Streamline Health Solutions Q3 2008 Earnings Call Transcript

Dec.15.08 | About: Streamline Health (STRM)

Streamline Health Solutions Inc. (NASDAQ:STRM)

Q3 2008 Earnings Call

December 15, 2008 4:30 pm ET

Executives

Brian Patsy - President & Chief Executive Officer

Don Vick - Interim Chief Financial Officer

Joe Brown - Chief Information Officer & Vice President of Client Services

Gary Winzenread - Senior Vice President of Product Development and Strategy

Scott Boyden - Senior Vice President of Sales and Marketing

Joe Diaz - Investor Relations, Lytham Partners

Analysts

Tom Carpenter - Hilliard Lyons

Bill Bunn - Fort Washington Investment

Mark Cahill - Private Investor

Operator

Good afternoon. My name is [Shadae] and I will be your conference operator today. At this time, I would like to welcome everyone to the Streamline Health Solutions Q3 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Joe Diaz of Lytham Partners.

Joe Diaz

Thank you Shadae and thank all of you for joining us to review the financial results of Streamline Health Solutions, for the third quarter and the nine months ended October 31, 2008. As the conference call operator indicated, my name is Joe Diaz. I’m with Lytham Partners. We are the financial relations consulting firm for Streamline Health.

With us on the call representing the company today are, Brian Patsy, President and Chief Executive Officer; Don Vick, Interim Chief Financial Officer, Gary Winzenread, Senior Vice President of Product Development and Strategy; and Joe Brown, Chief Information Officer and Vice President of Client Services.

At the conclusion of today’s prepared remarks, we will open the call for question-and-answer session. If any one participating on today’s call does not have a full text copy of the release, you can retrieve it off the company’s website at www.streamlinehealth.net or numerous financials sites on the internet.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements, subject to risks and uncertainties. The private Securities Litigation Reform Act of 1995 provides the Safe Harbor for such forward-looking statements. To words believe, expect, anticipate, estimates, will, and other similar statements of expectation identify forward-looking statements.

The forward-looking statements contained herein are subject to certain risks and uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein. These risks and uncertainties include but are not limited to the impact of competitive products and pricing, product demand and market acceptance, new product developments, key strategic alliances with vendors that resell the company’s products, the ability of the company to control costs, availability of products produced from third-party vendors, the health care regulatory environment, healthcare information systems budgets, availability of health care information systems trained personnel or implementation of new systems, as well as maintenance of legacy systems, fluctuations in operating results and other risks that detail from time-to-time in the Streamline Health Solutions filings with the U.S. Securities and Exchange Commission.

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

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

Brian Patsy

Thank you Joe and good afternoon everybody. This afternoon Don Vick, our recently appointed Interim Chief Financial Officer will summarize our financial results and then after Don’s remarks I will comment on the pertinent aspects of our quarter and our business. After my remarks, we will open it up to the question-and-answer session.

At this point, I would like to turn the call over to Don Vick. Don.

Don Vick

Thanks Brian. I would like to highlight the more important, more significant aspects of our financial results for our third quarter. Total revenues for the quarter increased 11% to $4.4 million, compared with $3.9 million reported in the third quarter of last year.

Operating profit was $26,000 compared with $16,000 in the same quarter last year. Total revenues for the first nine months increased 17% to $12.8 million, compared to $10.9 million in the prior comparable period. The operating loss for the first nine months of this year was $1.2 million, compared with a loss of $1.5 million last year.

System sales for the quarter were $1.3 million compared to $41,000 in the comparable quarter last year. This increase was primarily the result of a large system sale of nearly $1 million, including Streamline developed and third-party software through one of our remarketing partners.

While there was a decrease in services, maintenance and support revenues for the quarter primarily due to the timing of project management revenues, the margins associated with this revenue stream remained healthy. These revenues increased from $7.4 million to $7.6 million on a comparable year-to-date basis through October.

During the quarter, two more application-hosting contracts were signed. These will contribute more than $8.1 million in future hosting revenues. Application-hosting services revenues were $517,000 compared with $872,000 in the comparable quarter last year. This reduction in revenue was primarily due to the loss of an application-services hosting customer. Revenues from the recently signed hosting customers will begin to contribute to revenues during the next few quarters and have not yet offset the loss of this customer.

As demonstrated by the results above, the company is experiencing a shift away from its traditional purchase model or software sales, towards a large increase in demand for our application-hosting services business model. As a result, here at the end of the quarter, the company realigned to reduce our cost structure and cash flow needs to offset some of the effects of the slower revenue ramp-up and upfront cash needs of the application-hosting model. These actions are expected to reduce expenses by approximately $800,000 per quarter going forward.

Backlog for the period increased to over $22.8 million in the quarter, as a result of the large increase in application-hosting services contracts. The backlog for these hosting services has grown from $2.4 million in April, to approximately $12.9 million as of October 31, 2008.

