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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Computer Programs and Systems second quarter 2010 conference call.
During the presentation, all participants will be in a listen-only mode.
Afterward as we will conduct a question-and-answer session.
(Operator Instructions).
As a reminder, this conference is being recorded Friday, July 30th, 2010.
I would now like to turn the conference over to your President and Chief Executive Officer, Mr.
Boyd Douglas.
Please go ahead, sir.
Boyd Douglas - President, CEO
Thank you, Frank.
Good morning, everyone.
And thank you for joining us.
During this conference call we may make statements regarding future operating plans, expectations and performance, that constitute forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
We caution you that any such forward-looking statements only reflect management and predictions, based upon currently available information and are not guarantees of future results or performance.
Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission,including but not limited to our most recent Annual Report on Form 10-K.
We also caution investors that the forward-looking information provided in the call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.
Joining me on the call this morning is David Dye, our interim Chief Financial Officer.
David and I have a few minutes of prepared comments, and then we will be happy to take your questions.
In the second quarter we installed our financial and patient accounting system in 16 hospitals, and our core clinical departmental applications at 14 facilities.
Additionally, 17 hospitals implemented nursing point-of-care, and 20 customers went live with CPOE.
Add-on sales to existing clients made up 16% of total revenue.
At this time, we expect to install our financial and patient accounting system at 13 facilities in the third quarter.
We anticipate 14 new installations of our four clinical departmental modules, 19 nursing point-of-care implementations, and 32 CPOE implementations.
During the second quarter, revenue from this segment of our business grew 15% year-over-year.
In business management solutions, during the second quarter, we executed eight new Accounts Receivable management contracts, four of which were for full business management services, and four for private pay collections.
During the second quarter revenue from this segment of our business grew 15% year-over-year.
Clearly we are very excited about our second quarter results, and our prospects for the third quarter.
The positive effects on our business from the stimulus continue to increase.
With the final definition of meaningful use being published during this past quarter, a significant factor of uncertainty related to the requirements and reimbursement for EMR adoption has been removed.
We believe this can only increase the momentum that we are currently experiencing.
The staff we added over the past year in anticipation of this increased demand are now fully engaged in their system implementation duties.
As a result, our increased installation capacities are translating into significant returns for the Company, as indicated by our second quarter financials, and our third quarter guidance.
Furthermore, we believe that this increase in demand for system implementations will continue throughout the remainder of the year.
We continue to be optimistic about our position in the community hospital market place.
We are also confident about our ability to meet the certification requirements in as timely a manner as possible and are committed to doing so.
As evidenced by our current performance, we are also well-prepared to help each and every one of our customers and prospective customers to achieve full EMR adoption under the requirements specified, thus maximizing the financial benefits for which they qualify under the ARRA.
I would like to take this opportunity to briefly address the misappropriation of assets by our former Vice President of Finance and Chief Financial Officer, Darrell West.
The internal investigation of this incident is now complete, and resulted in approximately $55,592 in improper disbursements.
Additionally the investigation revealed that Darrell utilized approximately 4,761,900 American Express membership rewards points that were earned on a corporate credit card.
Some of the points were redeemed for the purchase of personal items, and the remainder of the points were transferred to his personal accounts.
As disclosed in the Form 8-K that we filed yesterday, the value of these points to the Company was approximately $45,238.
The Company has recovered the entire amount of the improper disbursements, and recaptured substantially all of the value of the misappropriated American Express membership rewards points.
While we are still evaluating the deficiencies and internal controls that were identified during the internal investigation, nothing has come to our attention as of this date that would lead us to conclude that there is a material weakness in our internal controls.
We have concluded that there has been and will be no material impact on previously reported earnings, or on the financial position or results or operations of the Company as a result of this matter.
We estimate the cost of this investigation to date to be approximately $300,000, this amount will be expensed accordingly during the second and third quarters of 2010.
I want to make it clear that this is an isolated event, attributable to the actions of one individual.
We are pleased that this unfortunate matter is now substantially behind us.
On a more positive note, I'm excited to be working with David again.
The past four weeks have rekindled a lot of good memories and on behalf of all of the CPSI employees, I would like to welcome David back in his new role.
At this time, I would like to turn it over to David for a few comments on the financials.
David Dye - Interim CFO
Good morning, everyone.
Thanks, Boyd.
I appreciate your comments.
Despite the less than ideal circumstances, it is truly great to be back among friends at CPSI again on a daily basis.
Now to the numbers for the quarter.
DSOs as of June 30th were 51 days, down three days from the first quarter, and five for the year.
Cash provided from operations for the quarter was $2.8 million, compared with $3.7 million for the second quarter last year.
Free cash flow was $0.8 million for the quarter, compared with $3.1 million for the prior-year period.
CapEx was $1,981,000 compared with $594,000 for the prior-year quarter.
