Eclipsys Corp. Q4 2008 Earnings Call Transcript

Eclipsys Corp. (ECLP)

Q4 2008 Earnings Call

February 24, 2009; 04:30 pm ET

Executives

Andy Eckert - Chief Executive Officer

Dave Morgan - Interim Chief Financial Officer

Jay Deady - Executive Vice President of Client Solutions

Analysts

Michael Cherny - Deutsche Bank
Corey Tobin - William Blair & Co.
Bret Jones - Leerink Swann & Company
Leo Carpio - Caris & Co.
Sandy Draper - Raymond James

Presentation

Operator

Welcome to the Q4, 2008 earnings results conference call. At this time all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation and instructions will be given at that time (Operator Instructions). As a reminder this conference is being recorded.

I’d now like to turn the conference over to our host Chief Executive Officer, Mr. Andy Eckert. Please go ahead.

Andrew Eckert

Good afternoon, everyone. With me today are Dave Morgan, our Interim Chief Financial Officer and Jay Deady our Executive Vice President of Client Solutions.

Please note that we issued a press release on our fourth quarter and year ended 2008 results this afternoon. A copy of that release is also available in the Investor Section of our website at www.eclipsys.com.

Before we get started, I’d like to remind our listeners that our prepared remarks and answers to questions will include forward-looking statements, including related to the company’s position, anticipated financial results and business plans. Including plans related to software development and capitalization, sales and marketing, business development and cost control initiatives client relationships and the benefits provided by the company’s solution.

Actual results may differ due to a number of risks and uncertainties. Future performance depends on achievement of various sales and performance targets that may be difficult to meet because of market competition and other factors and current economic conditions are unstable and may cause hospitals and other healthcare providers to curtail HIT system spending.

Eclipsys plans to adjust its cost structure and business practices in response to the challenge in an economic environment may not be effective. Performance objectives might not be achieved due to various risks, including slower than expected sales or implementations or higher than expected costs to meet client commitments and achieve our development objectives.

Cash consumption may exceed expected levels at the timing of collections or expenses that are not in line with our forecast or strategic opportunities require cash investment. Software development may take longer and cost more than expected and incorporation of anticipated features and functionality may be delayed due to various factors, including programming and integration challenges and resource constraints.

We may change our software development strategy in response to client requirements, market factors, resource availability and other considerations. Competition is vigorous and competitors may develop more compelling offerings or offer more aggressive pricing.

Eclipsys is required to meet specified performance standards and clients can terminate contracts, assess penalties or reduce contract scope under certain circumstances. We undertake no obligation to update forward-looking statements or relevant risks. These and other risks are described under the heading “Risk Factors” in the company’s Form 10-K, 10-Q and other filings made from time to time with the Security and Exchange Commission.

With that said thank you again for joining us today. I’m going to provide some very brief comments and then turn it over to Dave Morgan who will provide more detail on our financial results then Jay will comment on progress in our sales and marketing efforts and after a few more remarks from me, we’ll open up the call for your questions. First, some financial highlights for the fourth quarter and year ended 2008.

In the past year, we grew revenues from $477.5 million to $515.8 million, representing an 8% year-over-year growth. We ended the year with $1.45 billion in backlog, up 6% compared to 2007. We had $21.4 million of free cash flows in the fourth quarter and for the year had free cash flows of $30.1 million. The fourth quarter was certainly a disappointment on a number of fronts, but despite the tough ending of the year, our company did make meaningful strides in 2008.

We had many highlights in the year, particularly the three acquisitions we completed. Each of which will play a vital role in accelerating the growth of the company and while the economic environment remains a challenge, I feel that our value proposition is well suited to the world in which we are all operating.

Professionally speaking, we’re excited about the American Recovery and Reinvestment Act of 2009 was obviously recently signed into law and the Obama administration has made a strong commitment to increase healthcare IT adoption.

We feel this plan should certainly be a net positive for our industry and help drive increased adoption and deeper utilization of HIT, both in the physician’s offices and in the hospitals. In the hospital world the potential for average annual payments of $2 million are not at all insubstantial.

We are competing with one institution that does about $120 million of annual revenue and operates at less than a 3% margin. Clearly, $2 million of federal assistance is a meaningful catalyst in addition to the penalties planned to start in 2015 for those hospitals who failed to adopt a qualified EHR.

However, based on our review of the package, we are not factoring any benefit into our financial plans for this fiscal year as we believe the impact will more than likely be felt starting in late 2010. So before I pass the call over to Dave Morgan, I want to publicly thank Dave for doing a great job and as our interim CFO, we are in the process of evaluating candidates for our Chief Financial Officer position and hope to have an announcement out in the next few months.

