license deal, but candidly, we see a lot more what I would describe as cadence with GE in the mid market to the hospitals that are more in the community hospital, 200, 400 bed range and they have introduced their new centricity enterprise solution.

And as you all know, in the marketplace over the last several years, GE has not had a lot of activity and met new deals. They were selling a lot back into their installed base, but with the new platform, they're getting a lot more traction, sales traction for new deals and what's really exciting is that they're focusing on hosted as well. And they've had the hosted -- the hosting center for some time, but it really was an underutilized asset.

What we're seeing and the reason for the uptick in sales activity with GE is they're offering GE capital financing and with an ASP approach where they spread the payments out over seven years and that's becoming very attractive to the C-suite decision makers. And we're going along for the ride, of course, so, we do see and we do anticipate more deals this year than we did in past years.

Sure. One of the frequent topics of conversation on this call is sales and how do you get in front of more people. I think you're addressing that you said with more sales people. One of the things a lot of us -- a lot of investors would like to see is where you leverage some of the existing contracts you have where you've gotten in for maybe one to three hospitals, like a Catholic Healthcare West or an Ascension.

And with more healthcare dollars available because of the stimulus bill, hopefully some of the other money that they might have used will flow to companies like yourself. Can you talk about your plans to sell into the installed base like CHW and Ascension over the next two or three years with more funding out there for everybody?

You just read our strategic sales plan for this year. Obviously we're investing quite a bit more in sales and marketing and marketing programs to get reach for departmental workflow sales. But the low hanging fruit is within our installed base. We have a pretty prestigious installed base and frankly over the past several years, it's been underutilized in terms of software growth.

So, one of my key strategies this year is to personally get involved and visit all of our existing customers and get them jump started. We want to introduce them to our new architecture and the benefits of it. We want to introduce them to our new and exciting portfolio of work -- departmental workflow solutions and focus on selling back into our installed base. So, to me that is a key element of our success this year is getting our existing customers to get to know and enjoy our new solutions.

Okay, great. Thank you, I'll jump back into queue.

Actually, Tom, I'll circle back to you. Your question on the margins, I had a chance to merge a couple numbers together here that I had in front of me. The yard blended margin, encompassing all of the aspects of the services, including maintenance and support is -- it's about 54%. The numbers I was quoting to you before focused more on just the straight service component as opposed to including the real high level margins from our maintenance screen.

I like that number a lot better than the 35%. Okay, thank you, Don.

Sure.

Our next question comes from Dan Veru of Palisade Capital Management.

Hi, Brian.

Hi, Dan.

I saw the news regarding your head of sales and I also saw that you'll be assuming a lot of those responsibilities. What -- I'm assuming that the customer wants -- that there's more demand to see you as these big decisions are made by hospitals, but as you look to leverage your own time effectively, what caliber level of folks are you looking to bring onboard? How many? Where are you in the process of boosting up your sales force and what are you seeing out there that's giving you the confidence to want to invest heavily in sales and marketing relative to the size of your company?

Very important points that you're making and let me first start by saying for our size company and for the size of the transactions, large ticket items, it is a fact that our customers and our prospects expect the CEO to be involved in the process. We do what is called a vision lock where I visit with them personally, I get to know them so that they can pick up the phone and talk to me and give them a level of comfort in our ability to deliver. And we also talk about their strategic needs and plans and our ability to help them solve some of their vexing problems. So, I am involved in large ticket item sales anyway, always have been.

Having said that, I am going to get more personally involved in sales transactions from a leadership role and the reason I can do that is one, we have hired just an incredibly talented and seasoned group of sales professionals, so much so that we have elevated them to regional vice president of sales status. We have four of those. They cover -- basically the country is divided into four parts. They are comfortable at the C-Suite, they are comfortable being in a consultative sale. And so, we basically flattened the organization where I'm going to take over the leadership of sales and really heavily rely on them to do a lot of the heavy lifting.

So, we have four regional vice presidents of sales, we have one inside sales person, we have one marketing communication person, we just hired a new person that's called a sales analyst and that person's job is to help us generate leads and really reach out to the marketplace and look for where the activity is and really qualify high probability leads for our sales team. So, that's a new position. We have one demo specialist and we're in the process of hiring a second one because of the demand that we need. We also have in the budget for two more sales professionals and those will be hired over the next couple of quarters.