During the quarter, the company borrowed $2 million under its line of credit. Since October 31, we have collected a significant amount of annual prepaid maintenance contract billings. As a result, our current cash position today exceeds $3 million. We continue to monitor our expenses, cash balances and receivables carefully to ensure they are on plan.

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

Brian Patsy

Thanks Don. At this point I’d like to discuss additional remarks regarding our financial performance, our sales accomplishments over the last quarter, an update on our product development activities and our realignment recently implemented to improved efficiency and address the market shift toward hosted services, and finally our recurring revenue in operating expense prospects for this year and next, based on this year’s surgeon hosting contracts.

Regarding our Q3 financial performance, as Don discussed our Q3 revenues were approximately $4.4 million or 11% ahead of the comparable prior quarter. Our revenue year-to-date of $12.8 million was 17% ahead of last year’s performance. Our Q3 results were below management’s expectations, primarily due to a significant and unanticipated shift towards hosted solutions this year that impacted our ability to reorganize revenue in Q3 and year-to-date.

As a result of this shift to hosted services, our year-to-date results were also slightly behind management’s expectations. However, it is important to note that this year’s contract mix follow traditional patterns where 75% of our transactions are license and 25% hosted. We would now be significantly ahead of our internal plan for revenue and operating income.

This point is further simplified, when you look at our current backlog. Keep in mind that our hosted deals go into backlog and don’t contribute to revenue until the customer begins using our hosted services, which is typically six to nine months after contract signing.

At the end of Q3, our total backlog stood at $22.8 million as Don indicated. This was primarily the result of our $12.9 million backlog for application-hosting services, which increased $8.3 million or 180% greater than Q2’s hosting backlog of $4.6 million. When looking at our year-to-date hosting backlog growth, we experienced an increase of $10.5 million or 438% greater than Q1’s hosting backlog of $2.4 million. The significant increase in hosting and total backlog during that quarter was primarily due to the sign of two additional hosted customers, which I’ll discussed in further detail later.

Included in the $22.8 million total backlog is $3 million in recurring maintenance services. So, our backlog related to further recurring revenues for hosted and maintenance services are $15.9 million or 70% of the total backlog.

Finishing out our total backlog is $1.2 million related to future deliverables for Streamline Health Software and custom software licenses, $4.9 million related to future contract of professional services at systems that are implemented and finally $800,000 related to third party hardware and software components.

At this point I’d like to review our sales activities. We signed three new agreements in our third quarter, seven new agreements through the first three quarters and eight new agreements so far this year counting the Massena contract that was reported last week.

The three new agreements in the quarter contributed approximately $1 million to Q3 revenue. Also during the quarter, we had a quarterly recorded of $9.5 million added to the revenue backlog, primarily from the two new hosted transactions. As you know, our hosting agreements provide monthly recurring subscription revenue over the life of the contracts, which are typically five years.

On the hosting front, the two new hosted contracts signed in the quarter and six signed year-to-date provide great visibility in terms of recurring revenues and cash flow. However, these hosted deals also spread out the payments over the life of the contracts and require upfront investments in hosting infrastructure such as hardware and third-party software and other deliver on the contracts.

Even though the large growth in hosted backlog and its result in future recurring revenue stream as good thing for Streamline Health in the long-term, it does create a cash stream in the near-term until such time as the monthly subscription fees commence, which has typically six to nine months after the contract is executed. The good news is that we are making significant progress in 2008 versus 2007 in signing many more new customers.

In fiscal year 2007, we closed four large system sales; three were purchase and one with hosted. It generated $6.8 billion in combined revenue in backlog. We have already signed twice as many contracts this year as all of last year. More importantly, our eight contracts have contributed to the $23.8 million in combined revenue and backlog, which is 3.5 times greater than what was generated in all of 2007.

At this point, I’d like to provide additional insight into the three transactions close this quarter. One of the two new hosted contracts was with The Health Alliance of Greater Cincinnati. A network of five hospitals throughout metropolitan Cincinnati, who signed the new five year agreement to implement our document workflow solutions in four additional hospitals in their network, while renewing the exciting agreement with the University of Cincinnati Hospital for an additional five years.

University Hospital is our first customer and has been using our solution for over 17 years; implementation activities at the four new facilities have already begun. As a part of the agreement, we also will be delivering the SMARTworks, Clinical Enterprise Solution to deliver e-forms functionality to our partnership with Standard Register. This marks our first significant sale of Standard Register’s suite of solutions.

The second hosted contract signed in the quarter was a five-year agreement signed with one of the nation’s largest hospital organization located in the New York City metropolitan area. This is the fifth major hospital in the New York City area to utilize our solutions and a sixth new hosted customer signed this year.

