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Quality Systems, Inc. (NASDAQ:QSII)

Citi 2013 Global Healthcare Conference

February 25, 2013 9:35 am ET

Executives

Steven T. Plochocki - Chief Executive Officer, President and Director

Analysts

George Hill - Citigroup Inc, Research Division

George Hill - Citigroup Inc, Research Division

Okay. Good morning for the folks that are here and the people that are listening on the web. I'm George Hill. I'm the health care technology and distribution analyst with Citi Group. I have Steve Plochocki with me here, who's the CEO of Quality Systems. We're going to spend 40 minutes talking about NextGen. Steve, thanks for being here.

Steven T. Plochocki

Thank you for having us.

Question-and-Answer Session

George Hill - Citigroup Inc, Research Division

Happy to have you. As we were sitting here and talking, we have discussed that the theme of Citi's health care conference this year is kind of the value-based question on how the company has delivered value in health care as we go from now through 2020. Can you talk about the role that Quality Systems plays in delivering value in the health care supply chain?

Steven T. Plochocki

Yes. Well, the Quality Systems is a company that's been providing software services for almost 38 years now initially in the dental sector. Back in the late '90s, we've began providing software in the physician sector, and then most recently in the last 3 to 4 years, in the hospital sector. We're a company that has 20% return on investment. We have 20% operating income margin, 14% net income margins, $118 million in cash. We're debt free, and we have a 68% recurring model that is growing. When I joined the company as a board member several years ago, we had about a 42% recurring model. We're up to 68% and growing, and that will continue to grow as our Revenue Cycle Management businesses continue to expand. So we have a solid foundation, solid structure. And where the company is going through now is the same thing that's happening to our sector. We all realized the great benefits of the front end of the stimulus. Those first 2, 3 years, there was great lead flow, deal flow. There's -- probably in February of 2009 when the bill was announced, there was maybe 18% to 20% of health care that was electronic. And as we sit here today, you've got probably about 70% of the physicians that have made purchasing decision, about 75% to 80% of the hospitals have made purchasing decisions. So we're clearly on the downside of the bell curve of the stimulus impact. But we're on the front end of the bell curve in terms of the creation of Accountable Care Organization. And the ACO modeling is going to have 3 -- or 5 very specific requirements initially if you want to become an effective ACO. You're going to need software components that enhance population management, patient management, analytical tools, and then the 2 requirements of regulatory reporting tools and clinical reporting tools. In other words, to stay compliant and stay certified as an ACO, you're going to have to meet standards of regulatory and standards under quality in clinical. Those 5 specific reporting tools are all new modules that we're now selling into the sector. We're going to highlight them and promote them at our HIMSS conference, which is in a week.

George Hill - Citigroup Inc, Research Division

A little over a week.

Steven T. Plochocki

This is in a week. And that's a new emerging scale. So as we're starting to get health care towards the tail end of adoption, we're starting to move up the bell curve of all of these different components that health care is going to need. And as most of you know or may not know, the government is moving health care through various stages of software developments, where you have to meet and be compliant Stage 1, 2 and 3. Stage 2 is going to be -- we were surveyed just last week under Stage 2 certification. We're hopeful to be able to announce at HIMSS that we have met Stage 2 certification with our EHR product. And then, of course, the movement of ICD-9 to ICD-10, ICD-11 coding systems, which are all expansive coding systems. All of these areas, the Stage 1, 2, and 3 is creating a stronger base for companies like us, who have large installed bases that can meet these standards. And then of course, the same point on the ICD-9, 10 and 11 coding system. And I've long said this, and most of my peers will agree, that the top 10 of us in our sector, which have about 75% of the industry's physician attestation brought large installed bases into the stimulus. As a result of those large installed bases, we've been able to have a very strong maintenance stream of revenue. It's that maintenance stream of revenue that has enabled us to continually enhance our software development capabilities, to upgrade, enhance and meet the standards of all of these movements coming down the pipe. So the -- we think we're very nicely positioned. We like the position we're in. We are going through a transition as a sector, and we think we're going to be ready for it.