The vast majority of CapEx for the recent quarter was attributable to the buildout of our new business office outsourcing location in Mobile, which is now occupied and operational.
Depreciation for the quarter was $544,000, compared with $451,000 last year.
Cash collections were $36.3 million for the second quarter, compared with $31.6 million for the prior-year period.
We recognized stock compensation expense of $201,000 in the second quarter of 2010, and anticipate a charge of $212,000 in the third quarter.
Our headcount as of June 30th was 1,100, an increase of 13 for the quarter, and 94 year-to-date.
And with that, at this time, Frank, if we could please open the call for questions.
Operator
Thank you.
(Operator Instructions).
One moment, please, for your first question.
Our first question comes from the line of Jamie Stockton from Morgan Keegan.
Please proceed.
Jamie Stockton - Analyst
Good morning, guys.
Congratulations on a good quarter.
I guess the first thing is just a housekeeping one.
David, the $300,000 of expenses that you guys are spending, could you give us a feel how that breaks down in the June and September quarters?
David Dye - Interim CFO
Yes.
Almost exactly even.
Approximately $150,000 in the second quarter, and we expect that again in the third quarter.
Jamie Stockton - Analyst
Okay.
And then, Boyd, you talked last quarter about a little bit of a mix shift toward some of the deals, hospitals choosing to extend the payments.
Could you give us a little color on how that has progressed, as far as the implementation that you see in the September quarter?
Boyd Douglas - President, CEO
Are you talking about the hospitals that are using the software-as-a-service model?
Jamie Stockton - Analyst
That is correct.
Boyd Douglas - President, CEO
Yes.
I don't know that we have seen any more of an increase.
Certainly if you compare it to a year ago, we are seeing more.
But from quarter-to-quarter, no more.
But it certainly it is probably classified as 30% to 40% of the deals maybe are software-as-a-service.
Jamie Stockton - Analyst
Okay.
And then I guess my last question.
There was a change in the meaningful use final rules for critical access hospitals are getting more incentive payments.
I guess that is about one-third of your customer base that that would apply to.
Have you, I know that there hasn't been much time that has passed.
But have you gotten any feel for whether or not that is going to improve demand from that portion of your customer base, as far as the government program is concerned?
Boyd Douglas - President, CEO
It has been quick.
So it would be hard to say, it would be speculation on our part.
We anticipate demand being strong anyway.
I don't know that it has really increased the demand any.
Probably the most significant thing that came out of the final rule, was the fact that hospitals can get funding from both Medicare and Medicaid, given that they have got the patient populations to support it.
So that is certainly the most significant ruling that came out, because there was a lot of speculation before, if you had to get one or the other.
And it has been clarified that you certainly can qualify for both.
Jamie Stockton - Analyst
Okay.
All right.
Thanks, guys.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from the line of Corey Tobin from William Blair & Company.
Please proceed.
Jeremy - Analyst
Hi, guys.
It is Jeremy for Corey.
Boyd, I wanted to dig in on the CPOE numbers that you guys gave.
Obviously 32 expected for Q3 is a big number.
I am wondering how the 20 you installed this quarter kind of compares to what you have seen historically?
Was that a record result for the Company in terms of installations of CPOE?
Boyd Douglas - President, CEO
Definitely.
Definitely.
That is why I started highlighting that in the call.
Just to give you a background, really in the first quarter, we did six installations of CPOE.
And prior to that in 2009, we probably, anywhere between four and six per month.
Jeremy - Analyst
Per month or per --
Boyd Douglas - President, CEO
I am sorry.
Per quarter.
Jeremy - Analyst
Okay.
So obviously there is a huge uptick there.
As you talk to customers, obviously the meaningful use requirements are a driver there.
What changed I guess in the marketplace, that kind of is driving that specifically that you can identify?
Boyd Douglas - President, CEO
It is just the fact that they want to make meaningful, we had a lot of customers that were running all of our applications all the way up through and including nursing point of care and chart link.
But they had yet to take that big step for CPOE, and now they see that it is really the last remaining step to meet the meaningful use.
So they are moving forward with that.
It really speaks to I think the big benefit for us is, we have always talked about, as advanced as our customers have been installing the software, the penetration within our market and how much ahead we are, and how our hospitals do so well with using the advanced clinical systems, I think this speaks directly to that.
As evidence of that, this really was the last remaining piece for them to fill in all of the pieces of the puzzle, so they can make meaningful use.
Jeremy - Analyst
One follow-up on the expense, from the expense side of things.
Aside from the investigation expenses, it seems like sales and marketing expense ramped up, even the G&A excluding the investigation ramped up a bit.
I am wondering, how could we think about expenses going forward?
What is really kind of driving that?
I would assume there are some bonuses in there with the strong results.
Just give us some thoughts there?
Boyd Douglas - President, CEO
Certainly commissions is a piece of that.
There is just a lot more.
It takes effort to sell these systems.