Our Document Workflow Solution will be integrated into the hospital’s existing Eclipsys clinical information system with implementation scheduled for early next year. Finally, the third contract in the quarter was announced this morning and involved a sizeable system sale to a large healthcare organization located in the Great Lakes Region of the U.S.

This was a purchase or perpetual license contract signed to our remarketing partner GE Healthcare. This contract calls for us to integrate our enterprise document management and workflow solutions with the hospital’s existing GE Centricity Enterprise System and includes our accessANYware repository and our three health information management workflows, which are completion workflow, coating workflow and release of information workflow.

After the quarter closed, we announced our sixth new ASP customer this year, an eight new customers overall by signing Massena Memorial Hospital located in upstate New York. We are excited about this new ASP customer because it is our first implementation of our Enterprise Document Workflow Solutions integrated into the MEDITECH MAGIC Health Information System Environment.

MEDITECH has a large market share within the small-to-medium size hospital market. Once we achieve production on our solution sometime early next year, we will be well positioned to leverage our success of Massena Memorial hospital in winning other MEDITECH sites.

At this point, I’d like to comment on our product development activities. We continue to make good progress on the design and development of our next-generation enterprise document and workflow in management solution that incorporates multi-language capabilities, as well as enhanced functionality and new document workflows. As discussed last quarter, our time-to-market for new workflow solutions has been significantly reduced, which in turn will help create additional sales opportunities as this new workflow becomes available.

For example, our pre-operative workflow solution is now in data at one of our customer size. Pre-operative workflow streamlines the process of collecting the required documents necessary for surgery, in order to avoid expensive delays and rescheduling offering rooms or canceling procedures. This is the third workflow that we delivered this year on the new workflow architecture and we expect to complete a fourth new workflow before the end of our fiscal year.

As we have invested a significant portion of our resources over the past year to our new product development initiatives such as the new multi-language architecture and new workflows. We have also experienced a commensurate increase in our capitalized software, which is apparent on our Q3 balance sheet and income statement; which brings me to a discussion to some of the recently implemented changes to our organization.

Over the past quarter, we have realigned our sales, our product development and our services organization to better meet the changing needs with the marketplace. Specifically, we implemented plans to create a more efficient organization in order to respond to the shift in the marketplace that we experience toward hosted solutions. Even though, we didn’t anticipate the shift toward hosted solutions in our business planning process late last year, we believe this shift is here to stay and will require us to fundamentally change our close to the marketplace.

Factors that we believe we have contributed to the shift are; hosted solutions are now becoming more mainstream and market adoption as increase dramatically over the past few years, small to mid-size healthcare organizations don’t have the capital for the information technology staffs to support complex locally installed solutions.

The recent financial crisis and credit crunch has forced hospital organizations to reconsider their capital purchases and look to operating lease alternatives, such as our hosted solutions to meet their software needs. Finally, hosted solutions are an excellent hedge against further obsoleteness and provide a lower risk alternative to traditional license models.

In order to respond to these recent market dynamics and as a part of our plan scaling back of R&D expenses after achieving certain new product architecture milestones in the second half of the year, we have recently realigned the business. As a result we have achieved approximately a 15% reduction in our cost structure to more efficient use of our resources.

We believe these changes are prudent in today’s economic environment and will result in positive cash flow in further quarters. We also believe that these changes will better focus and position the company to take advantage of increased market opportunities for hosted services, particularly at the lower ends of the market where opportunities for hosted services is growing much faster than the marketplace in general and finally, we believe that our hosted solutions provide us with a significant advantage in the marketplace as many of our competitors do not have a comparable offering.

Let me conclude my remarks by providing some further information regarding our recurring revenue and operating expense prospects, for the remainder of this year and next year based on this year search in hosted contracts.

When looking back on our strong sales year-to-date, we have seen a fundamental shift to the hosted model, which results in revenue reorganization being deferred over the life of the contract, rather than recognizing the software revenue upfront. A desirable buy product to the shift to hosted services is much better visibility for future revenue streams based on backlog pro forma from hosting contracts over the five year of contract period.

With regards to our expectations for the remainder of this year, we as is the case with many other healthcare software IT companies are concerned about the impact of the recent financial crisis on hospital organization’s ability to allocate capital dollars toward large IT projects. This concern is collaborated by a December 2008 survey of Hospital and help system CFOs, Vice Presidents and CIOs entitled Healthcare IT spending and economic realities published by the College of Health Information Management Executives.

The results of the study show that 55% of surveyed CFOs are experiencing delays in accessing capital and expect the financial crisis to last 12 to 24 more months. Consequently, 57% of the CFOs are deferring IT purchases and 52% are delaying or lessening implementation timeframes for continuing initiatives.

Two thirds of surveyed CIOs are implementing longer timeframes for application projects. One third of all CIOs, have reduced spending on outsourced IT services and finally, almost all respondents 94% have cut IT budgets by extending implementation time of existing projects and delaying or reducing the slate of new projects.

