Streamline Health Solutions Inc (STRM) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to the Streamline Health Solutions First Quarter 2010 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 Joe Diaz of Lytham Partners. Please go ahead.

Thank you, Amy, and thank all of you for joining us today to review the financial results of Streamline Health Solutions for the first quarter of fiscal year 2010, which ended April 30, 2010. As the conference call operator indicated, my name is Joe Diaz and 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 other financial websites on the Internet.

Before we begin with today's prepared remarks, we submit for the record the following statement -- statements made by the management team of Streamline Health Solutions through 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, fluctuations 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 reflects management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision 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. For today's call, Don Vick, our Interim Chief Financial Officer, will summarize our financial results. After Don's summary, I'll discuss our first 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 first quarter of our fiscal year ended April 30, 2010. Revenues for the three months ended April 30, 2010 were $3.5 million, compared with $3.8 million in the comparable quarter of 2009.

The decrease in revenues was primarily a result of $182,000 decrease in third-party hardware and software system sales and $143,000 decrease in professional services due to delayed customer project timetables. These decreases were offset by $162,000, or 24% increase, in hosting revenues generated from backlog.

As announced, as part of our year-end earnings call two weeks ago, we were successful in closing two new hosted contracts during this first quarter. These were with Children's Medical Center in Washington, DC and with East Orange General Hospital in New Jersey. The value of these contracts contributed nearly $1 million of the $1.2 million in new bookings achieved during the first quarter. It should be noted that neither of these contracts provided any revenue in the first quarter.

Total operating expenses for the first quarter of 2010 were $4.7 million, compared with $3.7 million in the comparable quarter of 2009. This increase in expenses includes $180,000 increase in capitalized software amortization as a result of the recent general availability status of accessANYwhere 5.0 and other new products. This increase is net of a change in estimate, which I will describe in more detail in a moment.

The increase in expenses also includes a one-time charge of approximately $180,000 relating to our recent restructuring of our sales force. Other increases were primarily due to the cumulative effect of phased in staff increases and other investments made throughout fiscal 2009, especially in the areas of professional services and sales. Additional expenses increases came from legal and accounting fees and compensation expense increases Company-wide including reinstated bonus plans.

It should be noted that we reviewed the estimated useful life of our capitalized development costs during the quarter, and we revised the estimated useful life from three years to five years for most of our capitalized software projects. The net effect of this was a reduction of approximately $250,000 of capitalized software amortization for the quarter and an expected reduction of approximately $1 million for the year when compared with our prior three-year life estimates.

This change was primarily driven to more closely match amortization expense with the revenue recognition of our longer-term hosting contracts and the long-term life of our products as evidenced by our historical customer use. It's worth noting that this capitalized software amortization expense is included in the cost of system sales.

The cost of services, maintenance, and support for the three months ended April 30, 2010 was $1.4 million, compared with $1.1. million in the prior period. This increase is due to increased professional services staffing costs previously discussed and third-party maintenance contract costs associated with supporting an increased customer base over the past two fiscal years and further investment in the growth of the business process management, or BPM, services initiatives.

The cost of application hosting services for the three months ended April 30, 2010 was $457,000, compared with $432,000 in the prior period. The increase is primarily attributable to increased staff, 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 April 30, 2010 and 2009 were $1.7 million and $1.2 million, respectively. This increase over the comparable prior period is primarily due to the phased in incremental investments in staff made during 2009 and the one-time sales restructuring charges of $180,000 previously discussed. Additional expense increases came from legal and accounting fees and compensation expense increases Company-wide including reinstated bonus plans, also previously discussed.

During the first quarter of fiscal 2010, research and development expenses increased to approximately $470,000 from $346,000 in the comparable prior quarter of fiscal 2009. The Company capitalized approximately $696,000 and $949,000 of product research and development costs in the first quarter of fiscal 2010 and 2009, respectively.

I wanted to remind everyone that capitalized software development costs should be included when determining total R&D expenditures. For this quarter, on an income statement basis, it appears that our R&D expenditures increased, when in reality, they decreased by nearly $130,000 when capitalized software is considered. This decrease is due to the completion of the final stage efforts of accessANYwhere 5.0 at the end of the fiscal year.