You look at the increase in the CPOE.
In a lot of cases send somebody out on the road to install CPOE, or spend some time doing that.
We are doing a lot more of on-site demos, site visits, bringing people here for home office visits, just a lot more activity associated with selling these additional applications.
Jeremy - Analyst
One final one on the outsourcing.
The direct costs there seems to be pretty flat sequentially for the last five quarters or so.
And yet revenues ramping up.
I would assume that with the new facility up and running, how should we think about the direct costs associated, or the inverse of that, how should we think about margins from that segment going forward?
Thanks.
Boyd Douglas - President, CEO
The margins were really, really good this quarter.
I would probably think maybe even a slight downtick.
We are happy with our staff.
We do have everybody in place at the new facility, and we have been, beginning with the beginning of this year, putting some new measures in place to try to become more efficient, to automate certain functions, and I think we are starting to see the results of that.
That is why you are seeing a little bit with the increase in the margins.
But I don't think, I certainly wouldn't expect to see any significant more increase.
Jeremy - Analyst
Okay.
Great.
Congratulations, guys and welcome back, David.
David Dye - Interim CFO
Thank you.
Operator
Our next question comes from the line of Bret Jones from Brean Murray.
Please proceed.
Bret Jones - Analyst
Thanks for taking the question.
I know you don't break out the add-on sales any more.
But your commentary around the strength of CPOE within your existing customer base seems to indicate that, that base is what is driving bookings.
I know bookings were another record in the quarter.
Is that fair to say?
Or I guess can you give any kind of commentary on your new client wins?
Boyd Douglas - President, CEO
Well, the add-on sales were 16%.
I did give that in my comments, second quarter was 16%, which was down significantly from what it has been the last few quarters, which is a direct result of the new business that we are getting.
As far as wins, our win ratio remains relative constant.
It hadn't gotten any better,there is just a lot more demand out there.
Bret Jones - Analyst
Okay.
So this is demand from more new customers, moreso than existing customers adding on to their purchases?
Boyd Douglas - President, CEO
That is correct.
And another key factor here is, virtually every new win that we get, new customer that goes in, is going in with absolutely everything up front, which is a significant change from say a year ago.
Bret Jones - Analyst
Okay.
Perfect.
On the pricing side, I know discounting was fairly high a couple of quarters ago.
And sort of I believe that started to wane.
Can you give us a sense of where pricing is now?
Boyd Douglas - President, CEO
Pricing is very stable.
Again with the demand, pricing is good.
With that being said, every deal stands on it own.
It really depends on who the competent competition is, and what they are offering.
But we are happy with where pricing is right now.
Bret Jones - Analyst
Okay, so pricing is stable.
I am just trying to figure out with the margins, coming in systems margin had a nice rebound, 21%.
I know historically if you are hitting, say, 75% of your utilization, you can get that north of 30%.
Is that something we can expect to see some time next year, or maybe towards the end of this year?
Boyd Douglas - President, CEO
That is just difficult to say, because it is really going to depend on the demand.
As you know and as you saw last year, we have got to ramp up our capacity in advance of the demand.
So if we don't have to ramp up any more capacity, and we are going to run at 75%, and we are good with our implementation levels now, then possibly so.
But there again if we really see increased demand, we are going to have to increase our headcount to accommodate those implementations, and then you are not going to see the margins do as well.
Bret Jones - Analyst
Do you anticipate adding additional implementation capacity for the remainder of this year, at least as things stand now?
Boyd Douglas - President, CEO
As things stand right now, we are not looking at adding any, I would say if we were, we would possibly start looking at it in fourth quarter, and put them in place the beginning of next year at the earliest, if we were to do anything at all.
Bret Jones - Analyst
Okay.
Great.
Thank you very much.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from the line of Sean Jackson from Avondale Partners.
Sean Jackson - Analyst
Good morning.
Boyd Douglas - President, CEO
Good morning, Sean.
Sean Jackson - Analyst
Can you talk about in the CPOE implementations, how does that work as far as running a contribution for you guys?
Is it just part of the maintenance agreements with your existing customers, or is there some incremental revenue?
David Dye - Interim CFO
Sean, the ASP on CPOE about $80,000.
It can vary depending on whether or not they get their hardware from us.
But we looked at that recently, and that has come out at about $80,000.
Sean Jackson - Analyst
Okay.
Again remind us of the profitability and revenue difference between a software-as-a-service deal and just a normal historical deal?
Boyd Douglas - President, CEO
Well, I guess let me just talk about, you know how the normal historical deal works, on software-as-a-service, we don't recognize any.
We just start recognizing monthly revenue as it, as soon as we did the implementation, we start recognizing that revenue on a monthly basis.
Sean Jackson - Analyst
Okay.
Do you intend that to be a more profitable stream then the other one, or the same or less?
Or can you talk about that?
