Eclipsys Corporation Q3 2008 Earnings Call Transcript

Eclipsys Corporation (ECLP)

Q3 2008 Earnings Call Transcript

November 5, 2008 4:30 pm ET

Executives

Andy Eckert – President and CEO

Bob Colletti – SVP, CFO and Chief Accounting Officer

Jay Deady – EVP, Customer Solutions

Analysts

Richard Close – Jefferies

Sean Wieland – Piper Jaffray

Frank Sparacino – First Analysis

Michael Cherny – Deutsche Bank

Bret Jones – Leerink Swann

Corey Tobin – William Blair

Leo Carpio – Caris & Company

Atif Rahim – JP Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Eclipsys Corporation Q3 2008 earnings results. At this time, all lines are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, we are recording the call today. I would now like to turn the conference over to our host, Mr. Andy Eckert. Please go ahead, sir.

Andy Eckert

Thank you very much. And good afternoon, everyone. With me today are Bob Colletti, our Chief Financial Officer, and Jay Deady, our Executive Vice President of Client Solutions. Please note that we issued a press release on our third quarter 2008 results this afternoon. A copy of that release is also available in the Investors section of our website at eclipsys.com.

Before we get started, I'd like to remind our listeners that our prepared remarks and answers to questions will include forward-looking statements. These include statements about the company's capital position; anticipated financial performance, including revenue, margin, cash flow and profit expectations; our business plans, including plans related to software development and capitalization, sales and marketing, business development and cost control initiatives, client relationships, contracts, scheduled implementations of the company's software, benefits to the clients of the company's solutions, and market and competitive information.

Actual results may differ due to a number of risks and uncertainties. Financial performance targets might not be achieved due to various risks, including slower than expected sales or implementations or higher than expected costs to meet client commitments and achieve our development objectives. Cash consumption may exceed expected levels at the timing of the collections, and expense is not in line with our forecast or strategic opportunities required cash investment. Software development may take longer and cost more than expected, and corporation of anticipated features and functionality maybe delayed due to various factors including programming and integration challenges and resource constraints.

We may change our software development strategy in response to client requirements, market factors, resource availability and other considerations. Competition is vigorous and competitors may develop more compelling offerings or offer more aggressive pricing. Eclipsys is required to meet specified performance standards and clients can terminate contracts, assess penalties or reduce contract scope under certain circumstances.

We undertake no obligation to update forward-looking statements or relevant risks. These and other risks are described under the heading Risk Factors in the company's Form 10-K, 10-Q and other filings made from time to time with the Securities and Exchange Commission.

So with that said, I’d like to thank you all for joining us today. I will start the call with some brief comments and then hand it over to Bob who will review our financial results. Jay will then discuss our progress in sales and marketing, and following some additional remarks from me, we'll open up the call for your questions.

We are pleased with our operating results for the third quarter. Our revenues were $132.4 million, an increase of approximately 9% over the third quarter of 2007. Non-GAAP net income for the quarter was $16.3 million or $0.30 per diluted share compared to non-GAAP net income of $11.8 million or $0.22 per diluted share in the third quarter of 2007. This represents a 36% increase in this metric year-over-year. We generated $22.4 million of free cash flows in the quarter, which is the best quarterly result in the history of the company. We also expect to have positive free cash flows in the fourth quarter to close out the year on a very positive note. This will represent two consecutive years of strong cash flow generation.

We recently announced the completion of MediNotes acquisition, which puts Eclipsys squarely in one of the fastest growing markets in healthcare IT, practice management and electronic medical records for small to mid-sized practices. As you all know, only a small fraction of physician practices have electronic medical records and the government announces on what seems like a daily basis various incentive programs to encourage adoption of these solutions.

Additionally, most physicians are also looking to replace their antiquated practice management solutions, so we are very excited to offer an integrated practice management, EMR and supply chain solution to take advantage of this rapidly growing market. We have put the hard work of integrating the EPSi acquisition, which we completed in February of this year largely behind us. We are now focused on achieving similar success with MediNotes and leverage yet another great asset to drive revenue, increase market share, and provided added value to our clients.

With that, I’ll hand the call over to Bob.

Bob Colletti

Thanks, Andy. And good afternoon, everyone. We had a good third quarter. I’m pleased with our earnings as well as our free cash flow generation. Our non-GAAP diluted EPS growth in the third quarter was up 36% over last year, non-GAAP net income was up 39% representing strong growth in our profitability. On a year-to-date basis, we have achieved approximately 35% non-GAAP EPS growth compared to 2007.

In reviewing our results, as a reminder, all discussions on this conference call regarding results of our operations are non-GAAP and exclude stock-based compensation, acquisition related amortization and certain of our items that we do not consider indicative of our ongoing business operations. Please refer to our press release or our Investor Relations website for a reconciliation of non-GAAP to GAAP results.

Now more on the results in the quarter. On a GAAP basis, net income for the quarter was $87.4 million or $1.59 per diluted share, including a one-time income tax benefit of $80 million compared to net income of $8.9 million or $0.16 per diluted share in the third quarter of 2007. Our Q3 2008 non-GAAP net income was $16.3 million. An EPS of $0.30 per diluted share exclude the following items. An income tax benefit of $80 million or $1.46 per diluted share primarily related to the release of our deferred tax valuation allowance. This results from our determination regarding anticipated future earnings.