As a result of revenue and expense items noted above, the operating loss for the first quarter of fiscal 2010 was $1.2 million, compared to an operating income of $28,000 in the first quarter of fiscal 2009. The net loss for the quarter was $1.2 million, or $0.13 per share, compared to a net income of $16,000, or $0.00 per share, in the first quarter of 2009.

Total backlog at the end of the quarter was $18.6 million, compared with $19.9 million backlog at January 31, 2010. 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.

In our earnings release, we included a new table showing the non-GAAP financial measure of adjusted EBITDA. We define adjusted EBITDA as operating profit plus stock-based compensation, amortization of capitalized software development costs, and other depreciation and amortization. Given the relatively large amount of our non-cash amortization charges, we feel that this adjusted EBITDA measure is helpful in providing a more meaningful understanding of our underlying cash-based earnings.

For the three months ended April 30, 2010, adjusted EBITDA was a negative $277,000, compared with the corresponding positive adjusted EBITDA of $719,000 for the comparable period last year. We will provide this non-GAAP financial measure in future earnings releases.

Our cash at April 30, 2010 was approximately $1 million, with $1.7 million drawn under our line of credit. Our cash cycles are still very much dependent upon our seasonal patterns of pre-paid annual maintenance billings to our clients. We are currently evaluating our longer-term funding options, both debt and equity, to supplement or enhance our current AR baseline and credit.

Last month, we filed an S-3 Shelf Registration with the SEC in an effort to increase our possible financing options. We continue to monitor our expenses, cash balances, and receivables carefully to ensure they are on plans. That concludes my review of the numbers of the quarter. Let me now turn the call back to Brian Patsy. Brian?

Thank you, Don. This afternoon, I'll focus my remarks on three topics -- one, comments regarding our financial performance relative to our plan for Q1; two, a discussion regarding the recent sales organization restructuring; and finally, an update on our guidance for the remainder of the year. After my remarks, we will conduct our usual question-and-answer session.

The first quarter of this fiscal year brought a challenging marketplace. The uncertainty associated with healthcare reform, combined with the ongoing capital and operational challenges hospitals are facing, resulted in a purchasing market that was less than ideal. In spite of the market challenges, we were able to maintain our [newfesmer] momentum and to continue to build our foundation for sustainable top-line growth.

Regarding our financial performance in Q1, we ended up approximately 8% below our plan for revenue, and certainly behind our revenue performance in Q1 of last year. This was primarily due to a number of customer delays in implementing software upgrades, which resulted in a services revenue shortfall for the quarter. We expect those software upgrades to take place sometime during this fiscal year and we anticipate subsequently capturing those services revenues.

As we have discussed in prior years, our business has traditionally been cyclical, with our first quarter being the most challenging and our last quarter the most rewarding. For example, last year we reported 21% of our annual revenue in Q1 and 35% of our revenue in Q4. We believe that pattern will remain intact for the fiscal year 2010.

Last quarter, we emphasized that our growth should be measured by considering both our reported GAAP revenue and our new hosting contract bookings. When considering our reported GAAP revenue of $3.5 million plus our new hosting contract bookings, which was $1.2 million, we achieved $4.7 million in GAAP in new bookings revenue.

During the quarter, we were awarded two new application hosting contracts collectively valued at approximately $1.2 million over the life of those contracts. You will recall that last quarter I gave guidance that we anticipate ten new hosting contracts for fiscal 2010 valued at approximately $4 million in new bookings, or $1 million in new bookings per quarter. With the two new hosting contracts signed in Q1, we exceeded our goal of $1 million in new hosting contract bookings for the quarter.

Please keep in mind that when considering those two new hosting contracts closed in Q1, neither contract contributed to Q1 revenues. This is because application hosting contracts do not impact revenue until the solution is implemented and billing commences, which typically takes approximately four to six months. And once the billing does commence, we recognize the revenue on a monthly basis over the life of the subscription contract, which is typically five years. So we are pleased to have met an important quarterly goal.

Regarding our Q1 net income, three primary factors impacted our performance -- one, the services revenue shortfall discussed previously; two, the additional burden of software capitalization expense of approximately $180,000 as a result of the general availability status of accessANYwhere 5.0 and other new products; and three, one-time expenses of approximately $180,000 as a result of a recent restructuring of our sales force. Regarding that sales force restructuring, we recently made a change in our sales leadership and organizational structure.