Boyd Douglas - President, CEO
It is more profitable over the long-term.
But it certainly has to be over the long-term.
Certainly.
Short-term a traditional sale is much more profitable.
David Dye - Interim CFO
Sean, we designed that designed that so that the profitability over five years is approximately the same as a normal installation.
Sean Jackson - Analyst
Okay.
What is the typical profile I guess of a hospital customer that would typically buy a software-as-a-service model?
Really any hospital that is not doing extremely well financially.
And the reason they are looking at it is, because there is a buyout out of one of these.
The reason that they are doing software-as-a-service, that is the lowest cost to them to get a system, to get EMR in place, and then qualify for, put themselves in a position to qualify for meaningful use.
Once they have done that and done that successfully, and achieved the funds, then they will have the funds or the capital to go ahead and purchase the system.
All of these software-as-a-service have a buy-out clause in them.
When you are bidding for contracts for those hospitals, are the competitors also offering that software-as-a-service as well?
Boyd Douglas - President, CEO
Yes.
Sean Jackson - Analyst
Okay.
All right.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from the line of James Kumpel of Madison Williams.
James Kumpel - Analyst
Good morning, Boyd and David, how are you doing?
I just wanted to get a little more follow-up on the software-as-a-service element.
Can you give us an idea of how many customers are already on that particular revenue model?
And do you expect at some point in the future, an increase in the execution of those buyout clauses that might trigger anytime soon?
David Dye - Interim CFO
Jim, the first part of your question, there are about 40 customer that are currently installed on the software-as-a-services model.
And the second part, Jim, if you could repeat the second part?
James Kumpel - Analyst
I am sorry.
The second part was, do you expect any particular time soon those customers executing on the buyout clause?
Boyd Douglas - President, CEO
I think you will definitely, in fact, it is required in the contract that they buy it out, either with 60 days or 90 days of meaningful use funds required to buy it out.
James Kumpel - Analyst
Okay.
I guess the next thing is, could you give us sort of a sense of how the CFO search is going, and what a reasonable timeline might be to expect that announcement?
Boyd Douglas - President, CEO
Sure.
I can tell you where we are.
Obviously the investigation has just now concluded.
We have not begun the search yet.
We are happy with our interim CFO right now.
And We have got a couple other issues as I mentioned, we have got the internal control things that we want to identify, and we want to go ahead and wrap the rest of this investigation up and then we will start the search.
I would anticipate starting the search during the third quarter.
James Kumpel - Analyst
Are you seeing any kind of nontraditional customers, whether it is above let's say 150 beds, or outside of the hospital arena entirely, who are increasingly approaching you, now that we have got final meaningful use rules and there is a lot more clarity?
Boyd Douglas - President, CEO
No.
James Kumpel - Analyst
Okay.
And then finally on the competition front, everybody talks about, going into the community hospital market.
But very few are successful.
Have you run into any of the, the Cerners, Eclipsys, Quadrameds of the world recently?
And are they engaging in nontraditional or irrational behavior to your knowledge?
Boyd Douglas - President, CEO
We really haven't run into them at all in any kind of significant, I guess there may be a slightuptick in some of the RFP stage.
But pretty quickly it gets whittled down to the players that have always been here in the market, ourselves, Meditech, Healthland, and HMS.
James Kumpel - Analyst
Okay.
Great.
Well, thanks, guys.
Boyd Douglas - President, CEO
Sure.
David Dye - Interim CFO
Thanks, Jim.
Operator
Our next question comes Brad Hoover from Sidoti & Co.
Please proceed.
Brad Hoover - Analyst
Hi, good morning.
You seem to have a large base of hospitals that are maybe just running your core financial and patient accounting system.
As you are having conversations with that group of hospitals, obviously they are far from getting meaningful use today.
Are you recommending that they gradually start to go and implement new clinical applications, or are they wanting to buy a whole set up front?
What kind of path or pace are you talking to them in regards to getting them out of financials and moving towards meaningful use?
Boyd Douglas - President, CEO
Given the timeline that they have got, we are certainly recommending that they move forward with everything clinical, Phase two, Phase three, Phase four.
The fact of the matter is, most of our current customers that are in the position of only running Phase 1, the main reason, the overriding reason they are is because of lack of funding.
That is still an impediment to them to install these additional applications as well.
Some of them are having, purely because of financial reasons, they can only do it one phase at a time.
Brad Hoover - Analyst
Okay.
Have you tried to gauge a sense for what percent of your 650 or so hospitals are kind of ready to meet Stage 1 today, or be on track to do so and receive all of the money, the Stage 1 over the next year or so have you done any kind of analysis like that?
Boyd Douglas - President, CEO
Not a detailed analysis.
We have got the numbers that you are probably well aware of.
The point of care users are, anybody that has got point-of-care obviously is close to achieving meaningful use.
But CPOE is obviously a requirement there.