As of September 30, 2008, we believe it is more likely than not that the company will generate sufficient taxable income in future periods to realize the benefit of our previously reserved US deferred tax asset. As a result of the release of the deferred tax valuation allowance, future results starting in Q1 ’09 will reflect an estimated tax rate of approximately 40%.

As a point of clarification, tax provisions in the near future will represent a non-cash expense, as we do not expect to pay any significant tax payments for the next several years due to our NOLs. Expense of $5.6 million or $0.10 per diluted share for stock-based compensation compared to $4.1 million in the second quarter of 2008. This $1.5 million increase is non-recurring and resulted from our decisions during the third quarter to change how we apply our forfeiture rate in the calculation of stock-based compensation.

In Q4 2008, we expect stock-based compensation expense to range from $4.2 million to $4.7 million. Stock-based compensation was recorded as follows in the quarter. $2.4 million was included in cost of systems and services revenue, $1.9 million in sales and marketing, $900,000 in general and administrative, and $400,000 in research and development.

Expense of $1.4 million or $0.03 per diluted shares excluded related severance costs associated with the reorganization of our professional services business, expense of $1.1 million or $0.02 per diluted share for amortization of intangible assets associated with the February 2008 acquisition of EPSi, and $800,000 or $0.01 per diluted share net reduction in earnings resulting from non-recurring adjustments from prior periods. This non-cash charge was related to analysis we performed of all major third-party vendors and would have resulted in incremental costs from 2005 to 2007. However, these costs were not mature at any prior period results. Given that these costs are not indicative of current period performance, we have excluded them from our non-GAAP results. This impacted the hardware costs and cost of systems and services revenue.

In reviewing gross margins, to provide more clarity on our quarterly performance, gross margins were as follows. GAAP gross margins were $53.8 million or 41%. The following item should be considered in reconciling to non-GAAP results. Stock-based compensation $2.4 million, the services reorganization of $1.1 million, and the non-recurring adjustments I mentioned of $800,000.

After consideration of these non-GAAP gross margins, we are approximately $58.1 million or 44%. This decrease is a decrease of less than 1 percentage point compared to the prior year. The major contributing factor to the decrease was an increase in the amortization of capitalized software development cost, which is included in cost of systems and services, as well as higher outsourcing revenue in our current revenue stream, primarily related to a new contract signed in Q2 2008. We remain on track to achieve our stated objective of improving our overall gross margins by 100 to 200 basis points this year.

In Q3, non-GAAP EBIT margins grew 3 percentage points compared to Q3 last year from 9% to 12%. On a year-to-date basis, non-GAAP EBIT margins are approximately 9% compared to approximately 7% in 2007. Revenues for the quarter ended September 30, 2008 were $132.4 million compared to revenues of $121.1 million for the quarter ended September 30, 2007, an increase of approximately 9%.

Revenues consist of the following. Recurring revenues were $84.8 million, which is an increase of $8.1 million or 10.5% over last year. Software related fees totaled $6.6 million compared to $4.3 million in the prior year, an improvement of $2.3 million or 54%. These revenues included one-time license fees associated with new contracts signed in the period, including add-on license fees to existing clients as well as revenue from contract backlog that had not previously been recognized pending contract performance that occurred or was completed during the period and certain other activities during the period associated with existing client relationships.

Professional services revenues were $34.0 million compared to $32.2 million in Q3 of last year, an increase of 6%. Third-party software license fees were $2.2 million, an increase of 7% over the prior year. And finally, hardware revenues were $4.8 million, an increase of $1.3 million compared to Q3 of last year.

In reviewing capitalized software development costs, the amortization, which is included as a component of cost of systems and services revenues, totaled $4.7 million in the quarter, up $1.8 million compared Q3 2007. Capitalized software development costs were $5.5 million in Q3 or 28% of gross research and development expenditures, which is the same level as the prior year.

In reviewing expenses for the quarter, sales and marketing expenses were $17.4 million, which is an increase of $300,000 over the prior year. Gross research and development expenses were approximately $19.3 million compared to $19.1 million in Q3 of last year. Net research and development expenses were $13.8 million, an increase of approximately $200,000. Our Q3 G&A expenses were $7 million, which is a decrease of $1.2 million compared to the third quarter of 2007.

We ended the quarter with $89.5 million in cash and marketable securities compared to $61.7 million for the quarter ended June 30, 2008. Consistent with our balance sheet as of June 30, 2008, our auction rate securities remain classified as long-term investments. As of September 30, our auction rate securities have a carrying value of $111.1 million. This balance reflects a temporary impairment of $5.5 million or approximately 5% of the gross value. As of prior quarters, this temporary decline in value is recorded as a reduction in other comprehensive income as the component of stockholders equity. Accordingly, this adjustment is not reflected in our earnings for the quarter or the year.

We currently hold approximately $36 million of auction rate securities with UBS. UBS has announced a program to redeem these securities in June 2010 at par. During the quarter, we replaced our $50 million one-year revolving credit facility with a three-year revolving credit facility of $125 million, which is available to us through August 26, 2011.

As of today, we have approximately $56 million available for future borrowings. The available borrowing reflects borrowings made under the facility in October to fund a portion of the MediNotes acquisition as well as borrowings to retire the earlier $50 million facility. With this facility, the strong cash position on our balance sheet, and our free cash flows, we are comfortable with our current liquidity, although in light of the economic environment, we are monitoring market conditions daily.