Because expanding sales is so critical to our Company's growth, the Board of Directors has asked me to step in and direct our sales efforts for the near term in order to ensure focus and urgency so that we can meet or exceed our revenue and income targets for 2010. This is not unprecedented, as I stepped in to direct sales in a similar fashion in 2005 with very positive results, growing sales 16% that year.

I might add that CEO involvement in the sales process with new and existing customers is often expected for a Company of our size given the relatively large value of our contracts. As I said a moment ago, this is an opportunity to focus our selling efforts to maintain a real sense of urgency in everything that we do and to enhance the accountability of our sales and marketing process. I am confident that we will successfully drive sales going forward.

As I increase my focus on sales and marketing, I will be receiving support from the balance of our executive team and from John Phillips, our Non-Executive Chairman. John will be working with me in communicating with the investment community as we begin to reach out and introduce the Company more broadly to potential new investors. Other senior executives will become more active on certain operational matters and continue to report directly to me.

As a part of the sales restructuring, we have also designated our very senior, experienced sales executives as regional vice presidents responsible for all sales activities within their territory. We also will be investing in additional inside sales resources to drive a number of marketing programs to generate additional qualified leads, particularly in the areas of audit, enterprise audit management, and pre-operative workflows.

I'm also very pleased to have announced earlier today that Streamline Health has entered into a joint referral agreement with MRO Corporation, a leading provider of disclosure management applications and services for healthcare organizations.

Through the mutual referral marketing agreement, MRO will refer Streamline Health's document workflow and management solutions to its hospitals and healthcare customers, seeking to bridge the productivity gap between paper-based processes and transaction-based healthcare information systems. In return, Streamline Health will refer MRO to its hospitals and healthcare customers looking for disclosure management applications and services.

Overall, this agreement expands penetration into new and existing markets for both organizations and offers healthcare providers an opportunity to advance their facilities' technology and processes with integrated solutions. I believe that this type of collaboration between leading-edge providers will lead to incremental business for both organizations in the coming years.

More importantly, we can provide critical integrated services that will improve the operating efficiencies and bottom-line results for our hospital clients. In the current economic environment, these solutions do drive value.

Let me conclude my remarks by reiterating that in spite of our first quarter traditionally being our most challenging quarter, we anticipate revenue growth quarter-over-quarter and we still anticipate meeting our revenue and operating income targets for the year.

As Don mentioned, we have adjusted the amortization period from three to five years for our recently released accessANYwhere 5.0, which more closely reflects the anticipated life of the product. This has resulted in a reduction in software amortization expense for 2010 by approximately $1 million, as compared to the guidance we provided on our year-end earnings call.

Given the adjusted amortization period, our annual targets are -- 5% to 10% revenue growth; 15% to 20% increase in booked business, both subscription and licensed; and 5% to 10% adjusted EBITDA margin, a non-GAAP measure defined as operating income plus depreciation, amortization, and stock-based compensation expense. This concludes my formal remarks. I would like to turn the call over to Joe for the question-and-answer session. Don Vick will also be available for this quarter's discussion. Joe?

Thanks, Brian. Amy, would you please provide instructions to queue up for the Q&A?

Thank you.

(Operator Instructions)

Our first question comes from Tom Carpenter at Hilliard Lyons.

Good afternoon, Brian and Don.

Hi, Tom.

Hi, Tom.

Hey, Brian, I don't want to beat you guys up too bad. Consistent sales would have been, what, like 8X or 9X higher if they were purchase deals versus ASP? But the comments you're talking about about the industry, about it being slow, don't mesh with firms like MEDITECH and CPSI say they had record bookings in the first quarter and they are expecting similar in the second quarter. So, can you help us understand better what you're seeing out there, or if what you're seeing is different from some of the other HIT vendors?

Well, that's a fair point, Tom. First of all, there's two sides of that. We are seeing a slowness in what we would call license deals or purchase deals because of capital constraints. They are seeming to ease up, but what we're seeing is an uptick on the hosted side, and particularly in the departmental workflows, and I think that was reflected in our Q1 results.

So, there is some uncertainty about how to qualify for meaningful use, but we have seen some activity in terms of doing some investigations on possible solutions in the marketplace. So there's an uptick in our fee requests; there's an uptick in interest in our departmental solutions, particularly in the areas of enterprise audit management and pre-operative workflow; and there is clearly an uptick in our pipeline with GE Healthcare, and so in that regard we are seeing increased activity.