So, we're really building a very strong team here and that doesn't count the investments we're going to make with third parties to help us drive some marketing programs, some webinars and seminars, some speaking engagements and getting published. So, we're really ramping up. What you've seen over the last two years was a ramp up in R&D to the tune of $11 million. Now what we're doing, now that we've successfully completed our new generation software, we're shifting that investment over to sales and marketing to extend our reach.

How long -- I mean how long do you think this is going to take, I mean getting -- bringing new sales staff on board and training them can be very disruptive. Can you kind of elaborate on where you are in that process and --?

Well, we think for the remainder of this year, our four regional vice presidents are going to be enough to cover the market. What we need to increase is really the sales support staff to keep them out selling strategically and have the tactical stuff handled by our sales support staff so the investments we're making in additional bodies are for sales support and we're going out and reaching out the industry so that the ramp up time is minimal.

So, we have some very aggressive plans. I want my sales professionals to be very busy. So, I think we have some bandwidth there and they have the capacity to handle more leads than they're getting today. So, I think we'll be very comfortable in terms of getting these people up to speed in a hurry.

Then, switching over to the operations of the company or the product offering. How large of a company, once you stated this, do you believe Streamline can support without a major rewrite of the code, so to speak?

Well --

I guess I'm asking how much operating leverage do you have, think you could be twice, three times the size that you are now or some number in between there without either rolling out additional products or an acquisition?

Well, that's an interesting question that I really hadn't thought about. I'm not sure that I can link the new architecture to the size of the company as much as I can to how long that new architecture will sustain us. And the answer is probably about five years, possibly more and the reason I say that is it's probably 10 years since we refreshed our current -- our old architecture and that was an inordinate long period of time. So, if you use your imagination in terms of growth expectations for the company, I think the new architecture could carry us at least five years, maybe more.

And the reason I say that is it is truly -- and I know you hear this as sometimes a trite statement, but it is truly state of the art. It is something that's called a service oriented architecture and it basically is containerized or plug and play and each object or application has what we describe as a harness around it so that when we build product, we can plug and play with our existing objects such as auditing, printing, viewing, reporting, all those things now are plug and play, where in the old architecture they were kind of hardwired.

What that means in translation and layman's terms is speed to market. When we build a new application, it plugs into our back end and it's ready to go once we test it and so, we're going to be very flexible and I think that's going to be our advantage in the market is speed. And that's why we're focusing on these departmental workload solutions, because we can get them out faster, quicker, better and grab some territory before our competitors can react.

Now, can they build these solutions? Absolutely, it'll just take them longer because they don't have the benefits of a service oriented architecture. So, we ought to take advantage of that speed and that's why we're investing heavily in reach and sales and marketing this year.

Okay. And then, I had -- lastly and -- what gives you the confidence based on the current environment and obviously healthcare reform has to be something that you talk about and think about or at least get some feedback from. What is happening with your specific customer? Others have had comments about finally moving in a more concerted pace to invest in IT, but what are your customers saying -- clearly obviously, GE sort of taking up and starting to close more deals is clearly a very positive sign as well for the company.

Yes, so well goes back to the ARRA act that was passed last year which provided for funding for hospitals and physician practices to implement an electronic medical records sooner rather than later. And the way that act worked was there were certain funds, several million dollars in the case of a hospital that were provided by the federal government on the condition that they achieved what they describe as meaningful use of an electronic medical record in a very short period of time, within a couple of years.

In fact, as time goes on, the amount that the federal government contributes goes down. So, there's -- they're basically incenting them to do it sooner rather than later. The net effect of that in the market has to wake up the purchasing organization for these hospitals to get engaged in evaluation and selection of electronic medical record solution, such as that offered by GE. So, what does that mean to Streamline Health?

Well, interestingly enough, at East Orange Medical Center, the CIO felt that in order to achieve meaningful use, an essential component was the Streamline Health Solution and there's logic for that. Even though we aren't directly benefiting from those funds that are provided by the federal government, we do indirectly benefit in that one of the criteria is quote, "meaningful use," in other words adoption by physicians all in electronic medical record.