As a result, we are guarded about the possible impact of these potential delays on purchase deals that are currently in our pipeline and anticipate it to close in Q4 and beyond. With that concern in mind, we believe we can overcome some of the capital-constrained challenges by more aggressively promoting our hosted solutions as a means of avoiding large capital investments and taking an operating expense approach, thereby spreading the payments over multiple years.

Because of the surge in hosted deals this year and the fact that we recognized revenue over the life of the contract, once productive use is achieved, I follow it will be helpful to provide some insight regarding anticipated recurring revenues next year based on our improved visibility related to the six new hosted contracts signed year-to-date.

When considering our existing hosted contracts and the six new hosted contracts, signed year-to-date and without considering any potential new hosting contracts, our current hosting revenue should nearly double by the end of fiscal year 2009.

In addition of this increase in hosting revenue, we also expect backlog revenue fulfillment of approximately $1 million as a result of delivery of the multi-language support to our Emergis customer, McGill University and the University of Montreal, sometime in the second half of 2009.

Next year recurring maintenance services and professional services should show a modest growth in the range of 5% to 10%. Based on the third quarter realignment of the business, we reduced our cost structure by approximately $800,000 per quarter going forward and finally, we expect that next years quarterly operating expense growth should be very modest in the range of 5% or less.

Our goal over the next 12 to 18 month is to cover all of our fixed operating costs with recurring revenues. We hope to do this by greatly expanding our hosted customer base, plus that any net new system sale or hosted contract will drop directly to our bottom line.

This concludes my formal remarks. I have asked Gary Winzenread, our Senior Vice President, Product Development and Strategy; Joe Brown, our CIO and VP of Client Services; and also Don Vick our Interim Chief Financial Officer to be available for this quarter’s discussion to give you an opportunity to hear from our executive team and to ask them any specific question. Also Scott Boyden, our Senior Vice President of Sales and Marketing is traveling today, but maybe available for the Q-and-A session.

Let me now turn the call over to the operator for the question-and-answer session. Operator.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Tom Carpenter - Hilliard Lyons.

Tom Carpenter - Hilliard Lyons

Brain, I wanted to say I’m whole-heartedly in favor of the new strategy and it looks like it’s already paying dividends with Catholic Healthcare West and the unnamed hospital in New York City, which it looks like it’s a major hospital based on the revenue you talked about going forward that these are hospitals that can choose on whatever system they like and they are choosing you guys.

It seems like that, distribution always been the issue with you guys, but you seem like with shifting the focus to ASP, you’ll all be given the door more than you were in the past and get the company’s to sign in that dotted line instead of protracting the deals that we saw in the past?

Brian Patsy

Well Tom, thank you for your comments; we sincerely appreciate it. There’s a lot of dynamics going on right now. As I’d like to say, the vectors seem to be pointing all in the positive direction for a whole host of reasons. One is, we brought in some very talented Senior Sales Leadership and Scott Boyden, who has clearly focused our team on the true differentiators in the marketplace, which we’re calling at a higher level and we have a much more cohesive message.

Second of all, there is a shift that we’re seeing toward ASP solutions for the reasons I mentioned in my comments, but also with the financial crisis that even creates more opportunity to look at a hosted solution versus the purchased solution and now we’re focusing on what we do well and we’re not chasing every deal, but focusing specifically our resources on hosted opportunities and our large purchase transaction where we have a strategic advantage. As you said, the dividends are starting to payoff here.

Tom Carpenter - Hilliard Lyons

So with Catholic Healthcare West and the large hospital in New York City, maybe you can give us some insight as of why they choose Streamline; how you beat out some of your competitors and that can help accomplish or frame the investment decision better for next year?

Brian Patsy

Well regarding Catholic Healthcare West, first of all they wanted by definition in ASP solution. So, that eliminated a lot of the competition right there, but in the case of the shortlist for Catholic Healthcare West, it eliminated all the competition. Who could not provide the scalability that we have with our ASP solution.

Also it was important that the selected vendor be able to integrate their solution into their dispirit clinical information system environment and with 43 hospitals you can imagine there are a whole list of clinical information system vendors deployed. So, we proved that we could do the integration with multiple different vendors being vendor neutral as we are; that was a big advantage for us.

Tom Carpenter - Hilliard Lyons

The first three, to refresh my memory, what was the system; the first three you are doing?

Brian Patsy

Its integration to Cerner, I think one is the MEDITECH and Scott Boyden, are you online? I think it was Cerner, Siemens and McKesson, along with Cerner. Joe Brown, who is responsible for implementation just corrected me.

Tom Carpenter - Hilliard Lyons

So Cerner, Siemens, McKesson’s are the three you’re integrating?