I might add that our pipeline with GE is significantly greater than it was last year. We've already closed one deal through our GE partnership this year. We closed one all of last year, and I do expect to have several more this year from GE.

Okay. That would be good news. One more question and I'll jump back in the queue. The biggest thing for you folks has always been sales. Sales has been such a gating factor. You have fairly good products, but you haven't been able to get the sales, which because of that, you haven't had the leverage on income statement.

Now that you're shifting back more into a duel role at Streamline, and getting much more hands-on in sales, can you talk about how you're going to get in front of more hospitals and help the firm obtain leverage? Because you guys do win an Epic or Eclipsys deal, and then it takes so long to get another deal that you're kind of missing out on leverage.

That's a fair point, and I am obviously much more active and I think we're getting a positive response just because the CEO is involved in these large deals. There's three fronts that I'm focused on this year. One of them is what I would call low-hanging fruit, which is in the installed base. I just spent the last month on the road almost exclusively, visiting with all of our current customers because, as you know, most of our installed base is installed with licensed software.

We certainly have seen a shift to hosting in the last two years, but in terms of going back to the beginning of the Company, most of our installed base are licensed. So that creates an opportunity for us to sell them incremental new software licenses, particularly departmental licenses for workflow, which will have an immediate impact on revenues this year.

So, in order to maintain our growth, as we had a growth year last year and we want to maintain it this year, one of my initiatives is focusing on the installed base. You don't have competition. You have existing contracts in place, so you don't' have to go through the contract process. And the dollar amounts, because they're modules or departmental workflows, are much lower and, therefore, that creates much opportunity for us. So that's part A.

The second part is that we are focusing on the GE channel, which historically has contributed between 12 and 20% of our revenue. Now, last year was a tough year for us in terms of GE cadence, but I have seen a significant improvement in that and so I'm getting much closer and so are our regional vice presidents of sales to the GE channel.

And there has been a significant change in that channel in that GE is bringing the power and the influence of GE Capital to the table to help hospitals who are trying to qualify for meaningful use, which translates into ARRA reimbursement dollars. They are giving them an easy path in that they are now financing over traditionally a seven-year period some of those purchases, and that has created great demand. In fact, the East Orange announcement that we had was one of those examples where it was an ASP finance over seven years. So there will be, in my opinion, a focus and an uptick on the GE channel.

And the third one, of course, is the departmental workflows. And I have to tell you, just in visiting with our installed base and a couple of exciting new prospects, there is a lot of interest and demand in solving a vexing problem in healthcare, which is compliance. And with government regulations doubling and tripling and ARRA funds available, but there's hooks and requirements to qualify for those funds, auditing is becoming an enormous problem for hospitals, and the ability to meet all the government requirements, all the documentation

And there's examples like RAC, which is Recovery Audit Contractor. There's MA, which is Medicaid Auditing, and then there's OSHA and whole bunch of other audit requirements including payors. We have a solution now that is getting great interest in the market. We have a showcase account in Children's National Medical Center.

And so, to make a long story short, we're investing and focusing on getting reach -- doing a series of webinars and regional seminars to promote our solution, which we believe is ahead of the marketplace. Likewise, a similar path is being followed for pre-operative workflow, which our showcase account there is New York Presbyterian Hospital, which is a great account, a strategic account.

So again, summary, three areas -- one is installed base, low-hanging fruit; two is increase our enterprise sales and focusing on our GE channel; and three is focusing on departmental workflows. That's what I'll be doing the remainder of the year.

I've got a quick follow-up on departmental workflows, and this might help a lot of people, not just me. Is that -- are the departmental workflows, are they integrated to any specific software or are they agnostic?

Well, let me use different terminology. First of all, departmental workflows are what I would call standalone. They don't require accessANYwhere enterprise to install, so the cost is considerably less. So it is literally a standalone, self-contained solution that includes a workflow engine to route documents as needed and a document management backend to retain those and make those available for viewing. So, it's really kind of a black box, self-contained solution.

Some of those workflows can be installed without integration to any third-party products and some absolutely create much more value if they are integrated. And I'll give you an example of the latter. We have two applications. One is pre-operative workflow that I mentioned a minute ago that is installed at New York Presbyterian. They asked us to integrate that into their existing environment and also integrate with Amalga from Microsoft, which is a clinical data repository, because they need access to those historical documents in the data repository to schedule their operating rooms.