For the quarter, deferred revenue was approximately $110 million compared to $105 million as of June 30, a sequential increase of approximately $5 million. As we’ve discussed on prior conference calls, deferred revenue is expected to range from $100 million to $110 million in the near future. DSOs for the quarter were 81, a sequential increase of one day compared to Q2 and a year-over-year increase of seven days.

As we discussed on the Q2 conference call, we transition our billing to our Indian operations, which temporarily slowed down (inaudible) generation in the second quarter. This operation is now running efficiently with our US operations, and we had solid billing quarter in Q3. The sequential increase in DSOs was related to seasonally high billings in Q3, which is consistent with prior years and once again positions us to have a strong cash flow generation in Q4.

In reviewing our cash flows, the company’s operating cash flows for the quarter ended September 30 was $35 million, which is an increase of $12.6 million compared to the same quarter last year. Free cash flows for the quarter were $22.4 million compared to $12.3 million in the third quarter of 2007. On a year-to-date basis, we have generated $8.7 million in free cash flow. As I just mentioned, given our balance sheet position coming into Q4, we are confident that we will have a strong free cash flow quarter in Q4 and finish the year on a positive note. Capital expenditures were $7.1 million in the quarter compared to $4.6 in the prior year.

I would like to discuss our expectations for the remainder of the year. We continue to expect 2008 revenues to range from $520 million to $528 million, and we continue to expect non-GAAP EPS to range from $1.02 to $1.06.

We expect the following items in our GAAP results for the fourth quarter and plan to exclude these items in computing our non-GAAP results. Stock-based compensation is expected to range from $0.08 to $0.09 per diluted share, EPSi acquisition-related amortization is expected to approximate $0.02 per diluted share, and MediNotes acquisition related amortization is expected to range from $0.02 to $0.03 per diluted share. Other items in expense recognized in the fourth quarter may also be excluded in determining non-GAAP results if and as appropriate.

Overall, we had a good quarter, and we remain on track towards our revenue and earnings targets. At this point, I’ll turn the call over to Jay. Thank you.

Jay Deady

Thanks, Bob. On today’s call, I’m going to provide an update on general market conditions as well as our recently announced community strategy that Andy touched one earlier.

So, first addressing market conditions, given the amount of concern over the fiscal health of hospitals due to the recent economic crisis, I’ll start with some brief comments on what we’re seeing in the market in terms of our clients and prospects. Our third quarter revenue was only very modestly impacted by a few deals getting pushed out due to the extraordinary event in late September.

Deals always move in and out of quarters for a variety of reasons, and it was just that in Q3 with the disruptions in the financial markets and the amount of uncertainty that was created, certain hospital CFOs predictably and, frankly, justifiably got a little skittish. However, most of the hospital executives we have been speaking with, both prospective clients and current clients, are actively working through any issues and remain committed to making investment to healthcare IT. As Bob discussed, we are still confident in our ability to achieve our 2008 revenue and earnings objectives.

While we don’t provide official 2009 guidance until our fourth quarter call, I will address the reports that I have read that predict 2009 might be when HIT spending will finally slow down due to the disruptions in the financial markets during 2008. At this time, based upon what we’ve heard compliance and prospects in our pipeline and we are monitoring this very closely, we don’t anticipate any large impact on purchasing activity.

In the next few years, if hospitals don’t have the clinical information system with wide-spread adoption throughout the entire healthcare enterprise, they will have a hard time maintaining profitable operating margins. They will simply be so many reporting requirements, so many quality measures tied to reimbursement, and so many hospital-acquired conditions or never events no longer being reimbursed. Our clients and prospects that we are speaking to are well aware of these challenges and the strong sense of urgency with the prospects in our pipeline to get these systems implemented as soon as possible.

Now that Senator Obama has been elected to be the next President, we know that there is going to be even pressure on providers to publicly report on quality measures and healthcare cost, provide greater transparency and increased efficiencies. President-Elect Obama’s goal is to provide affordable and high-quality universal coverage through a mix of private and expanded public insurance, which he estimates will cost between $50 billion to $65 billion a year when the program is fully phased in. He expects much of the financing to come from savings within the healthcare system itself. And he sees healthcare IT is the main driver to deliver more efficient care. This is why this administration has said throughout his campaign that it will commit approximately $50 billion over five years towards the adoption of electronic medical records and other healthcare information technology.

So in terms of healthcare IT, we feel the Obama administration will be a great supporter and help accelerate demand and utilization of solutions such as ours. And while President-Elect Obama has stressed his focus on electronic medical records, there are tremendous operating efficiencies to be gained from utilizing Eclipsys’ revenue cycle management decision support solutions, which help hospitals improve operating margins and business performance with a pretty quick ROI. So we don’t anticipate any slowdown in these segments that have very solid pipelines.

There will certainly be a handful of hospitals who delay purchases due to financial issues, but in general, we don’t see in our forecast any scenario that points to a major slowdown in HIT spending in the near future. Of course, we will continue to monitor the situation closely, and as we’ve demonstrated in the past, will continue to structure transaction that are profitable for Eclipsys and take any consideration to financial position of our clients and prospects.

Being flexible as we go to market will enable our client to continue to move forward even if certain cash flows are impacted in the short-term. And clearly, our enterprise subscription model is an asset that we plan to continue to take advantage of in the highly competitive marketplace. As Andy discussed earlier, we are very excited about our new go-to-market community strategy that was bolstered by the acquisition of MediNotes. We estimate the addressable portion of this market opportunity for Eclipsys solutions to be between $1.5 billion to $2.0 billion over the next three to four years.

