Zix Corporation Q4 2008 Earnings Call Transcript

| About: Zix Corporation (ZIXI)

Zix Corporation (NASDAQ:ZIXI)

Q4 2008 Earnings Call Transcript

February 17, 2009 at 5:00 am ET


Richard Spurr - Chief Executive Officer

Susan Conner - Chief Financial Officer

Peter Wilensky - Vice President of Investor Relations


Jackson Spears - The Robins Group

Jon Hickman - MDB Capital Group


Good day ladies and gentlemen and welcome to the Zix Corporation fourth quarter and year end 2008 earnings conference call. My name is Wayne and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator's instruction) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Peter Wilensky, Vice President of Corporate Development and Corporate Affairs. You may proceed sir.

Peter Wilensky

Thank you, Wayne. Good afternoon and thank you for joining Zix Corporation’s fourth quarter and year end 2008 conference call. This call is being recorded and a replay will be available after the call's conclusion from our website or by dialing 1-888-286-8010 and entering the access code 2789401. This information can also be found at investor.zixcorp.com, which is the investors' portion of our website. Zix Corporation's Chief Executive Officer, Rick Spurr, will begin with an overview of the Company and discussion of our businesses followed by discussion of the Q4 and full year 2008 financial results by our Chief Financial Officer, Susan Conner. Mr. Spurr will then provide closing remarks. Afterwards, we will be available to answer questions from analysts and institutional investors and we will also be taking questions by email which can be sent to our Investor Relations mailbox, invest@zixcorp.com.

Before we begin, I would like to read a paragraph regarding any forward-looking statements that may be made during this call. This conference call may include certain forward-looking statements that are based on the current belief or assumptions made by or information currently available to ZixCorp's management team. Forward-looking statements may include words such as anticipate, believe, estimate, expect, may, project, would, could, should or other similar expressions. ZixCorp's actual results, performance, prospects or opportunities in 2009 and beyond could differ materially from those expressed in or implied by these statements.

Information concerning risk factors that could allow actual results to differ materially from those expressed in or implied by these forward-looking statements is contained in ZixCorp's filings with the Securities and Exchange Commission, as well as in ZixCorp's earnings press release issued earlier today. Except as required by Federal Securities Regulation, ZixCorp undertakes no obligation to publicly update or revise any forward-looking statement for any reason after the date of this call.

With that, I am pleased to turn the call over to Rick Spurr.

Richard Spurr

Thank you, Peter. Good afternoon and thank you for joining today’s conference call. Despite the extremely challenging times facing out nation and the world, ZixCorp continues to grow and we believe that our Company remains well positioned to weather this difficult economic environment. We ended the year on a pretty strong note. We exceeded fourth quarter guidance on every measure: revenue, deployments, and cash balance. In our e-Prescribing business, we signed several new contracts in Q4 which while not huge deals indicate the payors acknowledge a role in accelerating the adaption of e-Prescribing, and that they see an acceptable return on these investments.

Add in new sponsorships in Massachusetts, which I will discuss later, and ongoing discussions we are holding with other payors and those facts would suggest at least to this point that the economy is not negatively impacting payors willingness to sponsor the deployment of this technology. The larger of our two businesses, our Email Encryption business, just conclude a solid year including a healthy fourth quarter in which we recorded our second best quarter ever for new first year orders.

The 26% revenue growth and strong cash flows for the year in the Email business drove the overall growth and performance of the Company. After the years required to achieve critical mass in the Email Encryption business with a subscription model, ZixCorp entered a new phase of financial stability in 2008.

I would like to highlight several strengths of our business model, particularly the Email Encryption business. Focusing first on that business, we benefit from several factors that bode well for its future prospects. The continuing need for compliance, sustaining demand for our services, growing preference for a SaaS or software as a service offering for security in our maturing OEM relationships.