You can't just buy it and install it, it has to be actually used in the day-to-day business and the strategy of the CIO of East Orange Medical Center was in order to get adoption by physicians, we need to give them access to 100% of the information on the patient -- in the patient record, which means capturing documents and making them available along with the transactional stuff. So, long story short, I think Streamline Health will benefit, primarily indirectly by helping hospitals achieve meaningful use in order to get the funds from the federal government.

Okay, and then finally, you want to be careful not to be a one-armed paper hanger, so to speak. You have I think a very exceptional story given where you are in the company's growth cycle and prospects, but what have you thought about how to articulate the story more effectively to Wall Street and to sort of ease the burden of some of the overhang from large individual holders that have put pressure on the shares?

Well, let me say this that I have an excellent Board. The governance is very functional, very pleased with the guidance they give us. We have a new Chairman of the Board who is a healthcare professional who understands not only our business but the market in general and they've given me a lot of support and lot of help.

And the plan is for me to drive sales, at least for the interim. And also, while I'm out -- and I'll be traveling extensively, touch base with the investment community with a lot of help from our Chairman of the Board in order to tell our story. So, we're basically taking advantage of the efficiencies of me being out on the road anyway to meet with customers, prospects and investment companies and individuals.

Thank you.

(Operator Instructions).

Our next question comes from Madhu Kodali of Yaksha Capital.

Hi, I have a couple of questions on the product revenue and road map. Trying to understand that $1.4 million -- $1.7 million additional revenue you were talking about in terms of the new platform becoming available. I was wondering if you can explain what that actually means? Is that just becoming available merit you guys -- be able to recognize that revenue or is it already sold in the past? What the status is?

Yes, I can answer that one. $That 1.7 million related to our Canadian clients, where that revenue is recognized in the fourth quarter and essentially there, the products were sold earlier -- 12 months or so ago, and we had a commitment to the clients to actually provide this new release of software, the new flagship product as we call it. So obviously, as with any software revenue recognition, you can't record the revenue until you deliver the product.

Sure.

Well, since the product had to be completely built, it really was not able -- we weren't able to take that revenue until the product was completed and we use the term that it reaches general availability, maybe it's just a software term that maybe doesn't mean a lot to the investment community, but essentially what that means is that's the point at which the product is stable enough, it's been tested enough that we can resell it to any of our customers, it can become generally available to the customer base, and that's the point when that -- when the product -- a new product, the revenue can be booked.

But on the -- the cash for that particular project was collected last year?

Part of it was and part of it is still yet to come.

Right, that actually leads me to the second question in the cash flow statement. Your revenue increased overall and your cash flow was down. I understand you had some investments you made. Is there any other reason why cash flow was literally lower compared to last year?

I mean, you certainly see the continued investment in R&D. I mean on the cap software line. Our cap software numbers were similar this year to last year. That's a -- that's a big investment for us and obviously, that's -- puts a pinch on our cash flow. And then, likewise as Brian alluded to in his comments, our shift over to the hosted model where we have more of our revenues coming from the revenues and our billings, if you will, coming from the hosted model where those billings take place on a monthly basis as opposed to being a big pop or big chunks upfront, that's also had an impact on us.

Actually, we're a victim of our success in that applying that model is that the more hosted deals we sign, the thinner our cash flow becomes and we're very much aware of that. So essentially, when you sell a hosted deal, we have to purchase the hardware and install it in our hosting center to start the delivery of the solution to the customer and so, we incur an expense up front and then we receive the revenues as Don said, as subscription over typically a five-year period. On the long run, this is a better model and a more financially advantageous model, but in the short term, it does create some cash crunch.

Yes, so essentially an annuity model versus chunks of cash up front.

Right. So, I guess alluding to the question from the earlier questioner on the leverage point, so you have invested in the software, its generally available now and it's good for next five years approximately and you already have hosted model in place. So, I'm asking the same question again in a different way. So now, you have roughly $17 million, $20 million run rate. Without adding any new expense to the operations, either on the double open side or on the support side, how much revenue can you support with the current organization?