Dave Morgan

I’m now going to provide more detail on our fourth quarter and year end results. For today’s call, I’m gong to focus my comments on certain financial items that are not detailed in the press release and tables we have issued this afternoon.

Revenues for the quarter ended December 31, 2008 for $126.8 million compared to revenues of $124.4 million for the quarter ended December 31, 2007, an increase of 2%. For the year, revenues totaled $515.8 million, an increase of $38.2 million or 8% over 2007. Revenues in the fourth quarter consisted of the following.

Recurring revenues were $85.3 million, an increase of $8.1 million or 11% over last year. Professional services revenues were $28.2 million, compared to $29 million in the fourth quarter of last year, a decrease of $0.8 million or 3%.

As we said on the last call, professional services revenues were below expectations due to lower than anticipated utilization of our staff, as well as work required in excess of what we originally anticipated on some larger complex engagements. We have taken steps in the first quarter to address these margin issues that impacted our services business in the fourth quarter. Periodic revenues for the quarter totaled $9 million, a decrease of $1.2 million or 12% compared to 2007. Periodic revenues consist of the following.

Software related fees totaled $5.8 million, a decrease of $3.4 million or 36% compared to the prior year. As we previously indicated, this revenue stream was negatively impacted by a higher percentage of clients requiring extended payment terms as well as some clients deferring transactions to 2009.

Third party software totaled $3.2 million, a decrease of $200,000 or 6% compared to the fourth quarter of 2007. Hardware revenues were $4.2 million, compared to $4.5 million in the prior year, a decrease of $300,000 or 7%.

With regards to margins, please note that any discussions regarding margins or expenses are based on non-GAAP results. The press release and tables we issued this afternoon include a detailed reconciliation of our GAAP to non-GAAP net income.

To help you better understand the effect of our non-GAAP adjustments on margins in the quarter, stock based compensation was recorded as follows. $1.5 million was recorded in cost assistance and services which we will exclude from our forth coming discussions on gross margins. $1.8 million is included in sales and marketing, $300,000 in research and development and $600,000 in general and administrative expenses.

Non-GAAP gross margins were approximately $55.3 million or 42.7%, a decrease of 470 basis points from 47.4% in the fourth quarter of 2007. Sequentially, non-GAAP gross margins decreased 130 basis points from 44% in the third quarter of 2008.

Margins in the quarter were impacted by lower license revenue, lower margin on our third party license revenue, reduced demand for implementation services and cost overruns on certain larger implementation projects. For the year, non-GAAP gross margins were 44.2%, compared to 43.7% in 2007, an increase of 40 basis points.

Moving on to research and development costs; gross research and development expenses for the quarter were approximately $19.8 million, up $700,000 year-over-year and $500,000 sequentially. The year-over-year and sequential increase are largely due to our continued build-out of our development capability in India.

For the quarter, capitalized software development costs were $5.8 million or 29% of gross research and development expenditures, compared to $5.7 million or 29.7% in the fourth quarter of 2007 and $5.5 million in the third quarter of 2008.

Amortization of capitalized software development costs which is included in cost of system and services totaled $4.8 million in the fourth quarter, up approximately $1.6 million compared to the fourth quarter of 2007 and up $100,000 sequentially over the third quarter. The year-over-year increase in amortization of capitalized software is due to the market release of Sunrise Clinical Manager 5.0 in December of 2007.

Finishing up with sales and marketing, and general and administrative expenses; sales and marketing expenses were $21 million, an increase of approximately $600,000 over the prior year quarter and up $3.6 million sequentially from the third quarter of ‘08. This sequential increase is primarily due to cost associated with our Eclipsys user network conference, the acquisition of MediNotes and higher commissions due to higher quarterly bookings in the fourth quarter.

General and administrative expenses were $11 million, an increase of $4.5 million compared to the fourth quarter of 2007 and up $4 million sequentially from the third quarter of ‘08. The sequential increase is largely due to an increase in professional fees, the MediNotes acquisition and increase in our allowance for doubtful accounts related to specific clients.

Moving on to our balance sheet; wee ended the quarter with $108.4 million of cash and marketing securities, $107.2 million in long-term investments and $105 million in long term debt. The cash balances include approximately $2 million of cash related to the acquisition of Premise that was distributed to the former Premise shareholders in January of 2009. Excluding this Premise cash, we ended the year with approximately $106 million in cash, up $17 million sequentially.