Let me discuss these points in order. Compliance requirements and the need to secure data exist even in tough economic times. In surveys conducted a few weeks ago, Osterman Research found that while over half of respondents indicated that IT budgets would decline in 2009, approximately 90% said that spending specifically on the Email Security and in Encryption would remain the same or increase in 2009.

The Research firm Forrester has found that leading CIOs still give security as a necessary expense for 2009. Another piece of evidence supporting this contention is our strong renewal rate, which was 94% for the year in 2008. While on the topic of renewals, I would like to clarify the calculation of this measure if you are trying to forecast the growth of the business. When we report the renewal rate, we are reporting the dollars renewed as a percent of those dollars eligible for renewal in a given period. So, because the majority of our deals are for three years or more only a small portion of customers come up for renewal in any given year. For instance, if all contracts were three-year contracts and if new contracts were added each in every month on a consistent basis then exactly 1/3 of these contracts would renew each year.

This is important because we consider that our renewal rate in 2008 was 94%, being our non-renewal rate was 6%. It is 6% of a fraction of all of our contracts, not 6% of our total business. More specifically in 2008, we lost recurring revenue of only about $650,000 on a base of total revenue of almost $23 million. So, we have only 6% of our revenue but actually less than 3%.

In summary on this point, we are very proud of our customer retention rates which are very high by almost any standard, and yet, we will continue to focus on this very important measure of recurring revenue and customer satisfaction.

We believe more companies may look at a SaaS or software as a service offering for a variety of applications, including secure email that they might source from us. The SaaS model, such as ours, is attractive and that companies can lock into in established service, with steady known fees rather than make large upfront expenditures on capital with less predictable ongoing requirements from maintenance, with an on-premise solution such as those sold by almost all of our competitors.

The Research firm Gartner found in a recent survey of users that almost 90% of those asked say they will maintain or increase their use of SaaS offerings. With 1/3 saying they will transition applications from on-premise to SaaS solutions. IBC projected that IT Cloud Services would grow at 27% per year through 2012. We have always offered our Email Encryption as a service long before the term SaaS was ever coined and part of our founder’s genius was to build what we now called the ZixDirectory into Cloud to benefit from Metcalfe’s Law over the network effect, which implies exponential growth in both the size and value of the network.

To that specific point, less that a year ago we announced that the ZixDirectory had hit 10 million members and was growing at 70,000 members per week and today, the Directory has 15 million members and was growing at more than 100,000 new addresses per week. So, we remain confident that due to the addition of our founder and ongoing world class execution, we are extremely well positioned for the industry shifts underway today.

Another advantage to hosted service that resides “In the Cloud” relates to our financial performance. The services offered on a subscription basis typically sold in three-year contracts. Therefore, as we enter each quarter, the vast majority of our cash and revenue is already secured, either via contractual obligations from previously signed contracts or customer set to renew, which when you have a 94% renewal rate or higher as we have for years can be largely counted on.

For example, in Q4 of last year, 85% of our cash collected in the quarter was already identified as we entered the quarter. In these economic times, that kind of predictability and consistency is enviable.

Another advantage to our architecture comment to software as a service or SaaS computing is the exceedingly high gross margin due to the high percentage of fixed costs inherent in setting up the service, but would relatively low incremental costs necessary to service more and more customers. This, of course, is why our margins continue to improve each quarter, reaching 83% in the fourth quarter of 2008.

To improve the profitability of this highly scalable platform with predominantly fixed costs, we continue to focus on driving more volumes to the system. In addition to our traditional direct sales efforts, we have been focused on our OEM partners, the largest two of whom are Google and now Symantec. Back when we establish the relationships with their predecessors, Postini and Message Labs, IBC had estimated that those two companies together held over 50% of the worldwide security as a service market, which according to Gartner Research is expected to be the fastest growing segment in the IT security space.

