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Greenway Medical Technologies, Inc. (NYSE:GWAY)

Q2 2013 Earnings Call

February 12, 2013, 05:00 pm ET

Executives

Bill Esslinger - VP & General Counsel

Wyche T. Green - President & CEO

Al Cochran - CFO

Analysts

Ryan Daniels - William Blair

Jamie Stockton - Wells Fargo

Zack Sopcak - Morgan Stanley

Sandy Draper - Raymond James

Sean Wieland - Piper Jeffrey

Neil Chatterji - Sidoti & Company

George Hill - Citigroup

Sean Wieland - Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Greenway Medical Technologies, Incorporated Earnings Conference Call. My name is Caris and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Mr. Bill Esslinger, General Counsel. Please proceed.

Bill Esslinger

Thank you, Caris. Good afternoon everyone and welcome to the Greenway Medical Technologies 2013 second quarter conference call. In the course of this conference call, management may make statements that contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements regarding future events, our company performance or estimates or projections relating to the future.

Although, the company believes that the assumptions underlying any forward looking statements are reasonable, we operate in a continually changing business environment and new factors emerge from time-to-time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. Therefore the company’s actual results could differ materially from those that may be projected in management’s discussions.

Additional detailed information concerning a number of factors that could cause actual results to differ from the information that management may give you is detailed in the company’s filings with the SEC, including, but not limited to, the company’s Form 10-K for the year ended June 30, 2012. Copies of these reports are available upon request.

In addition, during today’s call, we will refer to certain non-GAAP financial measures. Please refer to today’s earnings press release available in the Investor Relations portion of our website at greenwaymedical.com for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

With that said, I’ll now turn the call over to the President and Chief Executive Officer of Greenway Medical Technologies, Mr. Tee Green. Tee?

Wyche T. Green

Thanks Bill and good afternoon. Thanks for joining today's call. We're reporting results for the first half of the fiscal year that produced 20% topline growth, continued margin expansion and acceleration in the trend toward revenue from recurring sources.

At 20% growth, we are at the low end of the guidance we issued at the start of the fiscal year. More important, revenue from recurring sources is 53% of our first half revenue, up from 47% for all of our 2012 fiscal year.

For the three months that ended December 31, 2012, however, growth of 12% was below our long-term expectation. We continue to achieve strong revenue growth from recurring sources and that was 32% for the quarter. Growth in system sales were 16%, a year-over-year decline in training and consulting revenue had a pronounced impact on our overall growth for the quarter.

Several of the factors that are affecting our quarterly results are the product of where we've been taking this company over the past several years. Specifically, our deliberate move toward a predictable recurring revenue model is happening at a faster pace this quarter than we have signaled and or gaining increased acceptance of our solutions by larger enterprise accounts. In fact, the average number of providers of our Q2 go-live sites was nearly double the average for our entire customer base.

These two factors are affecting our short-term financial results in the training and consulting services revenue line in particular. A portion of this was anticipated and included in our original outlook. A portion of this was identified by us and as I just said, this shift is occurring a little bit more rapidly than expected. With all of that, we think it's prudent to adjust our outlook for fiscal 2013 to reflect what we’re seeing.

I do want to provide some color on how this shift toward recurring revenue stream is impacting deployment related revenue. As a greater percentage of our customers choose to deploy on our cloud based [Plus S] offering, there is a direct impact on how we're able to recognize training and consulting services revenue. If we do the training, we incur the cost in the current period, but the revenue we will be recognized over an extended time.

We are also shifting some of this training particularly for smaller size to third-party partners. We can identify this shift to our Plus S and bundled revenue cycle management deployment is having a meaningful impact on comparisons of our one-time revenue lines.

Our move up market meaning to larger systems is also having an impact on deployment related revenues. Larger accounts were able to leverage their training spend across a larger provider base. As we move into the enterprise space, it's more common for us to see a train the trainer model in which the enterprise is taking more responsibility to train their providers and users, so the bookings related to deployment are lower on a per provider basis. There is one more wrinkle to this; a number of accounts build training schedules that push the service and therefore the revenue into the new calendar year which is our third fiscal quarter. January billing for training returned towards historical levels. We are encouraged by the growth in the number of providers using our platform as well as the pickup in bookings growth.