And I think that is why you are seeing our CPOE numbers jump up so much.
Brad Hoover - Analyst
Okay, exactly.
Thank you.
Boyd Douglas - President, CEO
Okay.
Operator
Our next question from the line of Tom Carpenter from Hilliard Lyons.
Tom Carpenter - Analyst
Good morning, Boyd.
Good morning, David.
Boyd Douglas - President, CEO
Hi, Tom.
David Dye - Interim CFO
Hi, Tom.
Tom Carpenter - Analyst
If we continue to see an increase in CPSI's and your competitor's implementation capacity utilization, can you comment on whether your three to six month implementation timeline upon deal signing can become a competitive advantage for you, versus some of the firms that can take up to a year or more?
Boyd Douglas - President, CEO
It absolutely is.
It has been for the past several years and it continues to be.
And we certainly plan on doing everything we can to keep that timeline intact.
Because we do think that is a significant advantage for us over some of our competitors.
Tom Carpenter - Analyst
Okay.
Then kind of a question here from left field.
When a community hospital, as a customer of CPSI is acquired by a for-profit entity, can you discuss situations where you remain the vendor, and also situations where it has moved to the vendor that is common across that platform.
And how often does something like this occur a year?
Boyd Douglas - President, CEO
Yes.
We are not seeing a lot of that happen.
When it does happen, the only way to really talk about it is every case really stands on its own.
We have certainly been successful in staying in there.
If we have done a good job with the hospital and got good support from the community hospital, it is not uncommon for them to fight for us, so we really want to keep them, and we will meet with the management of that for-profit, and assure them that we can get them any data they want, whether it is the ledger data or sharing patients, or whatever.
That we can coexist along with whatever system they're running.
In other cases they come in and we don't even have a chance at the table.
They are going to put in whatever system the for-profit chain is running.
And we never even get a chance to compete.
So it is kind of all over the board.
Tom Carpenter - Analyst
Okay.
Great.
Boyd Douglas - President, CEO
It does not happen a lot.
I mean really is a very, very insignificant number.
Tom Carpenter - Analyst
That is good to hear.
Kind of a follow-up up to a question earlier.
Are you seeing new hospitals and hospitals that are upgrading, request more trading than they have had in the past due to their striving to achieve meaningful use?
Boyd Douglas - President, CEO
No.
Tom Carpenter - Analyst
Is that impacting your operating?
Boyd Douglas - President, CEO
No.
Not at all.
Tom Carpenter - Analyst
Okay.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from the line of Sandy Draper, Raymond James, please proceed.
Sandy Draper - Analyst
Thanks and congratulations guys on the good quarter, and David welcome back.
David Dye - Interim CFO
Thanks Sandy.
Sandy Draper - Analyst
Most of my questions have actually been asked and answered.
Maybe, David, give us some thoughts on cash flow, and where you see that trending?It has ticked down a little bit.
Some of that may be going to some of the SAAS model and customer financing.
Just your thoughts on cash flow, and how you expect that to sort of trend going forward?
David Dye - Interim CFO
Yes.
I expect it to slowly improve, not necessarily over the next quarter.
But let's just say over the next 12 months, and primarily because we are essentially complete with the buildout of the new business office outsourcing facility in Mobile that has from a cash standpoint, hit us for approximately $3 million so far this year.
And as I stated in the comments, that is complete and operational.
So we don't have that outlay ongoing any further.
In addition, a couple more minor items that affected us recently, this is traditional in the second quarter.
You have two corporate income tax payments.
And additionally, our inventory is up close to $0.5 million over the course of the last several months, primarily due to the fact that we were having a little bit of difficulty getting our servers that are required for installations in inventory and, with all of the Linux upgrades that we continue to do, and all of the installations that we expect, we wanted to make sure we had enough for that.
We had an opportunity to buy in bulk and we did so.
So that gives you some color on why we feel the cash is down a little bit over the last couple of quarters, and to answer your question directly, I do expect that to improve going forward.
Sandy Draper - Analyst
Great.
Thanks again.
David Dye - Interim CFO
You bet.
Thank you, Sandy.
Operator
Our next question comes from the line of Del Warmington, Delwar Capital, please proceed.
Delroy Warmington - Analyst
Oh, yes.
Good morning.
In reference to the sales cycle, elongated or has it shrunk, in terms of how long does it take you to complete your typical sales cycle?
Boyd Douglas - President, CEO
The typical sales cycle is about 12 months.
I would anticipate now that we are closer to meaningful use in hospitals, I wouldn't be surprised to see that actually shorten a little bit as people are going through it.
We are already starting to see some hospitals during the very early stages that are telling us, and this is anecdotal evidence at this point.
But they are telling us right now that we are going to be on the fast track.
We are going to make a decision fairly quickly, because we want to get our systems in place in order to qualify for meaningful use as quickly as we can.
So we are hoping that will even shrink a little bit.