Now that Google bought Positini, and Symantec has acquired Message Labs, each of these partners can leverage as previous leadership position with the vast distribution channels of its parent, which should bode well for us. However, our experience with Postini and Google indicates that at least does it relates to us these acquisitions require sometime for integration, while we have certainly seen growth from Google who was largely responsible for the increase in new first year orders from our OEM partners from approximately $300,000 in 2007 to about $800,000 in 2008. It may take a little time for us to see increased growth from Symantec’s Message Labs business, which was still a relatively new partner for us, but, with our new focus on the data loss prevention segment from which we added our latest partner, Code Green Networks in the fourth quarter, and maturation of these other relationships.

We do expect to see continued growth in the contribution from our channel partners this year. Overall, I believe, the Email Encryption business will continue to perform at high level and drive growth for our Company.

I would now like to switch the attention to e-Prescribing, where we have negotiated yet another expansion in the Massachusetts marketplace with Blue Cross Blue Shield of Massachusetts. Blue Cross Blue Shield of Massachusetts and Zix Corporation were the original founding members of the e-Prescribing program in Massachusetts, known as the eRx Collaborative. As many of you know, the leadership showed by both our organizations has led to the creation of the industry’s largest stand alone e-Prescribing platform. This latest expansion will add another 400 positions in 2009. Under the contract terms, ZixCorp is to immediately begin recruiting and deploying PocketScript e-Prescribing services to 200 positions in Massachusetts. A further 200 prescribers will be recruited and deployed following the full release of the latest version of PocketScript, which scheduled and on-track for delivery early in the second quarter.

We expect to receive the signed contract from the customer this week and accordingly, we have already launched our recruiting activities. This new contract with BCBS Massachusetts will bring the total of new payor contracts including expansions. Since the passage of the MIPPA legislation in July of last year, to four, the other three announced late last year and being implemented today are the Aetna expansion in New Jersey, Blue Cross Blue Shield of Alabama, and United Healthcare in Texas.

As we have stated before, we believe that federal leadership demonstrated by CMS through the introduction of MIPPA and final standards for e-Prescribing would spur the commercial health plans to become more active, which has certainly been the case.

We have remained committed to selling directly to payors, where we are well funded; well designed programs can result in high scale speed to market. This approach moves the focus of time and energy to the front of the market development cycle. In this case, by getting the payors on board, we expect that this will build momentum and will result in capturing a large part of the market. These four new payor contracts signed in the last four months exceed all the payor contract signed in the previous year and a half. We believe that this new backlog from these contracts is only the beginning.

Let us now talk a bit about script volume. Many of you have noted we are looking at our script counters on the website that the script volume seems to be going up dramatically. It is true the script volume is increasing and the average number of scripts written per active doctor is increasing. However, the counter on the website is misleading.

The counter is driven by an algorithm that we periodically update to match the reality. The counter got behind and so we sped it up to cause it to match actual script volume. So, although, we are seeing improvements that are not as dramatic as the counter would indicate. When we all wake up tomorrow morning, the counter will read approximately 26 million scripts, up from 25.1 million where it now sits, and yet, a similar way, the Email directory count will be increased to the actual number of entries in the ZixDirectory, which now is over 50 million.

So, I mention that irrespective of this counter issue, the average number of scripts per doc is increasing. Why is this the case? Well, we believe this increased script activity is driven, one, by our recruiting and deployment’s team applying enhanced upfront screening of candidate physicians. This has resulted in the inclusion of those physicians that truly want to e-Prescribe and it weeds out the tire tickers.

We also continue to renew our loyal physician base. We have found that the longer people e-Prescribe the more scripts they write, and we are seeing greater usage of PocketScript by our docs to process renewal scripts. Overall, the average number of scripts per doc is up 18% as compared with 2007.

Let me now remind everyone about the strengths we possess in this market. The contracting vehicles which we have with our payor customers, which form the basis at any expansion is a valuable asset, particularly when dealing with such massive organizations. If the go-to- market strategy with the payors wins the day then we are well positioned to be the leader. Many of you were following us for years so you can appreciate the time, energy and commitment that have gone into fostering these payor relationships.