During the fiscal ‘13 second quarter, we added more than 750 providers to our platform; a number that’s up considerably from about 470 deployed in the first quarter of the year. The average size of the group that we took live during the second quarter was nearly double the average size of our entire customer base. We continue to add small groups; there were six enterprise accounts going live in the quarter, they have an impact on averages. In the past year, we have added more than 3,100 providers and that brings our total network to more than 13,400, of which more than 10,400 are physicians.

So provider adds is strong and given our recent history, the growth in our provider base leads to increased recurring revenue streams and a more diversified revenue. This quarter’s growth in cloud services including PrimePATIENT, PrimeSPEECH and PrimeMOBILE demonstrates our ability to build a more valuable relationship with our customers overtime.

As the nature of ambulatory care shifts toward community based models or information shared amongst specialists and sub-specialists and with lot health professionals our PrimeEXCHANGE and PrimeDATACLOUD offerings were gaining popularity. We recently launched a data service for labor and delivery making it possible for the delivery team at a hospital to access pre-natal record for delivering mom; more than 90 hospitals are using this service to coordinate care within their community and that number will grow. This is an example of our platform being used by healthcare system leaders to ensure that providers have access to the most relevant clinical information at the point-of-care.

During calendar year 2013, we expect to ramp our PrimeRCM platform which is now serving more than 300 providers. Our clinically driven RCM is becoming a fundamental part of discussions we are having in the marketplace. We believe that the integration of our clinically driven RCM will push accumulated knowledge of payer policies to the provider at the time the care is being rendered, this allow providers to make utilization decisions as part of their normal clinical workflow that will benefit their revenue cycle.

We are excited about our PrimeRCM is giving providers the tools they need to participate in quality based payment programs. We will continue to introduce innovation as we roll-out our RCM platform; its part of preparing our customers and prospects for new reimbursement methods based on clinical outcomes.

To that end, we completed the acquisitions of GHN-Online, an enterprise claims clearing platform at the end of December. GHN’s technology is being integrated into our platform and when completed, our providers will be able to have more of their financial intelligence integrated into a close loop view of the patient care cycle. This acquisition comes with modest revenues from its existing customer base and for us the excitement is having this technology integrated and the impact it will have will advance RCM offering.

At this point, I would like turn the call over to our CFO, Al Cochran for a review of our second quarter and some discussions of our updated outlook. Al?

Al Cochran

Thanks Tee and good afternoon everyone. As Tee said, we reported results that show continued growth and recurring revenue and I will discuss some of the traction we are seeing on the adoption of our platform, as well as some of our specific efforts to improve margins.

Revenue for the 2013 second quarter grew by 12%. This was comprised of a strong growth of revenue from recurring solutions of 32%. This was offset by 5% decline in revenue from non-recurring system sales and training and consulting for the fiscal ’13 second quarter.

The current revenue grew to 55% of total revenue for the quarter and of course that's a function of both the breadth of solutions being deployed on our cloud offerings as well as the decline in non-recurring revenue we experienced this quarter. System sales grew by 16% to $10.6 million for the fiscal second quarter.

On the revenue side, system sales benefited from additional work performed on behalf of our strategic partner Walgreen as we continue to expand our relationship to support their health cloud strategy that we did have a deleterious impact on margin however as system sales margin of 58.5% for this most recent quarter declined from 70% for the year ago period.

System sales margin was also impacted by increased amortization expense related to capitalized software development and acquired technology. Training and consulting revenue declined by 35% year-over-year to $4.1 million to the fiscal second quarter from $6.3 million. This decline has resulted several factors including fewer deployments overall and fewer hours being purchased for those deployments that occur during the period.

The average size of provider groups going live during the period almost doubled from slightly less than five to just under nine physicians. This is skewed by several large enterprise transactions that went live during the quarter. In addition, training hours associated with the deployment of our plus S offering are deferred over an extended period and as a result we are migrating the deployment of smaller groups to business alliance partners.

We forego some of the training revenue but at the same time the associated costs of deployment are borne by our partners. Approximately 25% of our go-lives during the quarter opted for our plus S offerings. So as we've said that was skewed to smaller provider groups during the quarter.

We expect that over time the adoption of plus S will include larger groups. Training and consulting services margin was 19.4% for the 2013 second quarter which is down from 27.6% for the year ago period. Margin decline is related to lower utilization of our training resources due to fewer deployments for the period.