George Hill - Citigroup Inc, Research Division

That's great color to start, Steven. You touched on a bunch of my follow-up questions. I'll jump in a little -- some of them in a little bit more detail. You talked about 70% adoption on the ambulatory side. I wanted to ask where you -- where the company thinks we are now in terms of adoptions. And can you maybe talk a little bit about the different market subsegments. How is the high end of the market processes over 50 docks set up, that 10 to 50 docks size, that sub 10 docks and where does the company see its best opportunity?

Steven T. Plochocki

Sure. The latest stats, which I -- which what I was quoting to you earlier, were actually the latest statistics that we have seen out of CMS that about 70% of physicians have made a Stage 1 certified purchasing decision on EHR, and about 75% to 80% of hospitals. The components on physicians, before I go a little bit further here, the -- with about 30% of the physician market yet to adopt, we're certainly talking about the smaller practices to mid-sized practices. The larger practices have pretty much adopted early, just like the large hospitals have. The more sophisticated systems adopted earlier, the lesser sophisticated systems are trailing a bit. But in terms of the certification process, don't lose sight of that. The reason -- one of the reasons Stage 2 certification was pushed out a year, it was supposed to be operable in 2013. It's now going to -- been enacted to be operable in 2014. The reason Stage ICD-10 was pushed out an additional year is that there's -- a lot of the smaller players in our sector have not been able to demonstrate the ability to keep pace with these new standards. Example I'll give you is that if you take the top 10 of us, we have 75% of these physician attestations. There's 482 different companies listed on the CMS website that have provided Stage 1 certified software for the physician market. The top 10 of us have 75% of that, which means that the remainder, 25%, is under 470-some-odd players. It's been that grouping that the government, as well as KLAS, one of our assessment study industry groups, have indicated that they believe there's going to be a replacement market that will emerge from that grouping. Many of them have already indicated that they won't be able to meet Stage 2 certification or ICD-10 compliance. So as that -- aside from the fact that there's 30% of the market yet to go, there's also going to be a replacement opportunity. Then it only stands the reason that, that 25% that may have to be replaced that's already installed, it only stands to reason that, that grouping will emerge into the top 10 providers.

George Hill - Citigroup Inc, Research Division

That makes al lot of sense. We're already starting to see some of those smaller companies fall by the wayside. I guess, with respect to that client churn or client retention, can you talk about which segments of the market does the company feel best positioned to go after? And are there are any segments to the market where the company feels like there might be any risk?