Today healthcare systems are very disconnected with disparate islands of data, poor coordination of care, and fragmented processes. And clinicians and patients are often left without tools and data required to provide and receive the best possible care. With MediNotes, we can now offer a comprehensive portfolio of solutions that supports our hospital and health system clients who want to provide connected coordinated care and enhance relationships with clinicians and other stakeholders in their community.

After several quarters of due diligence, we determined that MediNotes has the best combination of user-friendliness and powerful functionality, two very important criteria for this market. Additionally, it lined up well from a technology perspective against our current core enterprise platform. As with EPSi, we are once again taking a great solution in matching it with Eclipsys’ broad market reach. We feel this is going to be an exciting combination.

We recently have rebranded the MediNotes solution as Eclipsys’ peak practice, which is now the umbrella name for MediNotes web-based fully integrated solution, a practice management, EMR, and supply chain management. We are the only vendor that offers supply chain management capabilities in this space, which provides us the key differentiator, and practices that utilize a particularly high level of medical supplies and injectables such as ophthalmology, orthopedics, and pediatrics.

Of course, all of these solutions could be implemented local, but yet again another important market differentiator is that these solutions can delivered under either an application service provider model or remotely hosting by the health system or Eclipsys. This gives practices to cost-effective delivery options that make the solutions easy to use and maintain.

While MediNotes is focused on the small physician market, the solution currently scales the physician practices with up to 50 physicians. And we are currently investments that the solution will eventually meet the need of significantly larger practices. Other Eclipsys solutions that balance out our community strategy include Sunrise Ambulatory Care, Sunrise Patient Portal, and Sunrise Clinician Portal.

Sunrise Ambulatory Care supports hospital-based outpatient centers and tightly aligned practices with seamless integration with the hospital on health system, acute care systems. We currently have approximately 40 clients contracted for Sunrise Ambulatory Care. And more of Sunrise Clinical Manager clients, including recently Yale-New Haven Hospital and Community Hospital of the Monterey Peninsula, contracted for this solution and are choosing this solution to create greater continuity across care settings with a single patient record.

Our Sunrise Clinician Portal provides any time anywhere secure access for community clinicians with access to the hospital-based EMR and an inclusive view of the medical record and access to hospital ancillary services. And finally, Sunrise Patient Portal helps drive greater patient involvement with the health system by empowering them to manage their own health information through integration with Microsoft’s HealthVault solution and other personal records in the future.

Eclipsys is now a significant player in the community market and everyone attached to this project and my client solutions team is working hard to make sure that we realize the potential of this great market opportunity for us. We achieved many significant goals in the client solutions group in Q3 and I’m pleased with the team’s execution. On the sales front, we continue to close large transactions, win new clients, while also building a substantial pipeline to help ensure future growth.

With that, I’ll turn the call back over to Andy Eckert.

Andy Eckert

Thanks, Jay. We are pleased with our execution this quarter in the face of such a distressed broader economic environment that we are all living through. To build on what Jay mentioned, while we certainly do speak with clients and prospects who are having some financial issues, we don’t see a broad trend of organizations falling into crisis model or shutting down all new purchasing activity, especially when it comes to HIT as the solutions we sell, as you all know, are not a luxury, they are essential to helping healthcare organizations better manage clinical and financial operations in today’s healthcare world. So our sales environment we expect will become more challenging the burdens on us to manage our business so we can continue to achieve our revenue and profit targets.

As we head into the fourth quarter, we are cautiously optimistic we can end the year at a positive note. And as you know, to our advantage, approximately 65% of our revenue is recurring and we have strong visibility into our services revenue, which accounts for approximately another 25% or so. A very recent major milestone for Eclipsys was the on-time on-budget activation of Sunrise Clinical Manager Version 5.0 at SingHealth, the largest provider of healthcare in Singapore.

You may recall five quarters or so ago that we had booked a new contract at SingHealth, and one year later – just a bit over one year later, we have activated SingHealth across all three of its hospitals, which total more than 3,000 beds. And as is our trademark, SingHealth has had widespread adoption from the get-go. In the first few hours following the activation, more than 1,300 concurrent users were using Eclipsys to help improve care for thousands of patients across acute outpatient and emergency care settings.

As we’ve talked about on prior calls, this activation is being closely watching in the region and we feel our success at Singapore could prove to be a catalyst to help us drive new business, not only in the Asia Pacific region, but we trust throughout other areas of the globe. Given the importance of this activation for our international strategy and the complexity involved, please allow me to personally thank our team who worked on this project so tirelessly over the course of the last year.

EPSi continues to deliver very strong results. In the third quarter, we signed a record number of sales agreements for Sunrise EPSi. We are currently achieving we estimate about a 90% competitive win rate for this solution. And when we complete the demonstration, it’s nearly a 100%. This is a very unique place to be in this industry and has provided a nice shot of adrenaline into our decision support business.

The market opportunity remains strong with growing hospital demand to replace legacy often DOS-based solutions. Sunrise EPSi is simply the right product at the right time, and we see our success continuing certainly into 2009. I’m confident we can achieve similar success with MediNotes, as we see a similar level of market acceptance to the recent news of our acquisition.

We’ve also made some recent key additions to our senior management team. First we added Bill Bregar as the Vice President of Quality at Eclipsys. Bill is responsible for the company’s drive towards continuous quality improvement through a systematic client-centric approach. I’ve worked with Bill for ten years at another company and saw first hand how he was able to turn that organization into a Baldrige National Quality Award winner in 1996. Needless to say, I'm very excited to have Bill on board. He is making a big impact in his first few months.