ZixCorp has established a proven and respected brand within the payor community, resulting in their continued confidence and business. We see this as a competitive advantage for us and we remain a leading stand along e-Prescribing vendor in the industry, where we enjoy the benefit of follow-on business from our payor customers. In fact, with two of the nation’s largest payors, United Healthcare and Aetna, ZixCorp is the only stand alone e-Prescribing vendor they are doing business with.

One such example that we have not discussed in detail is United Healthcare’s expansion and Texas. United Healthcare, as many have you know is the second largest payor in the United States and has contracted with several hundreds of thousands of physicians in numerous states throughout the country. The Texas contract for 200 physicians builds on our successful pilots in Ohio and Florida. Although the pilot did have another vendor, this expansion was exclusively with ZixCorp. United Healthcare executives were interested in extending the financial, safety and efficiency gains that come with expansion and their leadership understands that physicians need assistance with the e-Prescribing startup costs. While that contract was nowhere near as large as what we are now targeting was expedited to take advantage of available 2008 funds and did provide evidence of their direction.

It is important for me to remind you also of an often overlooked barrier to entry in e-Prescribing. I am referring to our technical and application certifications which present a significant barrier to entry for the competition. As a practical matter, in order to be in the e-Prescribing business, a vendor must be certified and compliant with SureScripts and RxHub. ZixCorp has had these certifications for years and we continue to invest in them on an ongoing basis.

In 2008, the SureScripts RxHub introduced new requirements that significantly raise the bar and yet we have met these challenges. So, we remain confident in our strategy and feel better than ever about our future growth in this business based on our strong payor relationships, contracts, and our pipeline of new business. Our current focus remains on securing larger contracts to accelerate the rate of deployments of e-Prescribing and although we have been progressing more slowly than we would have liked, we believe these ongoing discussions will bear fruit.

Let us move now to a brief discussion of some of the more strategic issues we are facing with this business. First of all, the new $787 billion stimulus bill signed today contains funding for physicians who utilize a full electronic medical record in 2011. How might that affect us? Well, it will cause us to turn up the heat on our efforts to integrate within electronic medical records partner our partners. These efforts, if successful, will provide our prescribers both existing as well as new with the migration path when it makes sense. In the meantime, prior to new EMR incentives in 2011, we feel the MIPPA legislation passed in July of last year that pays physicians for use of e-prescribing today in combination with payer-sponsored e-prescribing programs will pave the way for early HIT adoption with e-prescribing, particularly in the smaller practices where 75% of the nation's doctors work.

Our second strategic issue is ongoing growth beyond just capturing large segment of the market for e-prescribing. We believe the longer term growth of this business lies in the development and delivery of additional value-added services offered on top of the e-prescribing platform. We have opened some detailed dialogue on this topic with our existing customers and the feedback to date has been positive. These services would cover a wide spectrum from the delivery of additional and clinical functionality to detailed customized reporting to new branding opportunities for the payers. The payers are currently offering their perspectives on prioritization of these services. Then our plan would be to utilize the power of our SaaS model to leverage the platform we are building and deliver these services to the payers chosen positions.

Finally, as we consider avenues for driving the business toward profitability and beyond, we are evaluating various partnering options which we will of course discuss in greater detail if and when it is appropriate.

With that, let me turn the call over to our CFO, Susan Conner, for a discussion of the financial results. Susan?

Susan Conner

Thanks, Rick and good afternoon everyone. First, I will start with revenue. We achieved companywide revenues for the fourth quarter of $7.2 million which was slightly ahead of our previously provided guidance of $6.8 million to $7.1 million. This is an increase of about $200,000 or 3% over the fourth quarter last year. The fourth quarter revenue was made up of $6.1 million from email encryption and $1.1 million from e-prescribing. The email encryption revenue increased $800,000 representing a 15% increase over the comparable 2007 figure. This increase was driven primarily by our continual addition of new users to the subscriber base while at the same time renewing 93% of the existing subscribers with subscriptions or approved renewal during the quarter.