Steven T. Plochocki

Well, I think for us, because we have nearly 80,000 physicians that are on, at least, one of our products and the fact that the Accountable Care Organizations are clearly demonstrating -- and I've sat on a number of panels that began over a year ago relative to accountable care development. It's becoming very clear that the key to an Accountable Care Organization's success will be to manage patients in low-cost settings: primary care, home care and hospice, for example. It also then translates into the fact that the patient health care starts when the patient sees a doctor. So the physician is gaining more and more stature under an ACO modeling, where specialty care and hospital care is the type of care area that you want to minimize if you want to make money under an ACO. So the first 4 certified ACOs last fall, 2 of them were NextGen shop. And what we're seeing in the emergence of ACOs, George, is that they're being largely led by physicians, by group practices. Large well-established group practices are being the lead and other areas are on the back burner. So we, as a company that provides software to physicians -- we've been doing it for 15 years. We have a large-installed base. We're watching many of these group practices starting to be the leads and to establishing ACOs and ACO modeling. We believe that we're extremely well positioned in being part of that entire movement, particularly along the lines of the different software that they're going to require as we indicated earlier: patient management, population management, analytics and then the regulatory and clinical reporting capabilities. So we think we're extremely well positioned in ambulatory as we always have been. Revenue Cycle Management, a business unit for us that we're doing billing and collection processes for physicians, we're also doing it for dentists now, and we're going to be quickly moving into the hospital sector, for Revenue Cycle Management. The advantage there for us is that we have a large installed base that we can sell to, and the fact that the movement from ICD-9, which is about 20,000 reimbursement codes, which is what the health care system has been operating under for some time now. But the movement from ICD-9 to ICD-10, ICD-10 has about 85,000 reimbursement codes, and then rapidly on the heels of that ICD-11, which has nearly 140,000 reimbursement codes. So if you're a group practice or a health care provider, and you've had struggle in billing and collection under the current system, is they will only become more exaggerated under the future system. So many health care providers are starting to realize that their time is better spent in engaging in ACOs; developing plans for expansion; for adding a specialty; for positioning themselves for the modern era of health care; and taking non-core competencies like billing and collection and outsourcing that to people who know how to do it, people that have the software to do it, have capabilities to do it, and will take the responsibility for doing it. So we believe that, that is, again, a very early stage movement that's being given birth to by the ICD-10, ICD-11 movement just like the stimulus bill gave birth to the great movement towards EMR. And we think we're nicely positioned there. We want -- we will continue to expand in those areas of Revenue Cycle Management. And this will also give us an opportunity to take our recurring base. We have about 68% of our business that's recurring today, and that's a combination of customers that are installed, that are on maintenance and then of course, the expansion of our Revenue Cycle Management business, which is typically a deal that is engaged in a percentage of collected revenue on a monthly basis. And we see that our ability to expand our recurring base over the next 2 to 3 years as being rather dramatic, and it's one of our goals. So ambulatory, we believe we're nicely positioned in. RCM, we're nicely positioned in. In the dental areas, we're starting to engage a lot of movement in terms of interacting with private equity group. There was a movement in the late '90s, early 2000s where private equity groups were consolidating group dental practices. Many of those large roll-ups, we are engaged in today. They're customers of ours. There's another movement of -- private equity money is coming back into that area. Health -- dental practices are still very fragmented, so there's a huge movement towards rolling up practices again by private equity-backed sponsors. And our ability to engage ourselves with them is something that we're in the initial stages of, and an example would be Smile Brands, which has been a long-term customer of ours. They have about 350 dental operations, received new sponsorship under Welsh, Carson about a year ago, and they have enormous plans for growth and expansion. So as we engage ourselves with these groups, as they grow, we grow. So we think in the next 3 to 5 years, we're going to see a nice growth pattern in our dental business, off the strength of this consolidation in dental, which appears to me to be growing faster than even the consolidation in physicians and hospitals. And then our last piece is inpatient. Our inpatient business, as you know, we built in 2009, last 2010 through the creation -- the acquisition of Sphere and then the acquisition of Opus. We created an inpatient model that was certified going into the front end of January 2011. That inpatient model is geared towards the small hospital. We did not believe we had the opportunity at that time to compete with the Cerner or Epic in the large hospital market, but we thought that there was a great future in enhancing the capabilities of small hospitals. One, there's 4x as many small hospitals as large. Two, these small hospitals are pretty much community-based, rural-based systems. They're not going anywhere. They are not going to be as greatly affected in this consolidation that we're starting to see in large markets of hospitals. And the ACO modeling is going to be, I believe, a further catalyst of large hospital systems joining forces, not to create more beds but minimize beds. A recent white paper that just came out said in 5 to 8 years, the utilization of hospital beds will go down 30% to 35% in major markets under ACO modeling. And that's -- you've got remember, that's in the face of the fact that almost 10,000 people a day, my generation, are entering into their Medicare years. So the large hospital market, which is largely based in big-city America and mid-city America, is going to see consolidation. We saw that happen in our own market in Orange County, where the 2 largest hospital systems, Hoag and St. Joe's just recently merged. And they recently merged not to create more beds but to minimize beds. So I think the small hospital market is going to have sustainability. The government will sponsor those hospitals if they have a difficulty in maintaining solvency because that hospital might be the only hospital within 500 miles of -- in the markets they're in. But it's the major markets and mid-city markets that will see consolidation in hospitals. And so our movement is in the small hospital market. We have over 300 hospitals that we're working with to date, about 65% of those hospitals we're doing the software for the physicians in those rural markets. And we continue to see the opportunities there for us to enhance that market, not only just with software on the ambulatory and inpatient side, but at, of course, the RCM Services. And one of the other movements we're seeing, George, is that there's more and more RFPs emerging now that are asking for bids for Revenue Cycle, but you have to be able to respond to the capability of providing RCM for a physician as well as their hospital. It's got to be -- you have to have the capabilities for both. So RCM, we think we're in great shape; inpatient, we like the markets we're in; ambulatory, we've always been one of the premier players; and dental, we believe, is going to have a resurgence now under this roll-up, this rapid roll-up market that we're starting to see.