Also, Cosmo Battinelli joined Eclipsys as Senior Vice President of Product Support Services. Cos will lead all aspects of our global product support operations with the goal of delivering world-class service to our clients. He comes to Eclipsys from Symantec where he was the Vice President of Global Customer Care. At Symantec he created and implemented many industry client support practices to assist the company in growing from about $800 million organization to $6 billion during his tenure there.

And most recently, we added Tobias Samo as our Chief Medical Officer. Toby was previously the Medical Director of IT for the Methodist Hospital in Houston, Texas, and he’s also in private practice as an infectious disease physician. His work as a member of the HIMSS Advocacy & Public Policy Steering Committee and extensive industry experience should help us drive improve solution offerings. These additions to our team reflect our ongoing client focus. We are very fortunate that these three people are on board. And we will continue to try and build the best management team in this industry.

So in closing, I’m pleased with the third quarter results. We are certainly operating in a challenging environment, but I’m optimistic that given the size of our pipeline and our improved sales execution, we’ll be able to meet our targets for the balance of the year.

Thanks for all your time this afternoon. At this point, I’d like to hand the call back to the moderator so we can take some of your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Richard Close with Jefferies. Please go ahead.

Richard Close – Jefferies

Yes, congratulations. With respect to the $800,000, I guess, or the $0.01 from the prior period, can you go into that one-time expense again, exactly what that is and why you took that in the quarter?

Bob Colletti

Yes. This is Bob. We’ve performed our comprehensive view of all of our major third-party relationships and from an analysis of the balance sheet; and as part of that analysis, we determined that there was some stuff that needed to be expensed in the period that related to prior periods. So we went through a very drill-down type of process. And really it’s kind of tied to the whole upgrading, the whole finance function that was done in the last six to eight months as part of the move to Atlanta and as just part of a normal process. So, non-recurring type of charge and we feel in real good shape as we go forward.

Richard Close – Jefferies

Okay. Should we expect more of those going forward?

Bob Colletti

No, I think we have done an extremely comprehensive view of the balance sheet. We feel real good about the balance sheet, the individual components and as a whole.

Richard Close – Jefferies

Okay. In the second quarter, I guess you paid higher commissions and look at that as a positive forward indicator. The sales and marketing doesn’t seem like you had a higher commission rate in the quarter. Should we view that as it wasn’t a great selling quarter?

Bob Colletti

No, Rich, I think we had a solid selling quarter. It’s really a lot of – tied to the mix of different things that we sold. So, no particular indicator about the forward-looking nature of that at this point. The other thing, the second quarter had some major events that are no recurring. So we had our executive forum that happened in Q2 that didn’t repeat, quite an expensive marketing event. So it’s a combination of those things. But no, it was a good solid sales quarter.

Jay Deady

Yes. This is Jay, and if I add some color to that, that obviously the larger the transactions and the more being sold by single individuals, the way the compensation plans have created, the commission expense will be higher than having a larger volume of transactions being sold by a larger volume of individuals where we have good solid amount of deals being sold by lots of people. Commission expense is not as high. So that’s the way these commission incentive plans work.

Richard Close – Jefferies

Okay. And then just one final one here. With respect to the EPSi, you signed a record number of agreements. I guess your license revenue in the quarter dropped off as a percentage of the overall revenue from where it was tracking in the first and second quarters. Are those record level agreements for EPSi, I assume, show up in that license revenue line for the most part, is that something that we should expect to come into the fourth quarter?

Andy Eckert

Well, so Richard, thanks for the question. EPSi is similar to other add-on solutions. If it’s sold – it can be sold by itself. Obviously, the net new relationship I think can be sold back into existing Sunrise clients, which is happening. And it’s also being sold as part of an integrated suite of a broad-based solution set. So, certainly a number of those sales go into the license number and others, depending on the size of the implementation, it could go into a little bit of an extended revenue recognition because of milestones being upside of 12 months. And in some cases, when it’s part of a broad enterprise deployment and we’re doing a subscription deal for our whole suite, that is going along with that and we don’t contract separately forward under different terms and conditions. So we certainly think that the mix will continue to be a little bit heavier on license, but quite a few of the EPSi deals are not necessarily recognized software upfront in the quarter in which we booked that transaction.

Richard Close – Jefferies

Okay. Thank you. Congratulations.

Andy Eckert

Thanks.

Operator

Our next question comes from the line of Sean Wieland with Piper Jaffray. Please go ahead.

Sean Wieland – Piper Jaffray

Hi, thanks. Couple of quick questions on SingHealth. Did that go live in the third quarter or since the start of the fourth quarter?

Andy Eckert

In the fourth quarter.

Sean Wieland – Piper Jaffray

So how does – remind us how that flows through the model in there? Are there specific payment milestones around the go-live?

Andy Eckert

What you’ll see, Sean, is about some significant professional service activity that’s the big item. Other than that there is not going to be a lot of movement in numbers tied to SingHealth in the quarter. But as you know, as you go live on these type of enterprise transactions, you’ll have a significant number of resources. So we’ll have a lot of activity like that.

Sean Wieland – Piper Jaffray

So we’ll see those professional services in the fourth quarter?

Andy Eckert

Yes, that will be in the fourth quarter, yes.

Sean Wieland – Piper Jaffray

Okay. And how about – I think this – correct me if I’m wrong, but the flow-through systems, the one-time – the software sales line, is that correct?