We have, of course, seen it expand over the past six months, because of all of the uncertainly around the meaningful use, but now that we are a lot closer to the final rulings and definitions and things on certification, hopefully that will go back to 12 months, and then maybe even shrink a little bit.
Delroy Warmington - Analyst
Thanks a million.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from the line of Corey Tobin from William Blair & Company.
Please proceed.
Jeremy - Analyst
Hey, it is Jeremy again.
Just a quick follow-up Boyd on the critical access market, of the 40 customers you mentioned on SAAS, do you have critical access hospitals that have been taking you up on that offer, or is it primarily just the more traditional small hospital?
Boyd Douglas - President, CEO
No, certainly some of the critical access do it as well.
Jeremy - Analyst
Curious what your thoughts are on kind of the meaningful use, the incentive payments and kind of how the critical access hospitals will be reimbursed different than the traditional hospitals, and how that relates to some of the subscription-based contracting versus the up-front costs?Do you have any thoughts how that could play out over the next, couple of years as these incentives kind of come to the market?
Boyd Douglas - President, CEO
Well, of course the main difference with the critical access is they get to depreciate the cost of the system every one year instead of five.
And they get to increase the Medicare share I think by 20%.
So certainly there is some incentive there for the critical access, where I can't think where the missing piece is.
We have got several customers that are in this boat.
Critical access hospitals that have already pretty much bought everything from us and are running everything.
There is really no incentive for them under the stimulus plan to qualify for any more money.
Because they have already spent the money and being reimbursed through the government.
But of course, they were early adopters of EMR, so they are going to push forward to have an EMR anyway, they already saw the benefits or realized the benefits of having an EMR.
Jeremy - Analyst
Do you see any challenges I guess is where I am going with this, with respect to renting the software as it relates to the reimbursement?If you are kind of doing a cost plus or in this case depreciating the asset.
How could that, I mean I assume if that were the case, they could just take you up on that buyback option, and kind of expense it all at once.
Is that how you see it maybe playing out?
Boyd Douglas - President, CEO
That is what we would expect to see.
Jeremy - Analyst
Alright.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
(Operator Instructions).
Our next question comes from the line of Brad Hoover from Sidoti & Co.
Please proceed.
Brad Hoover - Analyst
You mentioned you have a lot of hospitals out that are obviously still struggling with budgets and getting the money up front to purchase, and then obviously SAAS is another way to help it.
Have you discussed at all perhaps increasing the amount of financial help you are giving to hospitals to purchase,or looking at financing receivables?Are you set at where that is today?
Boyd Douglas - President, CEO
Certainly.
Again every deal is kind of on its own.
If they are not interested in software-as-a-service and are looking at financing it, certainly we encourage them to go to a third-party financier.
Traditionally we don't want to finance it.
If we get in a situation where software-as-a-service for whatever reason isn't appealing to them, and they can't get financing from a third party, then certainly we entertain it, and if that is what it takes to make the deal happen, and we feel like we have got a good chance of getting paid back, then we are not afraid to jump in and finance it.
That is certainly kind of the last option here.
Brad Hoover - Analyst
Just lastly before I hop off, I noticed the guidance both on revenue and earnings, a little bit wider than what you normally give.
Was there any change or just the visibility of your installs, or any way that you changed calculating guidance, or just kind of what was the reason for a little bit wider of a range for 3Q?
David Dye - Interim CFO
Yes, Brad, Boyd and I kind of looked at that and saw how narrow it was compared to our scale now.
And of course, I was involved when we started giving guidance back in 2002.
And we have got the same spread now.
8.5 years later than we had then, and we have doubled the size of the Company, so we just felt it was appropriate this time to expand the range, if you will.
Brad Hoover - Analyst
Okay.
That makes sense.
Thank you, guys.
David Dye - Interim CFO
Sure.
Operator
Our next question comes from the line of Sean Wieland from Piper Jaffray.
Please proceed.
Sean Wieland - Analyst
Hi.
Hi, thanks.
I want to go back to a couple of questions on the SAAS model.
First off, how do you recognize the implementation revenue on these SAAS deals?
Boyd Douglas - President, CEO
Just whatever the monthly fee is gets recognized the first month that it is implemented.
There is no significant up-front revenue recognition that takes place.
The rental just begins.
David Dye - Interim CFO
The implementation fees are no different than the software.
It all rolls into one monthly fee.
Sean Wieland - Analyst
In essence, the implementation revenue is recognized over the initial term of the contract, would be safe to say?
It is all bundled into one fee?
David Dye - Interim CFO
That is correct.
Sean Wieland - Analyst
Okay.
And so you said that the customers are going to, are require to buy out their contract when they achieve meaningful use.
If I do the math here, it looks like, what did you say 40 SAAS customers times $80,000 each, what is the buyout and how would that affect, are we looking at like a balloon payment at some point during 2011 as all of these customers buy out their SAAS contracts?