Scott Boyden

The first three. Scott, I thought I heard you out there. Are you available our there for answers as well.

Scott Boyden

Yes, I am.

Brian Patsy

Okay, great.

Tom Carpenter - Hilliard Lyons

So, how many different CIS systems they have in the 43 hospitals?

Scott Boyden

I really don’t know the number, but a reasonable guess would be over five and as many as six or seven.

Tom Carpenter - Hilliard Lyons

But there will be multiple other sites, you have the opportunity to bid on based in your house integration capabilities?

Brian Patsy

Let me word it very carefully here. Catholic Healthcare West is 42 or 43 hospitals; of which we signed a master agreement that we would have the opportunity to implement in a good number of those, more than the three that we started. So, there is a master agreement in place and we are the preferred vendors. So, as other hospitals chose to move forward with a Document Workflow Solution, we are the preferred vendor. There is no contract per say that needs to be negotiated or schedule that has to be executed.

Tom Carpenter - Hilliard Lyons

Then in the New York hospital, it’s unnamed, but I think they have Eclipsys as their system. What was their selection process there?

Brian Patsy

The key factor at that location was the volume of documents. The physical documents that were in that institution were enormous and they needed to have access to basically the historical repository of medical records and they preferred again a hosted solution because of the cost of deployment and so again we were in the driver seat simply because we had a hosted solution and the second reason sounds very similar to Catholic Healthcare West. It was our proven integration to the Eclipsys clinical information system. Those were the two dominant factors that move the deal our way.

Then I’ll add a third one; its scalability, in terms of we have a proven track record, not only with ASP, but with handling the largest of the large hospitals in terms of volume. Our system is very scale up to the largest of the hospitals.

Tom Carpenter - Hilliard Lyons

I hope both of those become showcase accounts for future references?

Brian Patsy

Indeed.

Tom Carpenter - Hilliard Lyons

Real quick on cash; so, I think we all got the balance sheet in front of us, so we saw that. Last quarter, I think you guys had about I don’t, 300 and change positive cash. It looks like you guys have capture of over this quarter, but counting what you guys showed in the balance sheet at the end of October and I’m impressed. Prepayment on 2009 maintenance contracts that you now have an excess of $3 million?

Don Vick

Yes, that’s correct. This is Don. Just within the last few weeks, we’ve had very sizeable collections of the large prepaid maintenance base that we have.

Tom Carpenter - Hilliard Lyons

Is the plan then to drawdown the revolver, so there is not an ongoing charge for that, for at least for further tapping?

Don Vick

Some we’ll certainly look at just based on our cash flow and where we are at. That’s certainly one of the key factors that we’ll continue to monitor and decide.

Brain Patsy

This is Brain. I want to interject that as Don indicated over $3 million in cash, there’s actually in looking just prior to this call another $2 million coming in, in near-term and so one of the options we have is to pay down the loan; however, don’t jump to that conclusion. To degree that we’re usually successful in signing new ASP deals, remember that the revenue is spread typically over a five-year period and we have some infrastructure to buy in order to get those projects of the ground. So, we’re going to watch it very closely, but it’s a nice position to be in.

Tom Carpenter - Hilliard Lyons

So, you said you have $3 million now, you expect another $2 million then by the end of your fiscal year?

Don Vick

It all depends on when the checks are cut, but working at our receivables it looks encouraging.

Tom Carpenter - Hilliard Lyons

So, it was nice to see that the MEDITECH wins, they had so many; would it be about several thousand small hospitals in the U.S.?

Brian Patsy

They are the single largest player as I understand in that market segment; I couldn’t tell you how many sites they have, for what.

Tom Carpenter - Hilliard Lyons

Going back to the topic we touched on earlier, the small and mid sized market of 250 bed or less to the predominate number of hospitals out there, they are so spread apart; it’s always been the issue for you guys. How do you get in front of them? Do you go to all the state medical conferences and things of that nature? I’m going to ask Scott, can you walk us through maybe the plan to get you guys in front of more of those hospitals?

Brian Patsy

First I’m going to hand that question off to Scott Boyden, but before I do, I wanted to emphasis something that I thing is very important at the low end of the market. Clearly, our distribution is a key need for us, but I wanted to point out that at the low end of the market you have some significant clinical information system players and MEDITECH being one, CPSI being another and [SargaMED] being a third and now that we have this MEDITECH site, which is in the process of begin implemented, we will have integration to all three.

We have size that will have our solution installed in all three. We have a CPSI site in Thomas Hospital, we have a MEDITECH site we just announced and we also have a collate mid-site at the small end of the market. So, as you said Tom, the real need here is to go after that market in a big way and Scott Boyden, I’d like you to weigh in on just how we’re going to accomplish that goal.