Also, we have a series of workflows that are focused on HR and materials management, for example, at Children's Medical Center in Dallas. And in that example, they asked us to integrate those applications with their existing Lawson administrative information systems.

So it's much more efficient to have that integration, and we have that capability, than if you just installed it without the integration. And specifically, what that means for those who are not technical is that you're in a Lawson application looking at human resource information and you can seamlessly launch and get access to documents such as resumes within that application without having to go out and launch Streamline Health separately. So that does create a lot of value.

Thank you. That is helpful.

Our next question comes from Bill Bunn at Fort Washington Investment.

Good afternoon.

Hi, Bill.

Hello there. Just to make sure I understand the accounting, let's go to the income statement and look at the revenues and expenses just for cost of services, maintenance, and support. Services was down year-over-year, but the costs were up fairly sharply year-over-year. Now, is that the revenue recognition issue that we've been talking about?

No, no. On the cost of sale on the services, maintenance, and support --.

Yes.

What you're seeing there is over the past year we actually had beefed up some of our professional services staff.

Okay.

And so you kind of have that stickiness of once an employee comes onboard, you've got their expense. So like some of these people have been hired -- maybe they were hired at some point in 2009, but maybe post first quarter. So now that we're comparing first quarter of this year against first quarter last year, the staffing costs are in the expenses this year, whereas on a comparative basis they might not have been hired last year. So it's not necessarily somebody who was hired just this quarter, but on a comparative basis they've been hired since first quarter of last year.

So, what should be the relationship between these two lines for the entire year?

Between which two lines?

For the revenue and the operating expense, are we still expecting the operating expenses to be running ahead of revenues through the course or the year or does that --?

No. As Brian indicated earlier, basically what happened here in the first quarter, the plan for the professional services revenue, we expected more revenue than actually came in. We had some customer delays. That revenue is still expected to come in. We still have the people on staff, so we have the expense; however, the revenue did not come in. But going forward, that revenue should come in, at which case, obviously, the margins will look better.

Bill, this is Brian. Just a 50,000-foot comment about 2009 versus 2010. 2009, we ramped up expenses to finish the new architecture, which is called accessANYwhere 5.0. That was anticipated in order to meet those demanding timeframes, and we were successful. So, our expenses went up over the year by focusing on that new architecture.

Now we planned in 2010 to peel that back and redeploy those toward sales and marketing. Now that we have the new architecture and new opportunities in the market, we need to move those expenses from the R&D area to the sales area, and that's indeed what we've done. So R&D actually has been lowered on a quarterly basis and we're redeploying that investment into sales and marketing. So that's one factor.

The second one is we did build up, as Don said, our professional services organization in anticipation of some sales growth, but also in anticipation of a series of upgrades including upgrades to the new architecture. And so we had to ramp that up in advance of the need so that we could get those people trained. We did that, and you're seeing that expense in Q1. What caught us off-guard was the delays in those upgrades. So those people are more on the bench than we'd like them to be, but those upgrades will happen and so that revenue will begin to flow the remainder of the year.

And I'll add a comment to Brian's comment about the shift from R&D expenses over to sales and marketing and other expenses. As I said in my comments, if you look at just the P&L numbers there on the R&D, it doesn't look like it dropped. I think it actually increased.

Yes.

But if you factor in the capitalized software, you'll see that on a total expenditure basis, if you will, it actually did drop.

From the end of January to the end of this past April, your cash line stayed the same, but your line of credit rose by $800,000. Do you expect that to reverse over the course of the year? Are you going to be able to self generate?

That's one of the those where it -- and I always hate to give you the same answer each quarter, but it's very dependent on the quarterly -- we're still very much dependent on the quarterly collections from those really large annual maintenance contracts.

It's one of those double-edged swords. It's wonderful to have those and to have that cash come in, but likewise, when you're dependent on that cash and you're looking for the collection of those receivables, there's some quarters where those collections are large, in which case those quarters the cash is pretty good. And then there's other quarters where those are few and far between, and it can look not nearly as attractive.

Typically, do you get those cash inflows the first part of the year or the last part of the year?