Andy Eckert

I’m sorry, say it again.

Sean Wieland – Piper Jaffray

Did the SingHealth software, did that flow through the systems –?

Andy Eckert

No, it’s not. In fact, that’s a – the license component of that is actually done on a percentage of completion basis. So, it’s a little bit as you go. There is not a – it doesn’t move the needle much. Most of that revenue on that contract related to license and maintenance was really recurring in nature. So you won’t see a lot of movement with that.

Sean Wieland – Piper Jaffray

Okay. And then my other question has to do with the market and the appetite for your subscription model, have you seen the needle move at all over the past several months there?

Andy Eckert

Yes, Sean, we’ve had a great success in the northeast, particularly in the New York State, which has always been a tough and sort of unpredictable reimbursement environment for our clients. And so we had a much heavier penetration of subscription clients in the northeast and Mid-Atlantic, but what we’ve seen is across the entire country certainly an acceleration of our enterprise transaction, a strong preference, take advantage of our subscription model. Many of these clients started out budgeting for a standard capital model because that’s the way most of our competitors price. But as they have spent time with us and they understand the subscription model, that’s become quite attractive to them in the current economic times.

Sean Wieland – Piper Jaffray

All right. Very good. Thank you very much.

Jay Deady

Thanks a lot.

Andy Eckert

Thanks, Sean. Thank you.

Operator

And next we have the line of Frank Sparacino with First Analysis. Please go ahead.

Frank Sparacino – First Analysis

Hi, guys. Jay, maybe this is for you. I know as it relates to ambulatory care the revenue cycle strategy is with Athena Health, I’m curious with MediNotes now what the revenue cycle strategy is going forward.

Jay Deady

Sure, thanks. So, as we talked about – we signed another couple of clients for our Sunrise Ambulatory Care product, which is the clinical portion of ambulatory care that’s fully integrated with Sunrise. However, on the high end, we use Athena Health as the very good and trusted partner to handle the back end of the professional services billing. Even with that in place, what we did not have was a solution that could be rapidly deployed to meet the needs of the small and mid-market physician practice market opportunity that either is being driven through our health system clients or just on a stand-alone basis. We have a large number of value-added resellers that handle segments of the market. We have a direct sales force that just sells stand-alone of that product. And then certainly we have a segment of our sales team that is selling through our health system relationships. So in no way it really augments the capabilities in the community space that we had with our Sunrise Ambulatory product and Athena, and gives us more capabilities to meet our clients’ needs, but it doesn’t replace our Sunrise Ambulatory solution or the relationship with Athena on the high end for professional billing.

Frank Sparacino – First Analysis

And maybe just a quick follow-up. On the comments earlier around just some deals being delayed, was there anything specific or comment across some of those deals, Jay?

Jay Deady

Well, we had contracts fully negotiated, and in the last two weeks of September, things got a little dynamic out there. And in some cases, and there only were a few, some people just got nervous and we’re working through that well right now. And in one or two cases, we had prospective clients that took a hit in the equity markets. And so we’ve had to take a look at maybe narrowing the scope of the initial transaction that they want to go ahead and go through. For the most part, I’ll comment and say that the shock of what happened caused people just to step back and say, hey, we have the capability of going ahead with the transaction. It’s just what’s happening out there and should we pull the trigger or not. And I think we’ve gotten over that initial shock. And so far, we have found very few prospective or current clients that were financially impaired as a result of what happened. And we have been working through that.

Frank Sparacino – First Analysis

Thank you, guys.

Jay Deady

Thank you.

Operator

And next we have the line of Michael Cherny with Deutsche Bank. Please go ahead.

Michael Cherny – Deutsche Bank

Yes, congratulations on the quarter.

Andy Eckert

Hi. Thanks, Mike.

Michael Cherny – Deutsche Bank

You guys talked a lot about the success you’re seeing at EPSi, and I think you quoted the 90% competitive win rate. With your other main competitor announcing recently getting their product back on the market, does that change any of your go-to-market strategy for that product, or anything else you have to do competitively to make sure you are able to keep that win rate at the level it is?

Jay Deady

So we – I did notice that press release from one of our competitors in this space. And I think part of what they are commenting on in terms of their new capabilities was to try to counter one of the main reasons why we have the 90% win rate against them and a couple of other people in the marketplace. So, so far, post that announcement, in deals that we are still competing against those guys, we have not seen any slowdown in our win rate. Look, as Andy said, it’s pretty unique to be in a position where people are spending adult dollars in this industry and you're winning at 90% rates. So, sure, our competitors are good and they will improve, and we’re going to obviously do everything we can to stay one step ahead of them. But so far we have not seen any type of negative impact based on announcement from one competitor that they are improving a certain portion of their system.

Michael Cherny – Deutsche Bank

Great. And then just going back – kind of follow-up to the last question. You talked about just a very few among the deals are pushed from last quarter. Can you give us any update to whether those deals – the CFOs have changed their mind with regards to those deals, and whether those specific ones has been a loosening of financing from the hospitals?

Jay Deady

Yes. So what we’ve seen is a couple that have kept with the same scope and people just being more comfortable of having kind of assessed the market situation, being more comfortable and now going ahead. And in another instance, we’ve been repackaging and phasing the enterprise solutions so that if it’s going to be a multi-year install, they are going to sort of bite off the first phase and then take auctions for the next few so they don’t have to put the whole entire thing on to their balance sheet or run it out of operating. So we’ve had to restructure one transaction like that, but for the most part, there is not a reaction to – we don’t want to make investments like this in these solutions. In fact, I’ve had couple of conversations with people just in the past week where they have literally been putting all their capital projects up that included building physical plants and other types of stuff. And I can tell you that the enterprise clinical solutions are being prioritized over a lot of those other types of capital projects.