George Hill - Citigroup Inc, Research Division

Steve, that's great color. Being a technology company, you guys have the challenge of always having a very high reinvestment rate to stay on top of or in front of your competition. A lot of the industry seems to be going towards it, whether you want to call it web-based product, right, SaaS-based product. The legacy NextGen product historically thought of as a thick-client product or client-server product. I guess, can you talk about the company's initiative towards developing the web-based product? I know we touched on it briefly in the last earnings call.

Steven T. Plochocki

Certainly. Well, first, for dental, hospitals and physicians, we do provide Software-as-a-Service and cloud-based through our relationships with Dell, so we do provide them. However, we are developing our own, and we are doing that under the modeling of a product we call NG7. NG7 is a product that will be cloud-based. It will provide the capabilities for physicians as well as hospitals. And we're also looking to develop it in a manner in which it will incorporate the accountable -- excuse me, the ACO modules that we already know will be required under an ACO model-based system. So we're trying to do -- not to coin the phrase, but a next-generation, a NextGen, a next generation of software that, based on this movement into accountable care modeling, is going to be an entirely new platform, to be cloud-based and have these capabilities to service this type of interactive methodology that's going to be required for the patients to be managed in low-cost settings.

George Hill - Citigroup Inc, Research Division

Can you provide any commentary on when you expect a broad NG7 go-live or a launch date? Or when should we as research analysts start to expect to hear feedback from clients?

Steven T. Plochocki

I think you'll -- I think it will be probably about a year from now, so that we'll actually have this thing in operation and operable and moving out to the market.

George Hill - Citigroup Inc, Research Division

You touched a bit on ACOs, and the trend that we're observing is that large health care systems and hospital systems are either aligning with or purchasing physician practices to build ACOs and to build integrated delivery networks. You've seen hospital systems look at the enterprise technology deployment, a la Epic. You've seen hospital systems look at a more siloed or fragmented technology deployment, I would say, a la somebody like a CHRISTUS Health or a Catholic Healthcare East. Can you talk about Quality Systems opportunity to sell into the ACO systems? And does the company perceive any risk with hospital physician consolidation?

Steven T. Plochocki

Well, there was -- there's no question that over the last few years, hospitals try to and have been buying up group practices. I think though, we're starting to see the beginning of that trend waning. As ACOs become more understandable, even amongst the provider base, I think there's a view that, I think, group practices and the ones we deal with, the 25 ACOs that we're actively engaged with right now, all physician-led, most of them from our customer base, they've all got the same theme coming back. They say hospitals will be less -- hospitals are always important, however, they will be less important under an ACO model. What will be more important is the activities that the physician engages in. And so the need for a group practice to have this desire or view that they have to be part of a hospital in order to participate in the modern era of health care, I believe, is starting to change. And as a result of that, I go back to what I said earlier, we are a preeminent provider in the physician space. We're expanding in the physician space. Every one of our group practices are growing and expanding. I spend most of my time -- not most, but a lot of my time is spent in quarterly sessions with our largest customers, engaged in discussion about their 3- to 5-year growth and expansion plan. And the reason -- the only reason I'm there is because they want to make sure that we can keep up -- first, that we understand where they're going; and b, that we can keep up with where they're going because they got very aggressive plans to grow. So I'm not so sure that the trend will continue. I think you'll probably see more physician groups get larger, exercise more of their strength and power in the market because they have it. And the movement towards a singular system is never what the government intended.