Boyd Douglas - President, CEO
That is, potentially that is true.
They are required to do it.
I think I said in the previous call, the good thing to us is if for some reason they don't, we can have the option to let them out of that portion if they want to continue.
Obviously it is more profitable for us over the long-term to just continue the software-as-a-service model.
But potentially if we do have in the next couple of years a significant number of buyouts, then yes, that obviously would be an increase in revenue.
Sean Wieland - Analyst
Okay.
Maybe I didn't understand it right.
I thought you said that they were required to buy out their contract when they achieved meaningful use?
Boyd Douglas - President, CEO
They are under the contract.
But we can selectively enforce that if we decided to do so.
Sean Wieland - Analyst
Okay.
And, Dave, can you give us a run rate on SAAS revenue today, or if you did, I missed it.
Boyd Douglas - President, CEO
I don't know that we have got that number.
Can we get back with you after the call after that?
Sean Wieland - Analyst
You absolutely can.
One other unrelated question.
We have heard about Epic's franchising model, where they are actually using their customers as franchises to go into some of the smaller hospitals and critical access hospitals.
Are you finding yourselves competing with neighborhood hospitals in the area, in the geography that you are going after a deal, with an Epic system or a Cerner system that is essentially sponsored by another hospital in the area?
Boyd Douglas - President, CEO
Certainly that happens from time to time.
And really has been happening for the last several years.
But it is not very common at all.
Maybe less than a handful of deals per year where that is at least even an option.
But most times it really boils down to the hospitals themselves.
Our prospective customer really wants to maintain their independence.
And they realize that under that model that they are subject to the larger hospital, and their IT staff and support.
And just over the years, we have seen that as a model that frankly doesn't work very well.
Sean Wieland - Analyst
Okay.
And then last question.
The quarter obviously is very strong.
The guidance is very strong.
What is the sustainability of that trajectory?
Boyd Douglas - President, CEO
It is hard for us to say.
I mean there is a reason we only give guidance one quarter out, because that is all of the visibility we have got.
Certainly with the stimulus package and the incentives that are there, you have got to say that the sustainability certainly would be better than it was two years ago at this time.
But that is very difficult for us to say.
Sean Wieland - Analyst
Okay.
I thought I would give it a try anyway.
Thanks a lot.
I appreciate it.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from Leo Carpio with Caris and Company, please proceed.
Leo Carpio - Analyst
Good morning, gentlemen.
Can you hear me?
Boyd Douglas - President, CEO
Yes.
Leo Carpio - Analyst
Yes.
Quickly again back into the question regarding the CPOE's.
If I am understanding this correctly, a customer who upgrades with a CPOE for $80,000, that sounds like it is the last piece of the puzzle for them to achieve that meaningful use.
That is apart from the training.
What is the typical payoff or MU funding that they receive in exchange for that?
Just trying to gauge in terms of the payoff for the customer?
Boyd Douglas - President, CEO
Well, first meaningful use is not just tied to CPOE, that is just one of the requirements of the 23 requirements that they have got to meet.
That is just one of them.
The typical payoff is around a couple million dollars for our average hospital.
Leo Carpio - Analyst
Okay.
And then with that in mind, with a typical payout of $2 million to $3 million in mind.
Have these hospitals indicated to you what they plan to use the payoff for, besides offsetting the costs they had for buying software and training to be MU compliant?
Boyd Douglas - President, CEO
It is all over the board from expansion projects to operations of the hospital, because they may be running really, really lean.
So purchasing additional diagnostic equipment for the hospital.
It is just kind of all over the board.
It just gives them more flexibility to grow their business, however they see that they need to do it to satisfy the needs of their community.
Leo Carpio - Analyst
Okay.
In terms of the credit markets, has there been any change in terms of hospital's ability to have access the credit markets?
I remember about a year, it was pretty much frozen solid and it sounds like it has been going through a slow thaw, and I kind of get the sense that the thaw is still continuing?
Boyd Douglas - President, CEO
As we have talked about before several times on these calls,our hospitals really don't use the traditional credit markets that you are referring to.
We have really not seen any change in the credit markets over the last couple years, as far as the credit markets that our hospitals use to fund purchase of our systems.
Leo Carpio - Analyst
Okay.
And lastly, in terms of competition, it sounds like the big players, Cerner and Eclipsys, despite what they are saying, it sounds like you haven't seen them in the bake-off RFPs, is their presence helping increase your pricing, in terms of just by their mere presence, drag the pricing up?
Boyd Douglas - President, CEO
No, it doesn't really have any effect.
Usually at the RFP stage and in the early stages of system selection, pricing is never really discussed.
In the normal scenario, pricing doesn't come into play until they have kind of narrowed it down.
So I would say it is has little to no effect.
Leo Carpio - Analyst
Okay.