Operating cash flows for the quarter were $31.8 million, compared to $31.1 million in 2007. For the year, operating cash flows were $73.4 million, compared to $70.2 million in 2007. In the fourth quarter we had $21.4 million in free cash flows compared to $22.4 million in the third quarter of 2008.

For the year, we had positive free cash flows which totaled $30.1 million in 2008, compared to $32.8 million in 2007. This slight decrease represents higher capital expenditures in 2008, due to the build-out in India, our new headquarters in Atlanta and investments in our technology solution center.

During the third quarter of 2008, we secured a three-year revolving credit facility of $125 million which is available to us through August 26, 2011. As of today, we have drawn $105 million against the facility and have approximately $2 million in outstanding letters of credit, leaving approximately $18 million available for future borrowings.

As of December 31, 2008 we held auction rate securities with a par value of approximately $116.6 million of which $36.3 million was purchased through UBS and $80.3 million was purchased through Goldman Sachs. The book value of these securities is approximately $107.2 million as of December 31, 2008.

In the fourth quarter we contracted to redeem our securities purchase from UBS at par in June 2010. This resulted in the recording of a $3.3 million asset with a corresponding credit to income for the fair value of the put option. Simultaneously, we reclassified the underlying auction rate securities from available for sale to trading securities.

This reclassification resulted in the recognition of approximately $3.9 million of unrealized losses, previously included in other comprehensive income on our balance sheet. The net result of this change was a $600,000 charge to earnings in the quarter.

Going forward, changes in both the fair value of the UBS put option and the underlying UBS auction rate securities will impact future earnings. We anticipate the changes in the fair value of the put option and underlying ARS securities will largely offset each other in 2009 absent any future deterioration in the credit quality of UBS.

For the ARS purchased through Goldman Sachs, we’ve recorded temporary loss in these securities of $8.8 million, reflecting the decline in fair value which was recorded in other comprehensive income. As these securities remain classified as available for sale, future changes in value will continue to be recorded through other comprehensive income in the balance sheet.

Day sales outstanding were 86 days which is up five days sequentially from the third quarter. Excluding our MediNotes and Premise acquisitions day sales outstanding were 82 days. The remaining slight increase from the third quarter to the fourth quarter is due mainly to higher annual maintenance billings in the fourth quarter as compared to the previous quarter.

Moving on to our backlog; we ended 2008 with approximately $1.45 billion in backlog compared to approximately $1.36 billion as of December 31, 2007 an increase of 6%. As we did last year we will disclose both the outsourcing component of our backlog and the backlog associated with our software operations.

Outsourcing backlog was $305.7 million, compared to $299 million as of December 31, 2007 an increase of 2%. While we signed a significant new outsourcing deal in the second quarter, that increase in backlog was largely offset by the loss of a client due to an acquisition.

As of December 31, 2008 our software related backlog excluding both MediNotes and Premise, was $1.145 billion compared to $1.072 billion as of December 31, 2007 an increase of 7%. This increase is the result of several new client wins as well as significant renewal business.

Now turning to our guidance for 2009; on our call back on January 21, we provided initial guidance that our 2009 pre-tax earnings on a non-GAAP basis would meet or exceed our 2008 pre-tax non-GAAP earnings. Given the continuing uncertainty around the economic environment in 2009 we maintained that as our guidance for 2009.

As the year progresses, we will continue to evaluate the guidance we provide. To be clear, I want to walk you through exactly what this means. Our 2008 non-GAAP pre-tax EPS is $0.79 per share. We anticipate that our 2009 effective tax rate will range between 40% and 42% which translates into a minimum after tax non-GAAP, EPS range of $0.45 to $0.47 per share. So please use this as your guideline for what we feel is the minimum amount we expect to earn in 2009.

Our 2009 model accounts for a change in the demand preference for extended payments and thus includes a smaller amount of one time license revenue, excluding the acquisitions of practice solutions and Premise.

Our non-GAAP guidance excludes stock-based compensation expense, acquisition related amortization and the purchase accounting adjustments related to the acquisition of Premise. It will also exclude any major restructuring activities in 2009.

At this point, I’d like to turn the call over to Jay.

Jay Deady

As Andy discussed, on our call back in January the market conditions toward the end of 2008 were challenging and we anticipate they will continue that way over the balance of 2009. While 2008 certainly didn’t end the way we anticipated from a bookings mix perspective, we did have quite solid bookings in the fourth quarter.

We were pleased with the new Sunrise enterprise client wins that we had in the latter half of the year, including Madonna Rehabilitation Hospital in Lincoln, Nebraska; Karmanos Cancer Institute in Detroit; and Wheeling Hospital in West Virginia to name a few. We also signed significant renewals with clients such as Yale New Haven Health Systems, Orlando Health, and Robert Wood Johnson University Hospital.