Well, that goes back to our hosting center and the infrastructure in our hosting center. If we're assuming 80% of our new deals are hosted, we have capacity within the hosting center to grow. I don't know what the exact numbers are, but I would wager to guess that it would be somewhere near double the revenue we have right now, the hosting revenue we have right now.

Now, there is some incremental expense in terms of what's called a storage area network or the storage hardware for our installed customers, but I think that we have already made significant investments in our hosting center in the infrastructure, though I think we have some model capacity there that we can take advantage of.

The other thing, too, you may -- if you were scanning back through our recent 8-Ks and all, you'll see that we recently purchased some more storage capacity for our hosting center. That's what the capital leaf that you'll see out there --

Okay.

-- like back in -- I think it was January that we signed up for, that's what that was for.

Okay. The other question is on the development side, did you need to add any more development resources or you have enough now and you're going to -- they'll still have to capitalize more software?

We essentially are good to go on the software side, the R&D side because as we've indicated we've -- we've finished the accessANYware 5.0. We're certainly going to be adding enhancements to it as every software company does, but what we're basically doing now is shifting our investments to the sales and marketing side because you have to build the product, make sure it's a quality product and then go out and sell it. So, we're in the selling stage now.

There still will be capitalized software. That doesn't mean that capitalized software is going to go to zero by any means.

Sure.

Just basically any of our new releases and all as long as they meet the criteria for capitalization, certainly we'll capitalize. But certainly, the intent is that as Brian said, that will shift some of our funding, if you will away from development and towards sales.

All right. So, from a product road map and revenue guidance perspective, you talked about $3.5 million roughly in the recurring whole sale revenue and $8 million in the maintenance. I would assume that that $8 million is coming from the product sales that you have done over a period of time. Correct?

Yes, that is correct. You're -

That is exactly right.

Got it right on.

So going forward, you plan to harvest your existing clients and you are focusing more on the hosted model. So, the question there is are you going to pitch in and convert existing clients from what they have already licensed or is it a new product? I'm trying to understand what is your product today, what have you sold until now, what is this hosted model and the new product you have? Is it enhanced version or an enhancement to the existing product? If you can maybe talk a little about that roadmap that would be helpful.

Yes, that's a great question. First of all, if you look historically at our installed base its probably in excess of 80% licensed and locally installed simply because we've been at it a long time. But going forward, as we've indicated, 80% of our net new deals will be hosted. So, in terms of maintenance, obviously that's where that money's coming from is the installed base account.

I have been engaged with certain of that installed base licensed customers about a conversion to hosted. We've already had one large customer convert the Health Alliance of Cincinnati from licensed to hosted. There are other customers that are very much interested in that conversion. The reason they're interested is because of the capital constraints that we all are dealing with today as well as the obsolesce factor. So, they are interested in some kind of transition. I can't tell you that a majority of our installed base would want to do that conversation, but some will and we welcome that. We like that model. So, that's our plan.

Recurring maintenance is not bad either.

No, we like the recurring maintenance as well. If you note in my prepared remarks, we're looking for about a 25% to 30% growth in the hosted side in terms of that bookings and about 5% to 8% on the recognized revenue side in 2010.

Right, and so you would continue to sell these licensed part model or is that something -- you don't do that anymore?

No, we do sell both and by the way, the application accessANYware 5.0 is just a -- the latest version of our previous solutions and its backward compatible, so our existing installed base will be required to upgrade to the new architecture at some point over the next two to four years. Some sooner, some later. So, it is exactly the same solution, it just has a lot more features and functions and capabilities and the really important factor is it's a lot easier to maintain for us and for the customers.

So, that's the plan is to really start selling the new architecture going forward, hosted and purchased and by the way, in terms of whether we sell hosted versus purchase, it's really the market that will determine that. There are for example large hospital organizations, multi-entity, multi-location that had very large investments in hosting centers themselves that would prefer to have it installed locally.

So, we certainly don't want to miss that opportunity as well. But again, 80% of what we see is going to be hosted. Interestingly enough, to the extent we can get some large purchase deals in the next year or two or three, that certainly boosts our top line revenue and has a dramatic impact on our results.