Thank you.
Congrats on the quarter.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from Gene Mannheimer with Auriga.
Please proceed.
Gene Mannheimer - Analyst
Thanks.
Gentlemen, nice quarter.
Just had a couple of questions.
And forgive me if you have mentioned this.
Certainly an impressive system sales number.
Did you happen to call out how much of that revenue was due to installations that were deferred out of Q1, but landed in Q2?
Boyd Douglas - President, CEO
We did not.
There was one installation.
As we talked about during the last two conference calls, there were two installations in Q1 that were supposed to go in Q1.
There were three total.
One went in Q1, and then the customer requested that we do one in Q2 and one in Q3.
We did the one in Q2, it went well, and we are scheduled to do the one in Q3.
So it was one installation.
Gene Mannheimer - Analyst
Got you.
Okay.
And then also breaking down that system sales number a little bit more.
Would you characterize the level of hardware as typical, or maybe a little bit higher this Q?
David Dye - Interim CFO
Definitely higher, Gene.
Gene Mannheimer - Analyst
Okay.
David Dye - Interim CFO
Yes we had a strong quarter for upgrades.
Gene Mannheimer - Analyst
Okay.
Very good, David.
And then I just want to sort of revert back to an earlier question, and say it a different way on margins.
I know that you don't really give margin guidance.
But generally, going forward do you think you could return to the levels of gross margin that you saw back in 2008 in the mid-40s?
Boyd Douglas - President, CEO
I believe we can, if we are not in a position where we have to do additional hiring.
Gene Mannheimer - Analyst
Very good.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from George Hill of Leerink Swann.
Please proceed.
George Hill - Analyst
Good morning, guys.
Thanks for taking the question.
As we look beyond stage one of meaningful use, how do you feel like you are positioned from a product perspective as we look to stage two and stage three?What components of the functionality will customers be able to get from CPSI, and what components of the functionality will they most likely have to go to third parties for?
Boyd Douglas - President, CEO
We are planning on all of the functionality coming from CPSI.
The only way we use third parties is for data content.
Some of their requirements when you get in two and three, require different, a lot more data and data content.
So certainly, but normally we provide that through here.
So our goal is for everyone to get everything they need through CPSI.
Some of the content may actually come from a third party.
As far as where we are, we are already working on those.
The requirements for the phase two and phase three.
And we are very confident of our position, and are happy with where we are.
Gene Mannheimer - Analyst
Okay.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Our next question comes from Del Warmington, Delwar Capital.
Please proceed.
Delroy Warmington - Analyst
Hi.
Quick question.
The proposed merger between Allscripts and Eclipsys, could you give us a sense of what impact that might have on you?
Boyd Douglas - President, CEO
Very, very little.
We don't really compete against either one of them.
Delroy Warmington - Analyst
Not against Eclipsys?
Boyd Douglas - President, CEO
I am sorry.
Delroy Warmington - Analyst
I thought Eclipsys was one of your major competitors?
Boyd Douglas - President, CEO
No.
They are not.
We hardly ever run into Eclipsys.
Delroy Warmington - Analyst
Okay.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Our last question comes from the line of Corey Tobin of William Blair & Company.
Please proceed.
Jeremy - Analyst
Last one I promise.
Boyd, can you remind us what your ED strategy is?
Do you have a separate ED module, or does the core clinical simply go into your customer's ED, and if you do have an ED product, what is the demand that you have seen for that over the last couple of quarters, and how might that pan out with the meaningful user requirements?
Thanks.
Boyd Douglas - President, CEO
We do not have a separate ED product.
We have all of the functionality you need to meet the requirements at our typical hospital, to run your emergency room system using our clinical products, our scheduling product, E-forms, nursing point of care.
You can use a variety of those to meet every possible need for the emergency room in our typical hospital.
We were before the stimulus package came out, doing some user needs assessments and things about an ED package, Trying to make the decision, whether that is the next application we would write, and when meaningful use came out, we really started focused our efforts on meaningful use, to make sure that we were in good shape there.
That is on our radar.
But frankly it is not a huge demand from our customer base.
Jeremy - Analyst
You already have customers using your core clinicals in their emergency departments, and that seems to meet their needs, is that kind of what you think?
Boyd Douglas - President, CEO
No question about it.
We have got plenty of sites that we can take people to see that system in use.
And it works quite well.
Jeremy - Analyst
Okay.
Thank you.
Boyd Douglas - President, CEO
Sure.
Operator
Mr.
Douglas, there are no further questions at this time.
Please continue with your presentation or closing remarks.
Boyd Douglas - President, CEO
Great.
I certainly want to thank everyone for their time this morning.
Appreciate your interest in CPSI.
And I hope you have a great weekend.
Operator
Ladies and gentlemen, that does conclude the conference call for today.
We thank you for your participation, and ask that you please disconnect your lines.
Have a great day everybody.