George Hill - Citigroup Inc, Research Division

I definitely agree with how you guys are looking at the market. I'll ask a few more of the micro questions with respect to Quality Systems specifically. As we've come up the utilization curve and the penetration curve, sales growth has slowed. Can you talk about how the company thinks about managing costs for a period of slowing revenue growth? And maybe would you try to keep costs steady through the lull or would you look to pare costs and then bring costs back online when revenue reaccelerates -- just go through about how you think about it?

Steven T. Plochocki

Sure. Well, and actually that's what we've been doing, George. If you remember, we brought on Chief Operating Officer, Dan Moorefield, in late September of last year. We engaged in a bit of a restructuring of an organization through October and November. The restructuring for us essentially was to start bringing the components of the business together. We had always intended to do this. But you have to remember, we created an RCM business in '08 through acquisition. It came off of its earn-out in 2010, so it was about 2010 to '11, we created this business unit. And then in inpatient, that's even been more recent. We needed those 2 business units to incubate in their own system, make sure they can operationalize their policies, procedures, practices, can sell on their own. And now we're bringing it all together. And that the areas that we're consolidating that we brought together in October and November is we bought the business sales organization together under one leadership. So all sales and marketing to the entire company is -- our 120 people in the field are all being cross-trained on all product lines. And we have a huge incentive movement in our sales organization towards, of course, general sales, but incentivizing multi-product sales. And if you remember a few quarters ago, we announced our deal up with Norton Sound in Alaska which started out as an ambulatory deal, which our sales individual evolved into an ambulatory, inpatient and dental deal. So it's a multi-product sale, which is better for us, better for him and more importantly, we're starting to getting everyone cross-trained in these areas so that they have more capability to do that. So we've consolidated sales and marketing. We've consolidated our technology development under our Chief Technology Officer to take all of our development resources, analyze them, assess them, build an organization and development towards what we call the vital few. In other words, we want to pick the few things we want to do well and we want to put more resources behind them so we can get them to the market faster, and we're engaged in that process right now as well. And then of course, Dan Moorefield, our Chief Operating Officer, is doing the same thing operationally in terms of implementation and training, customer support, customer services. We're bringing them together under one unit that will satisfy the entire organization. In every one of these movements, except sales, we've minimized costs. In some cases, it's not -- I always say it's not Noah's Ark, you don't need 2 of everything. And so in the consolidation process, we've been able to minimize duplication in certain areas, and we think we're going to be better for it. So we've already begun this process of calling in the organization -- streamlining, if you will, is a better term to use. But at the same time, where we're streamlining is in areas and cutting in areas that we assessed very diligently to ensure that we have the right capability. But we're -- at the same time, we're going -- we're expanding our capabilities in development, and we're going to be adding to our sales organization. But my view is that the long-term -- my long-term -- my long-winded answer to you is that we believe our goal is to try to hold our costs steady while we shrink some areas and grow other.

George Hill - Citigroup Inc, Research Division

That's a very reasonable explanation. When you think about the -- you talked a bit about ACOs and the functionality the company is developing right now for ACOs. Can you talk to us and give us a few specific examples of what types of functionality and what types of modules is the company bringing to market to serve ACO clients?