Scott Boyden

Sure. Yes Tom, that into the market is very, very exciting for us. In fact in our strategic planning if you were to go ahead and actually look at the number of hospital beds, 200 and below it’s about 72% of the entire market, a little over 3,500 beds. So, what that can do for us is a lot; quickly number one, it gives us a more collapsed sales cycle opposed to some of the larger sales which we will still go after and based on our success and also based on our customer base, which is really to who’s who of healthcare if you really did study that, that will continue to be a big lever for us, but we need other levers.

I think one of the biggest challenges we’ve had quite frankly is getting the word out in terms of what we do and how we do it. So, you’re going to see a lot more Waverly in terms of what happens on the web and kind of a refresh of who we are.

Secondly, hospitals talk and I think once we get the MEDITECH integration with the deal that we designed, I think we’ve got some strategies behind that in terms of how to leverage that win and leverage it fairly quickly and obviously when we continue that growth ramp, we will begin I think all such who include some more sales folks based on what those numbers look like, but fundamentally, that is a market that I don’t think we’ve completely leveraged.

I think, right now we’re in the middle of a perfect storm, not only the economy, but also more and more people obviously looking toward the SAS model vis-à-vis our ASP solution and I don’t think a lot of people know that we’ve been doing it for 10 years and have over 22,000 users.

So that is very, very exciting to us and as we begin to grow that end of that sector, that’s going to bleed up into the middle sector as well as the upper sector and we expect kind of the velocity curve to increase hopefully like a hockey stick, but we’ve got a lot of plans around really both of those levers in being able to pull them.

Tom Carpenter - Hilliard Lyons

Okay, that’s great and one more question and I’ll jump back in the queue. Brian, you talked about operating expenses growing 5% or less in fiscal year ’09. I wanted to tie that in with the $800,000 in quarterly reductions that you mentioned as well. I guess, you start off the first two quarters at a higher operating expense run rate in this quarter and probably what the next quarter is going to be like. So, I just wanted to clarify the 5% or less fee based on all of fiscal year ’08, obviously based under kind of the new second half of your numbers, annualized?

Brian Patsy

Tom, that’s a great question, it’s the latter. Actually the impact of those efficiencies really didn’t hit or will not hit till this quarter Q4. So, Q4 you should see approximately $800,000 reduction in our run rate. That will carry forward next year in the 5% or less supplies to the lower number.

Operator

Your next question comes from Bill Bunn - Fort Washington Investment

Bill Bunn - Fort Washington Investment

I’ve got a number of questions including some follow-ups, but first I’m not familiar with the name of Joe Diaz of Lytham Partners, what’s their roll there?

Brian Patsy

They’re our Investment Relations from.

Bill Bunn - Fort Washington Investment

Okay, great. Just to follow-up on some of the balance sheet questions; is the bank line just for $2 million and at this point are you fully drawn?

Don Vick

Yes, we are fully drawn at this point Bill.

Bill Bunn - Fort Washington Investment

Are there any covenants associated with that, that we should be aware of?

Don Vick

There was a tangible net worth covenant and there is also an EBITDA covenant which factors into determining what the overall borrowing basis.

Bill Bunn - Fort Washington Investment

Is that filed in the SEC document; I’d be able to look that up?

Don Vick

Yes, it is.

Bill Bunn - Fort Washington Investment

You talked about the cost cutting, is that largely through the loss of certain employees?

Brian Patsy

I’ll jump in. It’s a combination of things; for example part of it was a planned scaling back of R&D as Gary and his group got to certain milestones. As we indicated we’re going to spend more money in 2008 to get our new architecture out. As we get further down the road on that, we start scaling back. Some of that was a reductions and some of it was turning some contractors into employees and some of them was letting go some contractors.

We also realigned our sales organization to be a more efficient around the ASP approach, which allowed us to actually save some money in that area as well and then Joe Brown and his team got more efficient and realigned to save us some money in the professional services area.

Bill Bunn - Fort Washington Investment

What’s the make of the sales force at this point?

Brian Patsy

Scott?

Scott Boyden

We’ve got two national Account Managers, we have got an insight sales professional and then we have three outside professional sales executives and then we have a couple of folks and in kind of sales operation rolls and then we have two Application Specialist, who help us with demonstrations.

Bill Bunn - Fort Washington Investment

And how long does the national marketing…?

Don Vick

Is that National County Editors?

Bill Bunn - Fort Washington Investment

How long have they been with you guys?

Don Vick

One is brand new and one has been with us for over 10 years.

Bill Bunn - Fort Washington Investment

As far as the three outside Sales Executives?

Don Vick

Let’s see, two of them are fairly new within a year and one has been here I think for over four years.

Bill Bunn - Fort Washington Investment

Now that you’ve realigned and got your cost and order what’s revenue base are you now sized over? How can you increase the top line without stress in the existing play bid?