Sequentially, the $6.1 million for email encryption in the fourth quarter compares to $5.6 million for the third quarter or an increase of 9%. E-prescribing revenue for the fourth quarter was $1.1 million, which compares to $1.7 million for the fourth quarter last year. The $600,000 decrease primarily resulted from two things; first, a decline in the transaction or usage-based fees because in the second quarter of 2008, we reached the ceiling of the cap on the transaction or usage-based fees allowed under our contract with the single healthcare payer customers. And secondly, a decrease in deployment related revenues as the rate of new deployments during 2008 of approximately 725 had declined over the 2007 level of 1950.

We expect our e-prescribing revenues in the first quarter of 2009 to be relatively flat against the fourth quarter of 2008 in light of the slowdown in deployments during 2008. With the new contracts announced in the fourth quarter however, we do expect our revenues will pick back up again as deployments begin growing in the second half of 2009. For the full year ended 2008, our companywide revenues were $28 million versus $24.1 million for 2007 or an increase of 16%.

Email encryption revenues were $22.6 million in 2008 compared to $18 million in 2007 or an increase of 26% and e-prescribing revenues were $5.4 million in 2008 compared to $6.1 million in 2007 or a decrease of 11%. The changes in revenues for each of our business segment between the two years are consistent with the explanations I gave related to the fourth quarter. We ended 2008 with a bookings backlog of $37.4 million which is an 18% increase over the bookings backlog of $31.8 million for 2007.

In summary, we are pleased with the year-over-year growth in revenues for email encryption and are very encouraged with the new e-prescribing contracts that we signed during the fourth quarter.

Let us now move to our gross margin results and details on our expenses. We achieved an overall companywide gross margin for the fourth quarter of $4.8 million or 67% of revenues. This compares to $4.3 million or 61% of revenues for the same quarter last year. The email encryption gross margin for the fourth quarter was $5.1 million or 83% of revenue which is the highest ever as compared to a margin of $4.2 million or 79% in the same period last year. The improvement was due to an $800,000 increase in revenue and a $100,000 decrease in the cost of revenues primarily related to professional services.

These improvements are a natural result of our subscription business model and relatively fixed cost structure. Our e-prescribing gross margin was negative at $200,000 or 21% of revenues compared to a positive $86,000 or 5% of revenues for the same quarter last year. This reduction in our gross margin performance is due primarily to a $600,000 reduction in revenues as reported earlier particularly offset by roughly $300,000 in lower cost to revenues driven from a reduced rate of deployment.

Overall, companywide gross margin for full year 2008 was $18.2 million or 65% of revenues compared to $13.2 million or 55% for 2007. I will now move on to operating expenses.

R&D and SG&A expenses increase 7% in the fourth quarter of 2008 to $6 million when compared with the same period last year when we spent $5.6 million. This increase was primarily driven by a $282,000 or 21% increase in R&D expenses where we added headcount to support the development of new products and services for both of our product lines. On the topic of operating expenses, I would like to bring to your attention our plan for the coming year as it relates to salary performance raises.

Although we do plan to have some targeted hiring during the year, our plan for 2009 does not include any raises for management or their employee group during the year. We are very focused on the weakened economy and have our Company's could be impacted. Thus, we are taking these initial steps to ensure we stay focused on delivering continued financial performance in 2009. Our capital expenditures for the fourth quarter and yearend were $543,000 and $1.238 million respectively. Depreciation expense for the quarter is approximately $307,000 and is recorded in the various P&L line items with the majority or 75% of it being recorded in cost of revenues.

Finally, turning to cash flow. The Company had positive cash flow in the fourth quarter of approximately $100,000. These results yielded an ending cash position of $13.2 million. Consistent with previous quarters during 2008 included in the fourth quarter result is $271,000 of common stock that we issued to employees as compensation in lieu of cash for earned commissions and bonuses. We do not anticipate continuing this practice going forward.