Michael Cherny – Deutsche Bank

Okay. Thanks, guys.

Jay Deady

Thank you.

Andy Eckert

Thank you, Michael.

Operator

And next we have the line of Bret Jones with Leerink Swann. Please go ahead.

Bret Jones – Leerink Swann

Thank you. And sorry to beat the dead horse here, but when we talk about the deals that slipped, it sounds like just – Jay, on your comment, it sounded like some of those deals have gone forward, meaning they have closed. Is that a correct statement or am I misinterpreting what you are saying?

Jay Deady

No, that is the correct interpretation of my statement.

Bret Jones – Leerink Swann

Okay. And then getting on to going back to the 2009 spending that you don’t anticipate any large scale impacts, I guess in – Bob, as in the past, the expectation for the top line growth I guess should be low-double digit, low-teen kind of growth rates, do you think that that needs to be adjusted for in this environment or do you believe that the spending level, as you think, you anticipate in 2009 can support that level of growth?

Bob Colletti

Well, as I sit here today, we believe our expectations for our 2009 spending levels will support that growth. Listen, this is a brave new world we’re operating in here. And I agree with everything Jay said about. I think the shock is kind of settling in with folks. But whether or not (inaudible) market opens up again and then there is a number of factors involved. I will absolutely reinforce the concept that on a capital priority list, our solutions remain a very high priority. And I’m hoping frankly higher, given the new President that we’ve elected and his well-articulated plans around supporting healthcare information technology in general. So – but this is – if any company is telling you that you got any sort of crystal ball into the first half of 2009, I’d have a hard time believing that. But as we sit here today, lots of activity, lots of buying signal, buying signs, there really hasn’t been a slowdown in terms of the activity level. But until the CFO and the CEO agree that this is where they want to spend their money in and actually sign the contract, you’ll never know, to be honest with you.

Bret Jones – Leerink Swann

All right, great. And then when we talk about the pipeline and where you are seeing the strength, is this mainly in the community-based hospitals? Is it large IDNs? And this is strictly for the clinical side.

Jay Deady

About – from an enterprise perspective right now, probably half of the enterprise deals are clinical deals, and then the balance are split between combination clinical and revenue cycle single transaction deals and just revenue cycle transactions. And so to align that for you, most of the clinical buying is in the community hospital market. Most of the combination, clinical and revenue cycle buying is in the community hospital market. However, a lot of the revenue cycle replacement market is both community, but also further north and in larger IDN and academic centers that have been running 15 to 25-year solutions. Many of those have previously bought a clinical system, but they had held on to their old revenue cycle system. So we’re seeing a lot of movement in the larger space of enterprise market, but more on the revenue cycle side.

Bret Jones – Leerink Swann

And it sounds to me like from your comments the revenue cycle, the large IDNs, this is going outside of your existing base, and it sounds like you are attacking other clinical vendor – your other hospitals are running a different clinical system with your rev cycle?

Jay Deady

We are selling revenue cycle transactions outside of our SCM base than within our SCM base.

Bret Jones – Leerink Swann

All right, great. And then just one final question. We talked about some of the software license revenue. Bob, I think you’ve mentioned they were completed deployments from prior periods. I was wondering if you could break that out. How much of a contribution in the one-time software system sales is coming from prior –?

Bob Colletti

We don’t break the details out on that. What – my comment on the license fees is, we told it would be within a range for the year and I would expect that it would continue to be in that range. So it’s normal ups and downs, the license fees. I just – there’s nothing I laid [ph] into it.

Bret Jones – Leerink Swann

Okay. Thank you.

Bob Colletti

Yes, thank you.

Operator

And next we have the line of Corey Tobin with William Blair. Please go ahead.

Corey Tobin – William Blair

Hi, good afternoon. Let me start with a quick housekeeping item. Bob, perhaps you said this, but just to clarify. Where is that $1.4 million severance cost from the re-org, the pro services and the P&L? Is that –?

Bob Colletti

Systems and services.

Corey Tobin – William Blair

In cost of goods sold, yes?

Bob Colletti

Yes, exactly.

Corey Tobin – William Blair

Okay. And then the $1.1 million of amortization [ph] from EPSi?

Bob Colletti

It’s in D&A.

Corey Tobin – William Blair

It’s in G&A?

Bob Colletti

Depreciation and amortization.

Corey Tobin – William Blair

It’s in D&A, okay.

Bob Colletti

Yes.

Corey Tobin – William Blair

Great. Okay. And then shifting gears for a second, Andy, you talked about the international opportunity and you guys have talked about that quite a bit at the Analyst Day. I think if I remember correctly, the international is about 1% of revenue today and the goal is obviously to drive that a lot higher. Any change in that outlook given the current economic situation outside the United States? Thanks.