Support services increased by 43% year-over-year driven principally by increased adoption of several of our cloud services by our growing customer base. As a result, margins have improved by 580 basis points to 71.2%. Just to give you an example the number of providers deployed on plus S are still relatively small grew by 40%. Our PrimeEXCHANGE connections are up by 45%. The providers using PrimePATIENT our patient portal increased by 108% and the number of providers using PrimeSPEECH grew by a 115%.

As important contextual point, total provider count grew by 30% year-over-year. So we are successfully adding solutions on behalf of our existing customers and that's consistent with our efforts to build reliable recurring revenue strengths. Revenue growth for our cloud based services is strong. Plus S revenue grew by 79% year-over-year and margin improved as a result of some scale as well as better cost structure for that service.

The current revenue from foreign exchange was up 37% and revenue from PrimePATIENT grew 98%. Continuing on our electronic data interchange and business services revenue increased by increased by 17% year-over-year and margins improved by 670 basis points to 36.4%.

Within this revenue category, growth was driven by higher transaction volume as well as the expansion of our RCM platform. RCM revenues grew by 62% and margins related to that solution more than doubled. We are not quite at our target margins for RCM but we are making excellent progress there.

Overall margin expansion for EDI and business services can also be attributed to our focused effort to improve relationships with third-party partners and to introduce our own innovation. Overall gross profit of $17.4 million for the second quarter of fiscal ’13 is up 16% from the prior year. As important, gross margins continue to expand, for the second quarter gross margin was $53.2%, 177 basis point improvement from the prior year.

Sales, general and administrative expenses grew by 28% year-over-year and was 45% of revenue for the second period. Growth in SG&A as a percent of revenue is really a reflection of lower than expected non-recurring revenue. On actual dollar our SG&A spending activity is a little lower than our plan.

Restructuring development costs were 13.6% of revenue down a 100 basis points sequentially but up slightly year-over-year. We expect that ratio to continue to decline this fiscal year. On a non-GAAP or adjusted basis, I want to refer you to the detailed reconciliation of certain non-GAAP measures to their GAAP equivalent that’s contained in this afternoon’s press release. That release is available in Investor Relations’ portion of our website.

For the second quarter of fiscal ’13, adjusted EBITDA was $1.3 million basically unchanged from the prior period. Adjusted EBITDA margin for both periods was 4%. Debt definition of adjusted EBITDA or non-GAAP measure is earnings before interest, taxes, depreciation and amortization, acquisition related transaction cost and stock-based compensation.

We generated cash flow from operations for the three months ended December 31, 2012 of $3.7 million which is up from $3.3 million in the year ago period. Capitalized software development costs recorded were $3.6 million and capital expenditures were $4.6 million.

During this quarter, we had $3.9 million in acquisition related payments which includes a contingent payment for prior year acquisition. As Tee said, we acquired enterprise claims clearing platforms at the end of the quarter and during the quarter we also acquired a business intelligence technology. Cash flow impact of these transactions was $3.9 million for the second quarter and payments that we have made in January so expect us to report a slightly higher amount in our third quarter cash flow.

Moving to our balance sheet. We ended the second quarter with $27.4 million in cash and short-term investments and we continue to be debt free. Our total backlog at December 31, 2012 was $98.8 million that's up 13% year-over-year and about 2% sequentially, recurring backlog is $72.8 million is up 32% from last year and just under 5% sequentially, that’s a strong indicator that we are in a position to continue to drive recurring revenue growth.

At this point I would like to go through the revised outlook for the balance of fiscal year 2013 of course these comments should be considered forward-looking. Based on our results through December 31, 2012 along with a rapid shift of revenue from recurring sources, we think that revenue for fiscal 2013 will now be in a range of $145 million to $150 million.

We expect gross profit of $79 million to $84 million which means a range for gross margin is 54.5% to 56%. For fiscal 2013, we think operating income will be $5.5 million to $8.3 million and GAAP net income will be between $3.1 million and $5.2 million. This implies GAAP EPS of $0.10 to $0.17 a share for the full fiscal year.

On an adjusted or non-GAAP basis, we now believe EBITDA will be in a range of $18 million to $21 million and adjusted EBITDA margin will be 12.4% to 14%. Adjusted EPS for the fiscal 2013 will be $0.21 to $0.28 a share. Our view on the balance of 2013 is that we will continue to see solid top line growth and margin expansion will come from the number initiatives we described such as the introduction of our own integration as well as effective management or sales, general and administrative expenses.