Steven T. Plochocki

The modules, there's 5, and we'll have more on that at HIMSS next week. We're going to have workstations set up throughout our booth that will be able to demonstrate all of these. Population management. The goal under population management is to basically take different groupings of disabilities and package them. And the idea then of getting that packaged and then using the analytics tools to try to determine standardized practice pattern. In other words, in an ACO, you may want to determine what is the best standardized practice pattern for a type 1 diabetes patient that we're going to incorporate in our ACO. Because I can tell you, I've been in health care services for 35-plus years, and when I was in the outpatient facility business, the practice patterns of each one of my independent facilities were all totally based on the personality of the lead doctor. It didn't mean they were right or wrong, but there was no standardization. And I think where everybody is moving towards now is that -- look, there's probably some reasonable standardized practice pattern for every disability that should be incorporated in the early stages of managing patients. So this population management tool, along with analytics, will help enable the ACO to develop those types of standards. The patient management tool is probably one of the more important ones because it's to make sure that patients stay on their care plan. I can tell you, I think my dentist does a better job of making sure I'm in there every 6 months than my doctor does. And the patient management piece is going to be a tickler software that will be utilized at the physician's office to make sure that if the patient is supposed to have lab work done every -- periodically, that it's done; that if the patient is supposed to have an exam done either at the office or if they can go their own time [ph]. Don't let patients go extended periods of time without taking their meds, without getting the lab work done, without getting their exam or without getting their other tests because the longer you let a patient do that, the more you open up the door for them needing specialty care or, heaven forbid, ending up in an emergency room or in a hospital bed. And that's why that POP patient management piece is going to be a very diligent piece that's got to be managed at that level. So the guys like me who are not easy to manage, I'm in they're getting my lab work done every 6 months.

George Hill - Citigroup Inc, Research Division

Steve is an analyst. I know you're not easy to manage.

Steven T. Plochocki

Okay. Thank you very much.

George Hill - Citigroup Inc, Research Division

At about the 7-minute mark, I will pause and see if there are any questions from anybody in the audience. And if not, I have several pages of questions, so I'll keep going.

Steven T. Plochocki

Yes?

Unknown Analyst

Within the health care IT space, Athena is growing close to 30% and your growth rate is a lot lower yet your operating margins are triple. Can you talk about the dynamics there and what's changing? And is there going to be a meeting in the middle eventually? Or...

Steven T. Plochocki

Well, I think it's mixed. I mean, again, even though so many of us are categorized under one sector, I think, every one of our companies are a little different, in many cases, very different. Athena, yes, I mean, Athena was an RCM-based company that start to get into cloud-based EHR, and so they have a very large recurring model, 95% to 100% is recurring. We have 68% recurring and growing. So our mission and goal is to continue to expand our recurring base of business. We sell software. We've been selling software for a long time. We have a lot pays, a lot of customers on maintenance, which is high margin, over 80,000 doctors, 20,000 dentists, 320 hospitals, all paying this maintenance and that's high margin. It's just high-margin business. So yes, we do have the highest margins for operating income, highest margins for net income, 20% return on investment. I would say that most of those stats that it's at or near the top of our sector. But I think what you'll see over time is more of a blended company. We had a $460 million run rate today. If we get to become a $1 billion company in the next 3 to 4 years, 3 to 5 years, which is our goal, you'll probably see more of a 50-50 mix in the company in terms of software and elements of software, and then of course, service.

George Hill - Citigroup Inc, Research Division

Anyone else? Steve, I'll throw you on this about -- with a numbers question. You talked about there were more than 400 vendors that helped physicians attest to Stage 1 meaningfully.

Steven T. Plochocki

I think it's 482 is the recent on the CMS website.

George Hill - Citigroup Inc, Research Division

How many do you think will help physicians attest the Stage 2?