Well, the biggest collection time period for those is the fourth quarter.

Okay.

The two best quarters for it are second and fourth. The worst quarters are first and third.

And Bill, Brian here. Another thing to keep in mind from a cash flow perspective, certainly, all things being equal, our cash flow is very lumpy, as Don said, and Q4 is a wonderful quarter for us. We get many large maintenance renewals that bring in a lot of cash. So we have to manage our cash in those trough periods of first and third quarter.

There is another thing happening here, and that is as we are successful in executing our strategy to grow hosting revenues, in the short-term we actual create a cash drain because we're signing a typical five-year contract and we have expenses up-front to buy the third-party components that are required to get them up and running.

So in some respects -- cash flow -- we're a victim of our success. As we sign more contracts, it creates a bit of a cash drain in the early months of those contracts. Typically, depending on the contract, we hit a break-even within the first 12 to 14 months, where the revenues coming in put us in a positive cash position from what we had to dole out to get the thing started. Now, over the life of the contract, it's very profitable --

And especially when you factor in the renewal of the contracts.

So I could be sitting here a quarter from now telling you we blew it out and had 10 new contracts and our cash position will get much worse.

Okay.

So you have to understand that and appreciate that. That's a good thing, but we clearly have to manage our cash flow.

And that's why we're looking at all the financing options, just to provide some long-term capital to be able to finance those long-term contracts.

What kind of long-term options does a Company of your size have?

We're looking at everything. Obviously, the S-3 is out there, and most of you have probably seen that with the Shelf Registration. So that would be possible equity -- an equity route. We're still waiting for the SEC to come back and give us the approval on that, but that certainly gives a lot of option in terms of --.

A lot of flexibility.

A lot of flexibility. We've also looked at trying to enhance our current AR loan with Fifth Third. Fifth Third has been great to work with, and we've had discussions with them in terms of is there anything that they can do to assist us if need be. But we've also discussed with some debt-type lenders in terms of possibilities there, but we're really looking at everything, just any possible option to improve our capital structure.

And I'll add a fourth, which is we're watching our cash very closely --.

Oh, yes.

-- and managing our expenses extremely closely. And there's some cash management and expense management programs in place to ensure that we don't exceed our budget; in fact, come in below our budget. So the best thing we can do is not spend it in the first place, so --.

Exactly.

-- we're looking at all those as well.

Do you have anything going on at moment with St. Vincent's Ascension or Moses Cone, Catholic Healthcare West, or the Canadian partnerships that you have?

Wow, that covers them all -- or many of them.

Those are the large ones that we've been talking about the last couple of quarters.

Ascension Health is installed. We're waiting to go into production and, in fact, we may be in production; I think we are. I'm not sure that they've exercised the solution to its fullest extent, but if I recall, we have achieved a hurdle of being in production there. And that is a contract or management workflow. It's a compliance workflow. So that took longer than we would like, primarily because of delays on the Ascension side in terms of how they wanted to configure it, but that one is successfully installed.

Now, I mentioned in previous earnings calls that that is a trial that Ascension is doing in St. Vincent's that could create opportunities for us across all of Ascension Health for the solution to be deployed in other hospitals. Moses Cone is well underway, a great relationship, positive, positive experience. It's well underway in terms of implementation, so we're getting services dollars now as we implement that in. I might remind you, that's a very large-scale implementation, a very large hospital, 800 to 900-bed size hospital.

Catholic Healthcare West, we have two installed. They had put a moratorium on capital purchases. We're still waiting to hear where we go from here, but we have two successful installations there that are contributing hosting revenues.

The last one is Telus Health. What's really exciting about Telus Health is that obviously we won some very large contracts in Canada in the Montreal region -- two large ones, in fact -- to the tune of $2 million in license revenues plus services. And that was successfully installed and it is in production and they are currently expanding it to other healthcare facilities in Canada, outside of the initial implementation. So we're very active in Canada.

And what's particularly exciting is now we have a happy customer and a referenceable account and healthcare is all about references. So as luck would have it, myself and the executive team will be meeting with our partners in Canada within the next 30 days to talk about a lot of things, including aggressive marketing programs to now go out and spread the gospel, that now we have a reference and utilize that to earn additional business in Canada.

We do have a pipeline of opportunities in Canada, but what we really need to do is a focused marketing effort now, a joint marketing effort with our partner to spread the good word. Did I cover all of the ones that you mentioned or did I leave any out?