All right. And one last question on the product again, are you seeing more of a demand from workflow solutions and integration side of things or you're looking at where customers are actually more interested in the compliance product suite?

That is a very important point. What we're seeing -- first of all, we offer a whole list of technologies, but the three primary technologies we offer is document work flow, interoperability and document management or content management. The last one is becoming more of a universally known and kind of a commodity play. The first two are where the growth drivers are. Document workflow and workflow in general and business process optimization is what the market is asking for. That's where the thirst is and that's where we're headed and that's what we're focusing on.

In addition to interoperability, it's really important that we plug and play seamlessly and effortlessly with the existing investments that hospital organization have in third party applications, whether it be a clinical information system, billing information system, or even an administrative information system such as offered by Lawson and PeopleSoft. So, to me and to the company and to our strategic direction, it's a focus on workflow, workflow, workflow and interoperability with document management as kind of the foundation that allows them to create a historical medical record repository and a permanent patient record.

Okay, great. Thank you very much.

(Operator Instructions).

Now, our next question comes from [Mark Cahill], a private investor.

Good afternoon, gentlemen.

Hello, Mark.

Hello.

Congratulations on an excellent achievement.

Thank you.

Thank you very much.

I think it -- a lot of people have short memories and forget that the first six months of 2009 were very difficult given the credit crisis.

Yes, we were very pleased to have the kind of results we did in touch economic times. And again, I think that's a testament to the fact that we have recurring revenue and these contracts deliver, even when the economy doesn't support a lot of purchases.

Yes. Regarding Talus, when -- I think you said you had 30 entities, but back in the third quarter conference call you said 60 total?

Well, some of these are small locations --

Right, okay.

The 30 entities are the hospitals and the larger clinics.

Okay, when do you think implementation will be done for those largest entities?

Well, we should be wrapping those up throughout the rest of this year. We're pretty excited about the relationship with Talus. We've been very anxious to get the new architecture done, which is obviously the first step, get it installed, get a happy customers and a reference. And now the next phase of our relationship with Talus -- in fact, I'll be flying up there in the next several weeks, is to put together a strategic marketing and sales plan now that we have the happy customer and the reference site to go out and spread the gospel in Canada in terms of our new solution in other regions of Canada.

Is this the effort to go after incremental deals on top of what you've already sold them?

Yes, we've had great success in the Montreal region, but there are plenty other regions in Canada that we'd like to enjoy success as well. In order to do that, of course we needed the success in Montreal, which we just achieved.

Does this include consulting, BPM, that sort of --?

Yes, it does include that but the primary driver in terms of our success in Canada is really the integration and interoperability with Talus health oasis clinical information system. So, my belief is the primary driver is the fact that we are truly integrated at a code level with the oasis solution. And then, a secondary benefit would be our suite of workflows, which are important but my primary driver is the interoperability, which we enjoy exclusively.

Right. Regarding GE Healthcare, I know I should have asked this question last conference call, I assume you guys have already integrated your new architecture into their new architecture?

Well, no. Actually, we haven't yet. Remember, this new architecture just achieved general availability in January and so, I wish that companies the size of GE could turn on a dime, but they simply can't. There is a process they follow, they're well known for their Six Sigma process. So, the resources have to get scheduled which we're in the process of doing, then we have to mutually, both sides, write some code and then we have to test it and then we have to install it. So, we're in the process of going through that as we speak, but it is not yet available for prime time.

Do you expect to complete that process within the next six months?

We hope to complete it this year. Yes. So, it really depends on finding the property beta site to test the software, but it still a strategic advantage for us to have the relationship with GE and it's not like we haven't done this before, we did it with our current -- with our older architecture, so it -- I don't think there'll be a leap in terms of confidence in our ability to do it.

Okay. With respect to GE's new architecture, are they pushing the subscription model on that new version or is it the hosted version?

Well, what we're seeing is that they're -- they're now providing a large focus on hosted solutions in the market because of the gap created by the ARRA Act --

Right, right.