Steven T. Plochocki

Well, I think, the top 10, for sure, of which we're fourth. My guess is -- I don't want to be too much of a curmudgeon on this, but if they're struggling to meet Stage 2 and if the reason that -- one of the reasons the government extended Stage 2 certification an additional year and the reason they extended ICD-10 an additional year was to get these smaller players to meet those, even if a percentage of them meet that standard, how many are going to be able to meet Stage 3 and ICD-11? I think, there'll be a very large replacement market, maybe as much as 75% to 80% of that grouping will end up in some form of replacement in the period between now and Stage 3 and ICD-11.

George Hill - Citigroup Inc, Research Division

Okay. With just the 3 minutes that we have left, the capital deployment, historically, the company has been happy to do tack-on deals. Have not looked at anything that we would consider transformational or sizable? Can we talk about the company's appetite for M&A going forward and how you think about capital deployment x the dividend?

Steven T. Plochocki

Sure, George. As most of you know, we have a history of doing self-funded acquisitions. We've done 9 in the last 4 years. We have a lot of cash, no debt. But there are several things we're looking at today. We want to rapidly expand our CM. We want to get into the hospital side of RCM in a big way. And there are certain elements we want in terms of analytics, want further expansion there, and then there's also enhancement in our inpatient software that would enable us to move a little bit higher up the bed stream in hospitals. Some of the things we're looking at are deals that would require financing which would be, in our view, a bit transformational for our company's history. And we're in the gauge in those discussions right now.

George Hill - Citigroup Inc, Research Division

I guess when you think about financing, you don't see a lot of levered companies in the health care IT space. Equity is the preferred method by which companies do deals. The company's equity price is pretty far off as high, and you have the unique board structure with respect to ownership. I guess, can you talk about how the company feels like how it would pursue a mix of equity or debt to finance acquisition?

Steven T. Plochocki

Well, we've always had, just in our self-funded deals, a blend of stock and cash. We always like to move more towards stock. Interestingly enough, you're right, our stock -- our share price is down from its high. But many people see that as a value opportunity because they see the foundation that I talked about earlier with our return on investment, operating income, net income, cash, no debt, building recurring base. They see that there's many of opportunities for us, particularly, as we begin the front end of this bell curve for ACO modeling. To a certain degree, the sector is being kind to us. As they gave us stimulus to create the emergence of EHR and now it's on the downside of that bell curve, there's a new emergence under new modeling that's cost effective and qualitative that is going to pick up the slack off of the downside of the other curve. So I think no matter how we go about this, we're a company that creates a lot of cash. We have enormous cash flow. And I think whatever type of methodology we employ is not going to be a high-risk methodology.

George Hill - Citigroup Inc, Research Division

Okay. Well, last one. As you bring on more SaaS-based clients, we would expect to see that revenue recognized as more of a service as opposed to traditional software sales?

Steven T. Plochocki

Correct.

George Hill - Citigroup Inc, Research Division

Having said that, do you think, given the mix change and what we've seen thus far, have we seen the peak of software sales? Will software sales just not get as high as they have in the past?

Steven T. Plochocki

No, I don't think so. Because what we are seeing now is the emergence of the rest of health care joining. You got to remember the stimulus bill was for hospitals and doctors. We did a hanger deal. Hanger, we're going to start rolling out the software after we've done what -- we've gone through the process of customizing the software. Now we're going to start rolling it out in July to 20 to 30 of their centers a month until we're done, and they have over 700 centers. So that's a different software. That's not a hospital or a doctor's software. We are also engaged in discussions with large roll-up companies that are in physical therapy. Groups that are electronic medical -- excuse me, in diagnostic imaging. And the point in that is that if you go to a physical therapy center, there's a physical therapist, there's no doctor, but they need software if they're going to participate in the modern era. You go to a diagnostic imaging center, the doctor usually doesn't show up until end of the day when they start reading the scan. So the point being is that every one of these areas are going to need to become automated and software-based. So we think there's a lot of opportunity still there. It's not "physician-based" or "hospital-based" even though there's still 30 to -- for some of those markets. So I'm not ready to say that that's going to happen.

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