Brian Patsy

Well let me jump in Bill and clearly we don’t want to give an indication of future expectations on revenue, but Scott in his light realignment of the sales organization, we have lots of room for revenue growth within the existing employee base that we have.

We’re going to be taking advantage of our distribution relationships with GE Healthcare, with Emergis which is owned by Telus in Canada and with Standard Register to create reach and then Scott and his team will be going after selectively high-end accounts and primarily middle-to-low end accounts for the hosting opportunities. Scott, you want to add any comments on that?

Scott Boyden

No, I was completely remiss. We do have a very, very important strategic role and the channel account executive who does manage those relationships and we’re beginning to see with some additional focus I think some additional results and you obviously saw that with the Health Alliance contract, so we hope to gain leverage there by just some additional focus and talent in that area and then maximizing the current great group that we have.

Bill Bunn - Fort Washington Investment

Alright, thanks. Now, what’s the progress if any at this point through the Emergis contract? Is that starting to provide revenue at this point?

Scott Boyden

So keep in mind, that we reported earlier in the year two major wins in Canada, which is the University of Montreal and McGill University, the French Canadian speaking which have started the process of re-architecting which we were planning to do any way.

There’s been a lot of activity with our partner in Canada and several other opportunities and we’re engaged in very specific sales opportunities in other sites and that’s all I can disclose at this point, but I have said in the past and I’ll repeat it, over a period of a couple of years, I would expect our leadership with Emergis to yield the kind of results we’re getting from our partnership with GE Healthcare.

Bill Bunn - Fort Washington Investment

Has there been any contribution from our Standard Register at this point?

Scott Boyden

A significant contribution, particularly in our first deal which is The Health Alliance of Cincinnati. That was a very positive outcome for us, not only do we expand four new hospitals for five years, but re-up for another five years on the existing hospital and it was our first major contract with our partner Standard Register, very large in its revenue value to the company, again ASP. So that’s one nice kick off for our relationship.

Our business development activities are very aggressive now in finding other opportunities to remarket the Standard Register e-forms solution as a part of our package and sometime in Q1 of next year, they will be launching or remarketing our standalone workflow solutions, particularly referral order workflow which fits very well into their world.

Bill Bunn - Fort Washington Investment

Could you guys walk me through a hypothetical ASP, sort of contract when expenses are incurred, when you start to see revenues realized on a quarter-by-quarter, just a hypothetical one?

Joe Brown

Yes Bill, this is Joe Brown. So on an ASP deal, we typically see the hosting revenue start 90 days after the effective date; the 90 days after the customer signs, the hosting fees will start, so those will be the hosting revenues. Professional services start right away, because we start implementing. There are some capital expense and some standard hardware that we resell at that front, but the actual hosting fees start 90 days after the contract signs.

Bill Bunn - Fort Washington Investment

At that point, are they up to their run rate or is it growth from there?

Joe Brown

It depends, if there is add-on. If they’ve added on some third-party softer like e-forms, those could come on later and it depends if there is a face approach in the contract, but if its just our software, those fees typically start 90 days, but there could be and it would be a full impact. I mean all the revenues would start 90 days, but again it’s the time from the contract. Some customers negotiate different terms and if their phase is build in, then that would ramp up overtime.

Bill Bunn - Fort Washington Investment

So given that 90 days, we should begin to see those six contracts delivering as soon as the quarter we’re in now, right?

Joe Brown

Well, there is six contracts and there is probably six different terms negotiated in that, but our standard is 90 days after they’ve gone yes.

Bill Bunn - Fort Washington Investment

So in the current quarter, you had application hosting services revenue of $517 million. What do you think that would be on a run rate, based on just the six that you’ve got?

Joe Brown

I don’t know if I want to comment, I don’t have those numbers in front of me. I think we’ll go back to Brian’s comments, when he mentioned where we’re at today with hosting fees and where we’ll be at the end of next year. So, from a month comparison, not an annualized, I think Brain mentioned it’s going to approximately doubled.

Operator

(Operator Instructions) Your next question comes from Mark Cahill - Private Investor

Mark Cahill – Private Investor

In respect to the hosting facilities, are you processing the deals through your own facilities or to GE?

Brian Patsy

They’re through our own facilities. Is that right Joe?

Joe Brown

Yes Mark, we have a hosting center in downtown Cincinnati. It’s not our bricks and motors lease take and we do have a backup site that we replicate to date, again it’s our facility, not a GE facility. So the GE customers as well as the direct Streamline Health customers are hosted by Streamline in our hosting center.

Mark Cahill – Private Investor

Is that by customer choice; GE is not pushing their own facility?

Joe Brown

No, I mean they do have their own facility, but just the way the technology works, the increased bandwidth between facilities, GE has their own hosting facility in Chicago, they are the experts in managing their applications intercity enterprise and the like and we’re the experts in our application, we just thought it’s a better arrangement; but the experts are on it and again with the technology available its same as to the customer, they don’t know. The centricity enterprises systems in Chicago and the Streamline applications Cincinnati is just presented to them as one application.