-- such that hospitals have to invest in an EMR sooner rather than later and they may not have the capital so GE Capital stepped to the plate and said I'll help you bridge the gap by getting you a hosted solution where you can pay on an annual basis over a multi-year period. So, that's created a lot of buzz in the market and we're seeing an uptick in opportunities as a result. And of course, we've had that kind of a solution for -- since 1998, so --

Right.

-- we've been there for some time already.

Regarding Catholic Healthcare, I think you alluded in the last conference call that their budget was starting to free up. Is it now completely freed up do you think or is there still a lingering tightness there?

Well, there is some lingering tightness, but it's starting to thaw. And part of the challenge there is they're a big organization and as the funds become available, as they fall, so to speak, they have to go through a process or reprioritization of all of their IT projects and we're vying along with others for those dollars as they get freed up.

So, part of my mission goes back to stepping in and getting more active in sales is to personally visit with them and try to lay out a plan of action to work within their current constraint. So, I'll be reporting back to you once I have an opportunity to meet with their -- their C-Suite and find the lay of the land there.

Is that master contract you guys signed, does that have an end date or is it --?

No, it does not. But -- well, certainly for the ones that are already installed, I believe it was a five-year initial term. So, there's quote "an end date" for those, but there's also automatic renewals once the -- we've reached the team and as I've said earlier, we had enjoyed 100% renewal on all of our hosted contracts. So, the master contract though is just an ongoing contract that allows them to add new sites as they go. So, it's just a matter of printing off the dollars to do so.

Regarding your sales and marketing investment, is it 80%, 70%, 9% going towards the Blue Ocean effort, going after the smaller hospitals?

We launched a Blue Ocean program last year and we didn't get as much traction with that program as we would have liked. We did get some deals as you heard us announce, but we expected really to have a better response than we did and part of the challenge is reach in getting to that large marketplace.

And what we've decided to do is kind of roll the Blue Ocean program back into our existing sales infrastructure where we had four regional vice presidents of sales. So, we folded that underneath and have the -- instead of carving it out as a special program, we have just moved it back into the geographic territories because I think it'll give it better attention and better focus.

So, you're going to continue to see wins for that targeted segment and very candidly, I think the biggest boost we're going to get in that marketplace is GE. With their new program, I think providing a hosted solution on a multi-year contract is going to get a lot of attention in that market space and that's the kind of reach we need, because we had limited resources.

And our next question comes from [James Barton], a private investor.

Brian, how are you?

Good. How are you, James?

Good, good. Could you give us a brief rundown on your other partners? The IBMs, the Standard Register, what's happening with those folks in Streamline Health?

Well, first of all, our two most successful partners as you know are GE --

GE.

-- and Talus.

Right.

We have a relationship with a company called Ultimus and that relationship is bearing lots of fruit and that's in the work flow area.

Okay.

And we have a very close relationship with them and we've had a great deal of success with them in gaining traction in the marketplace with departmental workflow solutions. For example, we have seven departmental solutions installed at Children's Medical Center of Dallas. We've announced over the last several months that we won Ascension Health in terms of a workflow solution there and Children's National Medical Center in terms of our audit compliance. So, that's a very fruitful relationship.

Then, there's Standard Register, and frankly, the general manager or CEO of the division that works with us and I both admit that that relationship has underperformance and to our dismay. We're still talking, there are some challenges in terms of the leap -- in terms of moving from the forms business to the workflow business and frankly, its just not as easy of a transition as either one of us would have liked. I'm not giving up on it, but I'm not going to boast that we have high expectations for it either and it's disappointing, candidly, it's very disappointing. So, that's one relationship that we had high hopes that did not pan out to our expectations.

In terms of IBM, our relationship with them is more of a distant relationship. We use some of their technology embedded into our solution and so, we really have more of a back office relationship with them where we buy certain components and embed it into our solution. They do not actively sell our solution in the marketplace, but we do have a relationship in terms of a supplier systems integrator relationship.

Thank you.

This concludes today's question-and-answer session. I would like to turn the conference back over to Brian Patsy for any closing remarks.

Well, once again, we appreciate the interest in participating in our conference call. We thank you for your time today and I look forward to talking with you again at the conclusion of the current quarter. Have a great day.