To our total year 2008, positive cash flow totaled approximately $1 million which compares to a $500,000 cash burn in 2007. We continue to stay focused on operating our business for positive cash flow and feel that it is a prudent thing to do during these economic times. On a GAAP basis, our Company-wide net loss for the quarter is $900,000 which compares to $1.4 million net loss for the same period in 2007. The full year 2008 loss was $5.4 million which compares to an $8.1 million loss for 2007 which also included several nonrecurring items totaling $1.9 million in gain which we had previously discussed with you.

As everyone knows, we report our financial result in accordance with US Generally Accepted Accounting Principles or GAAP. However, we believe certain non-GAAP financial measures used in managing the business can also provide users of our financial information with additional meaningful comparisons between current results and results in prior operating periods. So, beginning in the first quarter of 2009, we will begin reporting adjusted earnings per share along with adjusted gross profit, adjusted operating income and adjusted net income or loss. Each of these non-GAAP measures will exclude noncash stock-based compensation cost. The adjusted earnings per share, adjusted operating income and adjusted net income or loss will also exclude certain one-time event which may occur in the future or which have occurred in prior comparable reporting period.

We use these non-GAAP financial measures in making financial operating and planning decisions and believe that reporting of these measures can assist the users of this information in evaluating our performance. I want to reiterate non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Accordingly beginning with the first quarter of 2009, we will provide with our press release an appropriate reconciliation between adjusted earnings measures and the results prepared in accordance with GAAP.

For purposes of this reconciliation, our 2008 noncash stock compensation charges were approximately $625,000 per quarter. Having said this, we project our adjusted earnings per share for the first quarter of 2009 to be between a $0.02 loss and a $0.01 loss. These earnings are supported by a revenue guidance ranging from $7.1 million to $7.4 million, again reflecting growth in email and flatness in e-prescribing due to lower deployment in 2008. We expect deployments to be between 250 and 350 for the first quarter. Finally, although cash will continue to be a significant focus for us and we will continue to report our cash performance to you, we will no longer provide guidance on this going forward.

I will summarize by saying while I am pleased to see the continuing improvement in our overall performance, we realized that there is still work to be done and remain committed to it. With that, I will turn it back to Rick. Rick?

Richard Spurr

Thank you, Susan. Let me conclude by saying that the email encryption business continues to be a strong business for us driving revenue growth for the Company, improving margins and generating good cash flow. We are witnessing a shift in the industry towards softer service coupled with cloud computing which we believe plays right into our hands because that is who we have always been. Our 2008 results do not indicate an impact from the economic downturn and we may benefit in some cases because of the more attractive cash flow implications of our offering. So at this point, we are still targeting solid growth for the business and expect to remain a leader in the industry.

In our e-prescribing business, there has been a great deal of activity in and around this technology which has brought greater attention by physicians, legislators, the general population and most importantly, from our perspective payers. I know it has been progressing more slowly than any of us would have hoped and I appreciate the patience and support of our shareholders as we have continued to build this business. All I consider at this point is that I feel very good about the ongoing discussions we are having with various payers drawn out, though they may be. I believe we are closer than ever to a significant development in this business and I look forward to updating you on our progress in the future.

Overall, I remain optimistic about the progress that we are making in both businesses and I am committed to the continued improvement in the execution of our strategies. Thanks again for your support and attention today and I will now turn the call over to the operator for questions. Thank you.

Question-and-Answer Session


(Operator's instruction) Your first question comes from the line of Jackson Spears - The Robins Group.

Jackson Spears - The Robins Group

Could you help us a little bit on the e-prescribing side? This tax stimulus bill gives massive incentives for electronic health records. I believe it ranges from about 40,000 to 60,000 physicians and it is clear that what the government wants is a total solution, not a standalone solution. Do you think your model is flawed and why would not the payers start to shift the strategy?

Richard Spurr

I heard you say that we think our model is flawed, what was the second part of that question, Jack?

Jackson Spears - The Robins Group

The payers, I was saying about the payers now. They only get, there is like 4,000 physicians to e-prescribing. You need a total solution and you are only a standalone e-prescribing solution.