At this time, I am trying call back to Tee for few additional comments.

Wyche T. Green

Thanks, Al. Before opening the call for question, I do want to point a few items that will give us confidence that we have the right strategy and the right approach toward execution of this strategy. On last quarter’s call I talked about the slowdown in the market during the summer months, a traditionally slow period, that was reflected in our bookings for the quarter, bookings for the second quarter were $22.6 million which is up 40% sequentially and 13% year-over-year. When combined with an expanded pipeline relative to the past several quarters and sustained backlog, we have good visibility into our financial performance for the remainder of the year.

The availability of our RCM platform at a time that’s ahead of the move toward payment systems based on clinical measures becomes addictive to our outlook as we’ve been intensively conservative in estimates for this service. During the last few months, concluding the second quarter in January our solutions have become available to an expanded universe of providers.

In November, we were welcomed into the affiliate program at ACA. Our second quarter bookings include several transactions that were completed and our pipeline is growing as we develop relationship across ACA’s regional structure. Separately, we have been selected by Baylor Quality Healthcare Alliance, a group of physicians who have formed the bases of an ACO for [Dallas] Baylor Healthcare System. This is an affiliate adoption program, and we now have access to large base of their affiliated physicians who practice within that large system.

These two opportunities are new to us, we have not been a player in this space, we are now. What's more encouraging is that we are there because educated partners who understand the competitive offerings fail the need to bring someone else and something else to the table for their provider groups. We are that someone else. Our innovation and service teams continue to differentiate our offering. PrimeSUITE is that something else, a very different solution that these partners believe will take their providers forward within our operability across their communities that result in true data liquidity. We've talked for some time about how open systems, the movement of clinical data out of silos will lead to a smarter healthcare system. These two large partners validate our strategy and recognize that we provide a clear path for sharing information across communities.

Finally there are a few important milestones that our organization has accomplished recently. We are the first to achieve CCA (inaudible) certification for 2014 meaningful use. Thanks to the leadership of our innovation team to be the first to certify for meaningful use stage 2, our customers and prospects should have confidence to plan well in advance for the care coordination approaches that best suit their communities.

The second item is that we've just learned we are pre-validated vendor for the National Center for Quality Assurance Patients in Medical Home Program. Now it’s much easier for our customers and prospects to pass the rigorous process of achieving National PCMH Certification which can lead to higher reimbursement from CMS and other payers. Okay, we've given you a lot to digest and I think this is a good time to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) and your first question comes from the line of Ryan Daniels with William Blair. Please proceed.

Ryan Daniels - William Blair

When we look at the revenue weakness that we saw during the quarter, you highlighted this a little bit. It sounds like there are several things, number one some of our larger accounts pushed out some of the training spend until the January period or Q1 on a calendar basis; the SaaS sales and then moving to third parties for some of the smaller implementations. Can you maybe walk through those three items in which is having the bigger impact and how you see those trending on a go forward basis, because it does sound like to you according to your comments that the January trend the revenues kind of back to where it was prior to this quarter.

Al Cochran

Yeah, Ryan I'll take that, a substantial portion of the Delta between the current training and consultant search revenue in the prior quarter is related to a few large enterprise accounts that push the training out into the January quarter. That was a substantial portion of that. The portion that related to deferral from Cloud based deployments on process that was maybe under 10% of the total. But that was a factor as well in terms of the delta, and then the push to move revenues to third party partners that wasn’t as active in that quarter but that's certainly a piece of is real probably again on the order of maybe 5% to 6% or so, which we can add all those pieces of and then coupled with the fact that the enterprise solutions that we did employ they are subscribed a fewer dollars, a few hours of training on a per provider basis so that's a little bit of a shift that's a factor there, and we see some of that recovery in calendar first quarter but the fact that we are taking into account are revised in guidance is an element of what we see here.

Ryan Daniels - William Blair

That’s helpful because it seems like the biggest portion is more transitory but is it something that’s going to be sustained. But in regards to the larger accounts, just as you do have more enterprise success. Can you give us a feel for how much lower, maybe on a percentage basis, the average spend is per provider versus the kind of traditional customer base?