We had a 100% attachment rate for additional Eclipsys solutions sold in conjunction with our renewal contracts in 2008. These additional Eclipsys solutions included revenue cycle, pharmacy, ambulatory and solutions within our performance management suite.

Client demand for additional Eclipsys solutions resulted in strong sales to our existing clients and reflects a trend we see prevalent in the market today, namely the hospitals health systems and physician practices would prefer to have one vendor to automate as many of their work flows as possible.

This is one of the reasons why we made three acquisitions in 2008 and continue to invest heavily in research and development of our core solution offerings. We continue to improve and expand our solutions portfolio which has allowed us to increase the value that our clients are realizing from their core Eclipsys investment, , as well as has provided our new business sales team additional solutions that can be sold to net new clients.

The rollout of Sunrise Clinical Manager 5.0 continues to go exceptionally well and our clients live on this version are quite happy with the performance and usability. With the majority of our Sunrise Clinical Manager clients now live on version 4.5 or 5.0, we anticipate continued improvement in our client satisfaction scores, as well as high rates of add-on sales into the base.

We did receive some great news towards the end of the year when the 2008 Best in Class awards were announced and Sunrise Clinical Manager had advanced to the number two ranking for acute care EMRs. As you know, class rankings often play a key role in the vendor selection and evaluation process, and this continued forward momentum should have a strong impact in our competitive position. Additionally, this improvement was a contributing factor to the 100% retention of our Sunrise Clinical Manager client base in 2008.

Our integrated ambulatory, EMR and Practice Management acquisition, MediNotes, is shaping up to be another very successful addition to our solution portfolio. We had a strong bookings quarter for what is now referred to Eclipsys practice solution and the pipeline for these solutions is now more than six times greater than it was prior to our acquisition in early October of 2008.

Given the interoperability requirements outlined in the stimulus plan that Andy spoke about earlier, to realize any financial incentive, CCHIT certification will be an essential requirement for any HIT solution and continues to be a major priority on our development road map.

The combination of the stimulus plan with the still very modest levels of acquisition in the integrated ambulatory EMR and Physician Practice Management space has us excited about the growth prospects of Eclipsys practice solutions.

At the end of 2008, we announced acquisition of Premise whose solutions we have rebranded as Sunrise Patient Flow, which are now a primary component of our suite of performance management solutions. In our industry, Premise solutions are often identified in the bed management category.

The value proposition of Sunrise Patient Flow is rather simple. With many hospital expansion projects now on hold, Sunrise Patient Flow helps hospitals maximize the utilization of current bed capacity and while many hospitals are forced to turn away ambulances and potentially lucrative ED visits due to a lack of capacity, Sunrise Patient Flow facilities quick bed turnover in the ED.

This helps reduce the number of ambulance diversions and increase the patient flow into the hospital, which means more net new insurance claims. Additionally, the solution also helps insure that patients are placed in the units with the appropriately skilled clinicians to care for them.

To bring this more to light, Hartford Health Care, an early adopter of the patient flow solution, credits this solution to virtually adding the equivalent to 35 to 50 beds to their institution. The significance of this can be put into perspective by another leading patient flow client, Banner Healthcare, who has documented that by adding one in-patient per day across their health system averages an additional $1 million in revenue annually.

We at Eclipsys fully agree with Dr. Don Berwick from the Institute for Healthcare Improvement and noted author, when he comments that patient flow is the primary common cause for what ails the healthcare system today.

The solutions have been road tested with a who’s who of leading US healthcare providers including MD Anderson Cancer Center, Robert Wood Johnson University Hospitals, Duke University Health System, UCLA Medical Center, SingHealth, as well as many community hospitals. Sunrise Patient Flow is perfect for selling in today’s challenging economic environment, as it helps hospitals achieve a quick ROI with minimal up front expense.

According to HMSS Analytics, 61% of hospitals have no solution for bed management so there’s a significant market opportunity for the solutions out there as well. We estimate the US markets to be about $2 billion of spend opportunity over the next five years and international markets to be equal or higher over the same period of time.

Sunrise EPSI, which continues to drive increased share in the decision support and budgeting market for us, as well as our integrated clinical analytics solution that helps provide clinical performance and reporting, are experiencing great sale success.

While pay for performance programs and the PQRI are already driving and incensing the need for clinical reporting, it is going to become even more critical as hospitals require advanced reporting on clinical performance and must show meaningful use of HIT to take advantage of the financial benefits outlined in the stimulus package.