Yes. Basically trying to anticipate when revenues might flow from what seemed like pretty high profile relationships at the time.

Well, obviously, in terms of revenue recognition, the biggest bang for the buck is in Canada because all of those deals by definition will be license deals. So obviously, in terms of achieving our goals and, frankly, exceeding our goals this year, it's installed base opportunities for add-on business and its Canadian deals. Anything else in terms of departmental workflows that are subscription-based or enterprise deals that are subscription-based will not have a material impact on the revenues this year for the reasons we've mentioned earlier.

All right. Thank you.

Thank you.

(Operator Instructions)

Our next question comes from Tom Carpenter at Hilliard Lyons.

Hello again. Just one quick follow-up. You guys did a good job on ASP over the past year-and-a-half, at the end of '08 and '09, and it looks like the last two quarters it slowed. You mentioned on the call there was some timing or delay issues with some customers. Can you give us some color on if ASP is going to pick up over the back half of the year?

Yes, it will pick up. And we have ASP opportunities in three areas -- direct sales to enterprise customers, GE channel, and we have departmental workflows. As it relates to the GE channel, I mentioned earlier there is a significant increase in pipeline there.

And the nice thing about the GE channel is that these are deals where GE is the incumbent, so most of these -- not all, but most of them are just add-on of our application to a customer that already has GE Centricity Enterprise installed. So in terms of contracts, it's basically an addendum to an existing contract.

Now, the good news there as well is that GE is now starting to win net new business, which they haven't done in a long time, and East Orange is a classic example of that. That is a net new customer to GE, and we've benefited from that. So in terms of hosting revenues, I see an uptick in GE -- a significant uptick over last year. Likewise for departmental revenues. Now, we've been very anxious to get to market with these departmental workflows. We needed those showcase accounts to go live because, as I mentioned, this is a reference business.

And so now we have Ascension Health live with a contractor management workflow, which is a compliance workflow. We are very close to having the application for enterprise audit management at Children's National into test and production, so that should happen within the next 30 to 60 days and we are in production already with pre-operative workflow.

We have a whole host of other workflows, but those are the primary drivers. So what you're going to see in the second half of the year, and my confidence level is high, that once we start doing these promotions, which are Internet webinars and seminars in regions, I think you're going to see a very positive response to those departmental workflows as well.

Okay. And that's on the sales side. That's helpful. I was talking more on the revenue recognition side. Are there any deals that are going into production that are going ramp ASP revenue? Are we going to have to wait till Orange is ready in the third or fourth quarter?

Certainly, East Orange is one of them. Departmental workflows, Ascension Health and Children's National, will hit in the second half of the year. Do you have any others, Don?

I was just thinking -- sort of drawing blank on some of the --. I'll pull our latest -- let's check to see if any other ones.

There's other backlog items that will hit the second half the year that are license deals that are departmental workflows to our license customers.

Yes, those would be the main ones that haven't already started. Oh, and there's a piece of revenue for New York on pre-op.

Yes, right, right.

Okay. Excellent. That's helpful. Thank you.

(Operator Instructions)

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

Hi, guys.

Hi, Mark.

I just wanted to clarify what you said in the last conference call and what the changes you're announcing in this conference call regarding revenues. I believe you said in the last conference call it was about $19 million to $20 million?

That's correct.

And you also said it was going to be about $19 million to $20 million for expenses. Given your $1 million net adjustment, expenses would be about $19 million, let's call it.

That's in the range, yes. Just to reiterate what I said was revenues between $19 million and $20 million. Expenses at that time were forecast as $20 million.

Right.

With this adjustment, you can do the math.

Yes. All right. I'd also like to kind of discuss the pipeline. In the past years, you've discussed pipeline with respect to your direct sales force pipeline, GE pipeline, et cetera. Can you give us a better idea of how that pipeline is developing within the direct sales force?

Yes. In the past, I shared numbers, but that was in the days when we were mostly license. And I'm uncomfortable sharing the size of the pipeline simply because most of them are ASP and subscription-based, and if you throw a number out of $100 million or $50 million --

Right.