Al Cochran

Yeah, I really kind of calculated at present, but it's more in terms of few hours per provider. So a typical provider would be just to illustrate now may be a couple hundred hours per provider and the enterprise applications and it's really a function of having a larger number of provider that you can have a 10% to 20% reduction in that in terms of average number of hours per provider.

Ryan Daniels - William Blair

Okay, that’s helpful color, and let me ask a bigger picture question. T you mentioned PrimeRCM, can you give us a little bit more of an update about how that’s being received probably in the market. It sounds like you’ve got some nice marquee accounts to sell in to out of the box, but what has been the feedback from the institutions that are using the product today and what you still have to do to bolster that in addition to acquisition you completed in the fourth quarter?

Wyche T. Green

Right. It's still early, we're still in an infancy stage with RCM platform. We do have 300 plus customers own it today and we just now started allowing our sales force to engage in dialog in new sales not just from existing customer base. So you know, early indications, Ron, it’s an exciting platform. We've always said that clinical process through our financial process and I think that's resonating especially when you look at programs like patients in a medical homes and care coordination efforts. We think it’s going to be a major growth driver over the next decade for us. But early indications from customers are positive.

Operator

And your next question comes from the line of (inaudible) with JP Morgan. Please proceed.

Unidentified Analyst

Hi it’s actually Gavin (inaudible) for [Lisa Gill]. In terms of the impact from Walgreen’s in the quarter, you said it, it definitely had an impact on the revenue and on the margin line. How should we expect to see that going forward?

Al Cochran

The benefit from Walgreen’s is part of the expansion of what we are doing to help them with their health platform, and it’s because of the low and expected overall system sales is more impactful in the current quarter. It is probably and it’s going to vary as we move forward to be honest. We had a portion of it this time. In all honesty it would be not appropriate for us to comment on margin profiles for particular customer. I would point out that the depreciation and amortization is really more impactful in my view because that’s a fixed dollar amount and for the quarter it’s something on the order of 1.5 million and that is a significant percentage of the total system sales for the whole quarter. So if we had the double the system sales that number stays fixed and so the margin [would] improve, if that makes sense.

Unidentified Analyst

Okay, so to sort of summarize the impact would probably be less on the system sales margin throughout the year?

Al Cochran

Yes, that will be in our expectation.

Unidentified Analyst

Okay, and then again turning the bigger picture, I saw an article recently and an example of Greenway as a replacement EMR. Can you describe, so how you view to green field versus replacement market and whether or not that is changing?

Wyche T. Green

If I go back 2Q it was relatively the same, 90% of our deals were greenfield deals, 10% were replacement. I think if you read into the announcement especially with some of our enterprise accounts it’s where we are seeing some of that replacement opportunity build in the pipeline. So I would anticipate that to pick up or [still] the remainder of 2013 especially more in the enterprise space.

Operator

And your next question comes from the line of Jamie Stockton with Wells Fargo. Please proceed.

Jamie Stockton - Wells Fargo

Maybe the first one, T I think you comment that pipeline is larger now then it has been in the last few quarters. Could you talk about the composition of that or maybe more specifically is the software potential with new clients is that portion of the pipeline larger then has been last few quarters?

Wyche T. Green

Al raised his hand. We just did some of this analysis so go ahead.

Al Cochran

Jamie I’d respond to it in this fashion. We spoke at length last quarter about what the impact of [Plus S] would have on license sale and training and services, and one of the things that this pipeline analysis showed is traditionally the one time revenue represented by licenses and training has been in the order of 60% to 65% of bookings in any particular period and can go back several years and that's pretty much been the trend. As I look at the pipeline now and I look at what the expectations the sales force is telling of the proportion of the deals that they anticipate closing, that component now that is licensed and training is down to less than 50%. So that's a pretty dramatic shift from where we've been and that tells me that the move to RCM services, that's a big piece of where we are going, Plus S as well as uptake on all of our other recurring services and so that's one of the factors that lead us to reconsider what the rest of the year will look like.

Jamie Stockton - Wells Fargo

Okay. So in that shift it sounds like maybe there is because you've rolled out like RCM which is a big revenue opportunity within the existing client base and obviously with new clients as well as you get them signed on, but within the existing client base that's a big opportunity that that maybe what's driving a little bit of the pipeline growth or maybe disproportionately what's driving the pipeline growth recently?