Andy Eckert

No. I mean – no, this has been a two-prong year. One, we’ve built in our organization and obviously continue to invest in that organization. We’ve got folks on the ground, various parts of the world now. And the other major focus was on SingHealth. And we’ve had quite a successful run there. And so those are kind of the two big objectives this year. Obviously, booking some business would be nice as well. And we are in the game and a number of pretty significant transactions. But basically the last six months we have spent a lot of time building the team up and getting our brand name established in various parts of the world. And I frankly think the SingHealth activation because it is a world-class name recognized by every healthcare professional in the world. We’ll open up a lot of eyes that we are a player outside of North America. So we are pounding away. I got a team that’s been gone for a month all over the world and coming back. I’m heading over in a couple of weeks. And so this is a sustained effort. It’s a multi-year investment strategy that’s going to I think pay off.

Corey Tobin – William Blair

Just a follow-up there. When would you – I mean, again if I remember correctly, you said that the pipeline overseas had ramped pretty dramatically in the last 12 months or so. What would you anticipate will be the timeframe when we start to see some of the pipeline converted?

Andy Eckert

I would hope the first half of next year we would have something to talk about. I hope that’s the case. I mean, like – I think the financial pressures are bit different, at least in the world we’re living in outside of North America. But the process, Corey, is perhaps harder to discern just given it’s a place that we’re not so familiar with. And so some of the timing of certain transactions that we thought would happen one month versus another, we’ve been off, frankly. And that’s I don’t think surprising given the scale of these types of investments. But again, a lot of activity going on. And so I’m a big believer where there is activity, eventually there will be some results. And we’ve established offices now both in the Middle East and in Singapore, which is a major step to establish credibility that we in fact are here to stay, which is very common concern for folks outside of North America about American company. So I think we’re doing the right things. And I expect that we’ll have a nice pickup in 2009.

Corey Tobin – William Blair

Okay, great. Thank you.

Operator

And next we have the line of Leo Carpio with Caris & Company. Please go ahead.

Leo Carpio – Caris & Company

Good afternoon, gentlemen. Quick question regarding the competitive environment, has the environment changed because of the whole credit crunch, or is it still pretty much stable?

Jay Deady

This is Jay. Thanks for the question. No, it hasn’t changed much. I would say our top competitors are top competitors, and every large enterprise deal is being significantly fought over. But there hasn’t been any significant change or competitive new strategies, if you will, that we’ve seen develop in the last month or two that weren’t there in the prior quarters before this situation occurred.

Leo Carpio – Caris & Company

Okay. And then going back to the whole issue regarding the credit crunch, have any of your hospitals noted in terms of the impact coming from the loss of GE as a major financier in this space? Or it was just simply issues over concerns of just the economic outlook that made them skittish?

Jay Deady

Just general concerns. I mean, if you have hospitals that were holding plenty of cash and were still in good position, obviously if you have an uncertain economic climate, even though if they can, are going to question before they do. And I think like other industries, or in general, like many of us, perhaps the severity in the speed of how that’s accelerated and hit people really surprised them. So they’re going to take a step back and assess every major acquisition and expenditure, and there are a lot of discussions with hospital Boards and that type of thing. But again, I think that kind of shock in all moment is in the process of passing, and people are getting their arms around being a bit more comfortable with where the markets are. And those that are in the economic capability to execute or starting to go ahead with transactions. And as I’ve mentioned previously, we’ve already gotten some of those deals done this quarter.

Leo Carpio – Caris & Company

Okay. And then just lastly, it sounds like you are a little cautiously optimistic on ’09, but yet you are thinking that the market, all these impacts are going to be major. Is it sensible to say you are comfortable what consensus expectations are for ’09 at this moment, or is it too soon to tell?

Bob Colletti

Leo, our policy is to confirm what our guidance is for ’09 with our Q4 call. So we’ll give you an ’09 update as we always do.

Leo Carpio – Caris & Company

Okay, thank you.

Bob Colletti

Thank you.

Andy Eckert

Okay. Operator, last question, please.

Operator

Our last question comes from the line of – one moment – Atif Rahim with JP Morgan. Please go ahead, sir.

Atif Rahim – JP Morgan

Hi, thanks. I guess most of my macro questions have been asked, but, Bob, couple of questions for you. You’ve called out a number of one-time items this quarter, but this $0.7 million from the gain on sale of assets that you’re not calling out as a non-recurring item, any reason for that?

Bob Colletti

Yes, sure. That particular item in the first two quarters was a material number. And it was $3.5 million for the first two quarters. And at this point, now it’s a small number and will be that for a while going forward. It’s kind of a recurring number now that we’ll have for the foreseeable quarters. So I just kind of plot the normal course of business at this point.

Atif Rahim – JP Morgan

Where did the gain arise from?

Bob Colletti

When we sold CPMRC last year. So if you go back on that, real large number in Q4, something like – I don’t know – $20 million, another large number in Q1, another large number in Q2. It’s pretty much noise now at this point.

Atif Rahim – JP Morgan

Okay. And how long can we expect this to continue?

Bob Colletti

It will be for the next three to seven quarters, something like that.

Atif Rahim – JP Morgan

Okay, okay. And then lastly, the provision for bad debt looks like it picked up a little bit this quarter. Anything to read into there, or any –?

Bob Colletti

Nothing specific. We always review our portfolio every quarter. And so consequently, it just was part of (inaudible). It wasn’t any specific trend at any particular area or anything like that. It was just we do a contract-by-contract review and provide it for them reserves, and nothing specific or nothing unusual.

Atif Rahim – JP Morgan

Okay, that’s great. Thanks a lot.

Andy Eckert

Okay. Well, thank you all very much for joining us this afternoon. We look forward to catching you up in the quarters to come.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. And thank you for using the AT&T Executive Teleconference service. You may now disconnect.

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