-- it's over five years, so it's misleading. So I'd rather just talk about the size of the pipeline in terms of the number of deals and which ones are highly qualified. And as I said earlier, Mark, the size of the GE pipeline, which are enterprise, large-scale enterprise deals for document workflow, document management, has picked up significantly and I'm very confident we're going to have an excellent year from the GE channel.

As I mentioned earlier, again, the primary driver is they have their new software released, the new version of Centricity Enterprise, the latest and greatest, as well as they've thrown the clout of GE Capital behind it, which has really opened up some new opportunities. So, our pipeline is about triple what it was last year. And these are highly qualified deals, where they're the incumbent in most cases.

The other significant increase in pipeline is number of deals relative to departmental workflows. Word is getting out. I can't tell you how significant it is to have a showcase account for enterprise audit compliance from Children's National, who is a leader among all the children's hospitals and will be a great showcase account, as well as New York Presbyterian for pre-operative workflow. So we are starting to network just with word of mouth and getting those pipelines going. But one we start implementing these marketing programs, it will ramp up rather significantly.

The net new ten deal that you referred to in the last conference call, that's just new deals, but you are also working on incremental deals with existing?

That's a good point, Mark, and let me drill down on that and clarify. The last earnings call I said that our model and our business plan called for ten -- count them, T.E.N. -- ten new hosted deals. Our model showed an average revenue from those ten deals of $400,000 over the life of the contract, so that's an incremental new business on the subscription side of $4 million this year.

Over the contract.

$4 million, excuse me, over the life of those contracts. We have hit two in Q1, and are actually ahead of our goal because it's about $1 million a quarter and we did $1.2 million in new contracts. But that does not include all the other streams of revenues, which include license deals; it includes add-on business to our installed base, and our installed base, as I talked about earlier, a great opportunity for low-hanging fruit that would add on to that revenue.

Okay. Once the hospitals get more comfortable with the meaningful use issue, do you see the pipeline getting an extra boost after that?

Well, meaningful use, just to clarify, translated means physician adoption. Healthcare organizations can get significant dollars from the federal government if they meet the criteria for meaningful use within a specific time period.

So everybody's scrambling to, first of all, understand what is meaningful use? What's exciting for us is that dollars will flow into the marketplace to help fund the purchase or the ASP subscriptioning of solutions that allow them to achieve meaningful use translated adoption. We believe that our solution encourages physician adoption; therefore, it will help toward achieving meaningful use.

It encourages physician adoption because it presents to the physician at the point of care all of the healthcare information they need. There has been some concerns in the past about the electronic health record, which is the digital piece of information, slows a physician down. And when you layer on our applications, which, frankly, speed up a physician, we think that is good news for us in terms of helping them achieve physician adoption.

Right. Also, on the last conference call, the issue of capacity came up, and I didn't think, actually, capacity was an issue with you guys, so I'd like to revisit that.

Yes, that's right. Capacity is not an issue. There's two areas that I think we addressed in the last earnings call relative to capacity -- one was the hosting center; and two was the professional services.

We already talked about professional services. Actually, we have more capacity than we need right now because of some delays, but that will bode well for us in the second half of the year. So those folks will get off the bench and have billable hours in the second half of the year. So our cadence in the second half of the year will be good in what we expect.

Relative to the hosting center, there's two components there -- there's a fixed cost and there's a variable cost in the hosting center. We have plenty of capacity relative to the fixed cost. We could grow quite a bit without incurring additional cost. So we're in great shape there.

The variable cost goes per deal, and that relates to how many documents are they scanning, how much storage do we need, the communication lines, and basically, the numbers of servers. So that component is really funded by the customer, based on how we charge them on the subscription fee.

Okay. And just go back to my first question regarding the revenues and expenses. Going forward for the next three quarters, should we expect wild swings or just making up for the first quarter?

As it relates to what?

Revenues falling down to the bottom line also.

Yes, well, I think we're going to have a great second half of the year based on the pipeline and where GE deals are in the pipeline. But as you know in this business, one large license deal can have a dramatic impact on one quarter versus another.

Right.

There are some large deals that we anticipate closing. Whether they close in Q3 versus Q2 could have a dramatic impact on what we report, but by the end of the year I'm confident we'll make our numbers.

Okay, good. Thank you.

That does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Patsy for any closing remarks.

Thank you, Amy. I'd like to thank you all for your participation in today's call and I look forward to talking to you again at the conclusion of the current quarter. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.