Al Cochran

Its driving some of it, but just the overall, and another factor is, even at less than 50% being one time revenue as Tee indicated the pipeline itself is larger so…

Wyche T. Green

Yeah, and the key thing when I am referencing or we are referencing pipeline, we are referencing new sales. We are not referencing our internal farming type potential, when we reference pipeline, it’s more of the hunter mentality.

Jamie Stockton - Wells Fargo

Okay. And then maybe on Walgreens; can you talk about how much work have you done with them especially on the world health solution, you know, I know you may not be willing to throw a number out there, but just from a percentage standpoint or a fraction of the overall opportunity that you see with them to develop this proprietary system. Where are you in that today and should we be expecting some incremental lump of bookings or business from that at some point in the future?

Wyche T. Green

Yeah, it’s Tee, the way we look at it we are in 1.0 of this relationship and 2.0 has been framed, so yeah, we kind of said this initial relationship was in the order of magnitude of $25 million to $30 million, but we would anticipate overtime as we develop more and more into this platform that our opportunity would grow.

Jamie Stockton - Wells Fargo

When you say $25 million to $30 million, are you including the employer clinics in that or just the, just proprietary edge that you are developing?

Wyche T. Green

That's just to develop their health cloud platform, the employer clinics are separate.

Jamie Stockton - Wells Fargo

Okay. And then maybe just as my last question, let's talk about the implementation services gross margin, obviously the cost of goods sold came down there during the quarter along with revenue. I hear that you expect an acceleration of revenue there as some of these enterprise deals that were the implementation kind of got pushed, that's kind of hit back in the March quarter. What should we expect from a cost standpoint, my guess is there's going to be some uptick, but maybe much less significant than what's going to go on with the revenue line?

Al Cochran

I think the margin will rebound a bit, the thing that was impactful for this quarter is we have a fixed resource spend there and if we didn't have the volume then the margin is going to decline. So as we rebound some of that, and I think getting margins back in the 25% to 30% is certainly within reason. One of the things to bear in mind, we implemented our contracted program to specifically account for ebb and flow in demand, just in this particular quarter, the fall-off in demand because of the things we sighted, just were enough to consume all of our internal resources. So we will look at that and manage that to a better improvement but I would think again in the 25% to 30% range.

Operator

And the next question comes from the line of Rick Goldwasser with Morgan Stanley. Please proceed.

Zack Sopcak - Morgan Stanley

This is Zack Sopcak in for Ricky. And I had a question on the Plus S go-live. So for the quarter, I think you talked about 25% of go-lives were unprocessed, which if I recall the last quarter was I think around the same rate but this quarter you said they were skewed towards the lower side. I was wondering if you can give you any color, I guess, normalize out to enterprise accounts. Is the skewed towards Plus S dramatically up for the quarter? Or can you give any kind of color on a normal mix what that’s Plus S go-live percentage would have look like?

Al Cochran

Yeah, the 25% for the current quarter, you are right, that’s comparable to the number of size. What we're trying to communicate, is that go-live Plus S in the current quarter are more towards the smaller sized practices and the counter to that is as we're talking about the number of physicians we add, number of providers that we add is that we implemented a number of large enterprise accounts and that drove the average size of practice that we were implementing in this quarter from something on the order of five to something on the order of nine. So that’s what we were trying to communicate. Now as we move forward, we do have expectation that Plus S will be adopted by some of the larger enterprise. We didn’t that specifically in this current quarter but that’s one of the things we would anticipate going forward.

Wyche T. Green

And we do see that in the pipeline that's why we are adjusting some of this guidance for the remainder of the year.

Zack Sopcak - Morgan Stanley

And then one last question on the training and I know you talked about in the March quarter you will expect to see some of the training expenses from those large enterprises that were posted in January when we think about normalized training going forward, is that going to be lumpy depending how many enterprise deals you have and whether they decide to go with Plus S or a normal distribution or should we think about that going forward?

Al Cochran

I think that’s a fair assessment depending on and of course enterprise transactions are more complex, sales cycle is longer, implementation cycle is longer. So it will introduce an element of lumpiness and all elements of the P&L to be honest, but certainly in training because there would be, if it’s a licensed transaction with enterprise, we would have the recognition of the revenue perhaps in a quarter that to complete all of the earnings process there but the implementation could be a quarter or may be even two quarters delayed depending on exactly what their desire is for implementation and those services and revenue there from are recognized as we perform it.