Mark Cahill – Private Investor

Right, but it’s more efficient for your facility than theirs as it sounds like.

Joe Brown

Again for the reasons I mentioned, yes it just works out better that we host our application and they host their application.

Mark Cahill – Private Investor

Is Streamline aligned with the GE’s tax system with the CPOE system yet?

Joe Brown

No, we’re not.

Mark Cahill – Private Investor

Any thoughts of doing that in the future?

Brain Patsy

No, we’re not aligned with the pack systems. This is Brain. They’re really different technologies and different architectures; Dycom is a whole different ball game for Pax Images. We’re a document workflow company, not a tax workflow company. Relative to CPOE, yes we are aligned. We have integration to GE centricity enterprise and so that’s one of the real differentiators in the GE installed base.

Mark Cahill – Private Investor

In the hosting agreements, it sounds like the old agreements used to be two to three contractors and now you’re five to seven, am I correct there?

Joe Brown

Maybe a year ago the agreement was a four-year agreement; the standard now is a five-year agreement. We’ve had some discussion about the seven and eight year agreements. So, there’s some benefit obviously the customer and us to lock it in for a longer-term.

Brain Patsy

I also will comment at, we have some really mature hosting customers going back to 1998, 1999 time for him and those original agreements were even though four or five years. Once the four or five years expired, then it went on annual renewals and if you continue on the old deals, some of them are annual renewals, but almost all of the new ones are five years for more.

Mark Cahill – Private Investor

The great next deal that you announced this morning, can give us a little more detail on how big of an organization and how many hospitals there are there?

Brian Patsy

I’m not at liberty to share too many details, plus that you could triangulate and figure out who it is, but I can tell you its very large, it’s on the high into the scale.

Mark Cahill – Private Investor

And more to the Catholic Healthcare you’re going to install [Inaudible]?

Brian Patsy

It’s a very large hospital as opposed to a bunch of medium to small hospitals; very, very large, with a large number of bids.

Mark Cahill – Private Investor

Going to Standard Register have you established a pipeline out of that angle yet?

Brian Patsy

We have. Scott any other commentary there?

Scott Boyden

Yes, we had established a pipeline, several meeting, several focus groups, several value prop discussions; they have been at our user group conference; we’re now planning to do something similar with theirs; we talked about several different market initiatives and I’m not at liberty to go in to the details but that’s a very focused relationship and we’re both very exited about it.

Mark Cahill – Private Investor

I think I heard some comments that you’re going to start selling Streamline products in the first quarter; I though you were doing that already?

Brian Patsy

Well they’re going to be selling our stand along workforce; they had to defer the launch of that because they had another major product that was being launched, so we’re getting all the box in Q1 of next year.

Mark Cahill – Private Investor

Okay; are we devoting one sales resource to standard Register or are all-executive.

Scott Boyden

Well we’re leveraging the entire team, but we believe in singular owners and so we have a channel account executive. He was only handling and focusing on three of our core partners and then from that relationship then there is referrals, there was leads. Once that dashboard is out there and managed, then that percolates into our entire sales funnel, across all the territories, both into our base as well as new opportunities.

Mark Cahill – Private Investor

Is there a individual pipeline out of Telus yet?

Scott Boyden

We have a pipeline, its actually one that we are sharing and putting together as we speak that really originated from the user group meeting; just because it was staring to grow and so we need to put some discipline around it and so that’s why we named the channel. The account managers to really handle that and manage that relationship from our side have had subsequent meetings since then which the dashboard was a big component of it. So, yes we do have one, we do have a pipeline and we are looking at it.

Mark Cahill - Private Investor

Last question from me; the pre-operative product, I saw that back at the Hinn’s show. I was surprised to hear that still in beta. Aren’t you close to finalizing that?

Brian Patsy

I’ll turn that one over to Gary. He’s been anxious to have his voice over here.

Gary Winzenread

Thanks, a good question actually. Now our products have been developed and released from our development environment for several months now. As you know we take all of our products through customer beta, so the customer schedules impact how quickly we can get it through the beta process, but it’s held up well, it’s not a product issue and it will probably be in beta for another 30 days or so before we can announce it as GE.

Mark Cahill - Private Investor

So, it’ll be starting to sell in Q1.

Gary Winzenread

I would hope that Scott’s already working on that, but yes.

Operator

There are no further questions at this time. I would now like to turn the call over to Brian Patsy for closing remarks.

Brian Patsy

Let me thank you one more time for participating on today’s call. We appreciate your continued interest in Streamline Health. We look forward to talking with you again at the conclusion of the current quarter. We’d also like to wish you and yours all the best wishes for the holiday season. Have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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