Richard Spurr

I understand that part. Okay so let me address the standalone e-prescribing as an entry point to HIT adoption. We have seen that money that money does not cause doctors to run out and we search and install technology. We have seen that time and time again and so what we believe must also be present is the existence of the set of standards that everyone knows they can adhere to and remain compliant going forward and secondly and very importantly, a set of support processes and training and installation around the actual implementation to accommodate the work flow change and the change of the practice.

Our programs have always been built with all of those components addressed. So the new HIT stimulus bill, while we do believe it will make a significant difference, we do not think it is going to have any near-term impact. Longer term as we said in the script, we know that we are going to have to provide our physicians both existing as well as new with an easy migration path or integration with the full EMR suite should they choose to do that through some mechanism.

Now let me talk about the payers. So, I am not a payer but we talk with them and I have been told by many of them that they are not interested in the investment required to support the electronic medical record transition, not just for the acquisition of the technology but much more importantly the cost associated with moving data in the systems and then creating an ongoing method or mechanism for the ongoing update of those records. The return on investment to the payers is very clearly and tangibly due to lower drug cost and the availability of tangible justification for the broader EMR suite is not yet widely accepted. So, our payers at least continue to be very interested and focused today on e-prescribing and it is not clear there is any movement on their port to support EMR.

Jackson Spears - The Robins Group

Your competition and mainly all scripts are growing about 20% a month. You are hardly growing, did not it raised some serious questions whether you have the right model?

Richard Spurr

That is a good question. I do not know, I cannot comment on their growth because I do not know…

Jackson Spears - The Robins Group

You publicly stated it, 20% a month and there are over 25,000 physicians that have adopted this solution for e-prescribing method.

Richard Spurr

So, again, I am not familiar with their measures or they are talking about physicians or prescriptions or e-prescribing or electronic scripts or, there is a lot of different ways you can slice it. One of the few vendors in the industry that actually reports on clearly defined active doctors and explicitly on scripts, I do not know if they have common measures. But let us just for the moment assume that it is an accurate statement and that we are stuck in the mud and that they are growing it 20%. Let us just give them the benefit of the doubt on that.

We are on very different paths. They are on a direct to doctors, slug it out, one practice, one doctor at a time and we are on a strategy that invest heavily upfront in the payers and looks to scale in a high-speed way and the tortoise and the hare analogy. Now, the question investors have to make is have we placed our bets well or not and I think that is the decision people have to make. We think it is the right decision. We see activity with our payers that would suggest as much, and that is but all I could say at this point on that topic.

Jackson Spears - The Robins Group

You mentioned about some partnership possibilities here. Would that be another way of off loading some of your cost and like with the Caremark or [57.56] partner with them because you have offered a part solution going after the small doctor or practice doctor?

Richard Spurr

Those ideas are among those that we are exploring, so the idea of reducing our costs through some partnering relationship and broadening our distribution is among the ideas we are considering.

Jackson Spears - The Robins Group

So if we were to run the clock six to three months or six months forward, would you think it is likely it have one or more of these partnerships completed?

Richard Spurr

I am sorry, Jack, I could not comment on that.

Jackson Spears - The Robins Group

On the email side, could you walk us through how well you are doing with the OEM? Is there any, you have indicated I think with Google, you are at $800,000 versus $300,000 a year before. What kind of monthly growth are you seeing in your OEM partnerships?

Richard Spurr

I am glad you asked, Jack. Actually the numbers that you threw out and that we talked about, we said were driven largely by Google. Actually those numbers represent our entire OEM channel new first-year orders. So the entire OEM channel new-first year orders for 2007 were approximately 300,000 representing about 5% of our total new first-year orders. Last year in 2008, the number was closer to 800,000 so a very substantial growth in both actual volume as well as percentage contribution. We had previously reported that through the first half of 2008, we matched all of the 2007 results and we went on to say that we had very strong third quarter and we had a good fourth quarter as well.