So you are exactly right. There will be some lumpiness. And we will keep you as informed as we can on how that seems to shake out, but at this point it’s we have got an element factored into the year that’s the reason we do annual guidance. So the quarter-to-quarter variations would be very difficult to predict.

Operator

And your next question comes from the line of Sandy Draper with Raymond James. Please proceed.

Sandy Draper - Raymond James

My question really revolves initial one around on the expense side, if I just do some quick math, if I maybe wrong, it looks all if I take the sort of mid-range of your gross profit guidance and the mid-range of your operating profit guidance and look at first half year versus second half, it looks like you are expecting since the operating expenses in the second half to be about the same as the first half, is that right or am I missing something, I am just trying to make sure I got that math right, I am just trying to understand how those can stay flat on first half and second half?

Al Cochran

That math works Sandy and that's kind of our regional internal plan was put together and we will drive towards that. We would expect obviously the implications is the higher revenues and they start variable expenses, a little margin in concert with the growth in revenue but there is also leverage that I think will come to bear. So we have an SG&A infrastructure, we have a marketing infrastructure and we have an R&D infrastructure that will support higher revenue. So we don't have to invest at the same pace. So as we look at it we think that flattish expense line works for us.

Sandy Draper - Raymond James

Okay, great. And second question Tee or maybe for Al too is, when you look at the growth in the plus service line and the (inaudible) is that, how much of that sort to buy, are you guys pushing it to sales guy really trying to push that product because he needs to because there are probably a couple of other vendors out there, are they trying to compete against those guys and therefore pushing it, is it a customer pushing it and if so what is it, is it a payment structure that the customer likes or are they really starting to get the technology? Thanks.

Wyche T. Green

Great question Sandy and I would probably have to calculate may be sum of all of that but I think it really comes down to, I think customers are catching on to the technology platform. They are certainly catching on to the cost structure. But I still think in these enterprises we are going to see different entities deploy different types of platforms and I think that's the beauty behind our innovation as we can allow for PrimeSUITE to be deployed in either manner and still manage it the same way. I think that's critical in how some of these communities are moving today.

Sandy Draper - Raymond James

And one final question here, when and I know this is difficult asking about sort of competitive or competitors, when you look at your sort of first new advantage for some of the stage two stuff, how much do you think, you know we really didn't see that big of a shakeout in the market relative to meaningfully stage one in some of the smaller players. What are your thoughts around other smaller competitors especially getting either their products certified, how difficult was it for you and more importantly getting their customers to stage two, do you think we could see a shakeout or are we really needing to maybe get to stage three or beyond before some of these requirements really knockdown some of the little players? Thanks.

Wyche T. Green

Again a great question and it's a bit like looking into the crystal ball but if you look at the amount of capital of energy that we spent leading this effort with (inaudible) two and if you look at the amount of energy we are going to put behind training and consulting to get our customers into the position its considerable and so companies that are smaller in nature don't have access to those investment resources. I think it is going to be tough, because when you start moving into coordination of care, its not just an exchange of these transactions, it’s the word flow and I think that's why Greenway has become a leader in this and why we are working with the companies like Epic and Cerner and McKesson. It’s not just the passing of information, its how you are integrating this information into the communities work flow and that takes substantial R&D dollars.

Operator

And your next question comes from the line of Sean Wieland, with Piper Jeffrey. Please proceed.

Sean Wieland - Piper Jeffrey

I missed the recurring and non-recurring backlog number in your prepared remarks if you gave it. Do you have that?

Al Cochran

Yeah, sure, the total backlog is $98.8 million, recurring backlog was $72.8 million, so by difference the non-recurring backlog was $26 million.

Sean Wieland - Piper Jeffrey

So the midpoint on the revenue guidance, midpoint to midpoint on the two ranges came down about $5 million and $3 million plus of that was in the quarter, which means my question is, did you check guidance down enough, given what happened in the quarter and the outlook.

Al Cochran

Great question, but we think that we did. We evaluated the current condition of bookings, current condition of our backlog, current condition of our pipeline, and the big issue is the training consulting services in the quarter that was the largest portion, and considering that we anticipate a recovery of some of that in the first half of the year, first quarter of the year, we think so and the opportunities we have with enterprise gives us the larger transaction. We have five months to reel those in. And that’s a considerate analysis. We think that this is the right number.

Sean Wieland - Piper Jeffrey

Okay. Can you tell us exactly the number of training and consulting revenue that was deferred because it came in on the SaaS contract?

Al Cochran

I can. For this quarter, it was $200 million. I am sorry, $200,000.

Sean Wieland - Piper Jeffrey

That sounded a little bit high. And then RCM, you spoke a little bit about it. I just like to know what are you learning in that space as you get that business off the ground, and can you give us any kind of information about like what you are doing in terms of average cash collection increase or days and account receivable decrease after customers go live on your platform?

Wyche T. Green

Yeah, we can. We don’t have those numbers right in front of us, Sean. Again, we haven't. We just started releasing some of the return on investment case studies. We just started posting those but we will be able to bring more of that to light next quarter.

Operator

(Operator Instructions) and the next question comes from the line of Neil Chatterji with Sidoti & Company. Please proceed. Neil, your line is open.

Neil Chatterji - Sidoti & Company

Now my question was regarding kind of going back to the OpEx. The SG&A was running higher there, are you expecting that to kind of remain elevated there or return to a more normalized level and if you could add any color there?

Al Cochran

I am sorry Neil I didn’t get part of that, which was it that you said appeared elevated.

Neil Chatterji - Sidoti & Company

The SG&A.

Al Cochran

It was a bit higher in 2Q timing for expenditures as a part of that, and we do expect that to come down over the balance of the year.

Neil Chatterji - Sidoti & Company

Okay and then in terms of the amortization impact on cost of goods sold, are we going to see something similar to that 1.5 million kind of on a quarterly run rate?

Al Cochran

Yeah, the total amortization that’s part of system sales, cost of goods presently is about 1.5 million and that number will be fixed. It will vary as we release new innovations. They are amortized over 36 months period, but the base now will be 1.4, and once the amortization period for innovations have already been released once that goes to 36 months than it will decline, but for right now 1.5 per quarter is a good proxy of what that’s going to be.

Neil Chatterji - Sidoti & Company

Just one final question, in terms of the you kind of talked about the affiliate programs. What would you expect there is there anything unique there in terms of how those would get implemented. Would that be more comfortable to your normal practices or it would be more like an enterprise?

Wyche T. Green

Those are going to if you take (inaudible) landscapes in the Baylor there are two different environments and some will have more of the enterprise flavor and some are going to have more of the Plus S smaller practice type deployment, so we will just have to see how that shapes over the next six months.

Operator

(Operator Instructions) And your next question comes from the line of George Hill with Citigroup. Please proceed.

George Hill - Citigroup

T. I wanted to ask how we should think about these affiliate programs, because you look at across lot of these large health organization and you lot of vendors announce these affiliate programs, but none of them seem to be exclusive, they seem to be hunting licenses, you highlighted Baylor in particular which hasn’t announcement merger with Scott & White. Scott & White has got a big epic deployment underway. So should we think about these affiliate programs as like the all racks basically it’s a hunting license to go after docs that are affiliated with the health systems or is there a real advantage that comes, a real sales advantage that come from being part of the affiliate program and is the really any exclusion that comes to not being part of the affiliate program?

Wyche T. Green

Yeah, George when we look at, we certainly believe there is tremendous advantage especially when you look at an organization, lets say HCA where we have not since the beginning of time been involved in that, so we look at 160 campuses around the country where we really not been employer in that and post that relationship where we already have four transaction inside this communities. So I’d say absolutely it’s an advantage for us.

George Hill - Citigroup

Okay, and I guess how many other vendors are participating in the HCA affiliate program?

Wyche T. Green

I think they are what two or three other but they have been there for a while. That is what I am saying, that kind of gives us a real energy around it because its something different.

Operator

And the next question comes from the line of Sean Wieland from Piper Jaffray.

Sean Wieland - Piper Jaffray

Just one quick follow-up, was there any realignment of headcount in training and consulting for the quarter on going forward or are you keeping with your same staff levels.

Wyche T. Green

No we don't, we are not going to make any adjustments just because of some of the larger enterprises and some of the things moved out. Like I said January rebounded so I think we will continue to evolve the programs as we cater more and more in to that enterprise and then obviously we will continue to use our contractor program.

Operator

And at this time there are no further questions in queue.

Wyche T. Green

Okay, well, that's it guys. We appreciate your time today and we will talk to you next quarter.

Operator

And ladies and gentlemen that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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