So, this is where these channels work. I mean you get in and just slug it out, it may start to show growth. I think it is too early to project trends based upon the very healthy growth we have seen but we are optimistic about the possibilities.


Your next question comes from the line of Jon Hickman - MDB Capital Group.

Jon Hickman - MDB Capital Group

Susan, well I do not care who answer this I guess, but in your script you said something about paying employees for work done with stock and stock options and you were not going to do that anymore. Is that on top of the standard stock-based compensation expense?

Susan Conner

Yes, that was on top of. The 625 number that I said, that is the noncash comp number. That is the FAS 123R number and then the other amount that I quoted in my script is on top of that.

Jon Hickman - MDB Capital Group

Okay. So you are telling me that next quarter, you are going to do adjusted, you are going to adjust your, I mean you are going to give these other financial metrics adjusted for the stock-based compensation. Are you taking anything else out? I mean is this adjusted EBITDA or just..?

Susan Conner

Right now from what I can see, the only adjusted items we will have in the first quarter is for the FAS 123R so that is all I am seeing for the first quarter and obviously as we move to the quarters and move through coming years, there maybe other items that would be wanted to be adjusted out. I am trying to get pure operating earnings per share. That is what I am trying to present.

Jon Hickman - MDB Capital Group

Then take out depreciation to it.

Susan Conner

I had planned on keeping depreciation in.

Jon Hickman - MDB Capital Group

Well it gives you real cash earnings per share.

Susan Conner

Yes, but I paid money for those items that I am depreciating so I am just taking the hit for doing that.

Jon Hickman - MDB Capital Group

Okay. Then I had a question about the, I guess this is more of a strategy question kind of follow up the last caller, you had four or five contracts now since the Medicare legislation was adopted.

Richard Spurr

Accounting the Massachusetts contract that we said we expect this week, yes the number is four.

Jon Hickman - MDB Capital Group

Okay, and you talked like you anticipate more coming. In fact, you talked like there is going, the growth might accelerate here. So I guess I am trying to get you to tell us that the legislation is really having an effect that you can really something different even though it is not, I mean I guess there is some marginal vision here in the numbers but what you are seeing in your discussions, and can you elaborate on that? Can you make us feel better?

Richard Spurr


Jon Hickman - MDB Capital Group

Just feel warm and fuzzy, whatever?

Richard Spurr

Sure. The legislation as you know pays doctors for usage. That fact all be important is not seemingly, there is no tying a wave of change based upon the fact that doctors had an opportunity to made money. However, the passage of the legislation is viewed by the payers as a huge, huge stamp of approval on electronic prescribing and many of them as I think you may know are turning around and announcing right on the back of the legislation, their own mandates for electronic prescribing for physicians in their network.

So the momentum and influence of the law is more geared to all of the payers led by the largest one in the nation, the United States government saying, 'Hey electronic prescribing saves lives and oh, by the way, it saves money,' and you see the payers responding to that.

Jon Hickman - MDB Capital Group

Are you still there?

Richard Spurr


Jon Hickman - MDB Capital Group

Okay, just one more question then, so one of the thoughts that I had when this legislation for FAS was that you might see some of your doctors who had been trained on this system and have been installed in their office who had become inactive or who were never active, maybe take the device out of the drawer and start using it. Have you seen anything like that?

Richard Spurr

We have seen some of that. It is not, it is meaningful but not overly so if that was a big deal, we would be reporting on it. We are seeing some up tick but again, the numbers are what the numbers are. You see the numbers and number of active doctors is still less than 3500.


And at this time, we have no additional questions. I will be turning the call back over. You may proceed, sir.

Richard Spurr

Okay, everybody. Thank you for your patience. Thanks for listening. We know what we said. We feel good about things. We are fortunate to be in a company that is not in a stable position and built on in incredibly engineered model and we have some great opportunities in front of us we believe. So again thanks for listening.


And that does conclude today's presentation. Ladies and gentlemen, you may now disconnect. Thank you for joining.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!