In conclusion, I want to take the time now to thank my client solutions group for achieving many of the goals we set out to accomplish in 2008. I’m very thankful for the team’s hard work and dedication to Eclipsys’ success. I would like to turn the call back over to Andy Eckert.

Andrew Eckert

Okay, thanks Jay. Since our call last month, we have taken steps you would expect to adjust our cost structure. In addition to the continued migration of work to Eclipsys India, we reduced our professional services capacity to reflect the current and projected business volume. I feel we were now appropriately staffed in our services area, but we we’ll obviously be watching closely how the client base performs in the months to come.

Organizationally, we’ve combined our professional services and client solutions team. I believe our go to market and field coordination will benefit greatly from this change. By having sales and services more closely aligned, I feel we can better manage the client relationship on a long term basis.

With this move, Matt Sappern who’s our Senior Vice President of Professional Services, now reports to Jay and will continue to be a member of our executive team. Matt has done a good job driving a better client focus and process improvements in his 12 months of running our services area and I think this move will help build on the progress he has made and we look forward to providing more detail on our progress during our next investor meeting at the HIN show in a month and a half.

We now have 650 employees in India and that operation continues to function at a very high level. It now feels more like just another Eclipsys office frankly, than an operation almost 10,000 miles away. The level of the talent that we have attracted in India has truly been remarkable and the ongoing success of this operation is paramount to our continued growth.

In the last two and a half years for instance, we have doubled our development capacity with only a 10% incremental cost. We have built billable capacity and professional services and an outsourcing which provides a very attractive value proposition for our clients in today’s ultra cost conscious world.

Our international marketing expansion got a nice boost when we recently signed an agreement with Infosys Technologies Limited, a world leader in consulting and information technology services to jointly market each other’s solutions. Infosys will co-market our Sunrise Enterprise Solutions to healthcare organizations and certain geographic regions, including the all important emerging Indian market. Correspondingly, Infosys will provide implementation services using Eclipsys’s proven methodologies, as well as offer systems integration infrastructure management, business transformation outsourcing and other consulting services.

We continue to be very active in pursuing some large deals, both in the Middle East and in the Asia/Pacific regions and SingHealth is now hosting site visits for us on a regular basis. Our goal in this part of our business is pretty straightforward; to build on our SingHealth success in 2009 by adding another marquis international clients.

Over the last three years, we’ve done a great job I think evolving our solution portfolio to meet the needs of the market, as seen in our successful role out of integrated pharmacy and emergency care and other solutions. We’ve also added key solutions, such as our patient and clinician portals, as well as important capabilities such as orders reconciliation.

In 2008, we made the decision to significantly expand our solution portfolio and enter new markets with the acquisitions of EPSI, MediNotes and Premise, as Jay described. Each of these additions represents exciting opportunities on a stand alone basis, but the overriding catalyst was to drive important and incremental competitive advantage across all of Sunrise Enterprise.

EPSI and Premise in particular are proven to be quite impactful to our market positioning as the outcomes company. Both are attractive solutions in good times, but are particularly well suited for difficult economies; given the modest up front cost and most importantly, the operational and financial insights and actionable information they provide.

These three businesses are proving to be more than just additive. We believe they will help us accelerate our growth at a rate we couldn’t have accomplished had we only focused on our core business. In return, Eclipsys has brought industry presence adds enormous benefits to our new colleagues.

In each case, we’ve effectively increased their distribution reach by 10X or more. We believe these will help these smaller private companies that lay any viability concerns and provide immediate access to the C suite of any of our major clients. I believe we will assume a sooner return on our invested capital for these acquisitions than originally anticipated, based on our results today.

Just to pick a couple results out; ESI bookings grew by 300% plus in 2008 versus 2007 and just in the first quarter as part of Eclipsys, our MediNotes acquisition or as we call it Eclipsys peak practice, had a record bookings quarter out of the gate in the fourth quarter. Premise also closed the year with strong results prior to the acquisition and in summary I really feel all three of these deals are winners; great people, great products, great clients and value propositions that fit today’s market.

As Jay mentioned, Premise is now part of our performance management suite of solutions. Having this set of solutions that help drive both improved financial and clinical performances is becoming a game changer for our company in helping increase our ability to win new clients, both clinical and performance management as well as adding yet another item to our sales people’s bags to sell into our client base.

To wrap this up, one of the first objectives I established when joining this company about three years ago was for Eclipsys to become the recognized leader in our industry with respect to client satisfaction. The metric we use to monitor our progress is the class ranking. A few months after I arrived, our acute care EMR solution was ranked number five in the industry, but through a lot of hard work and process change, I’m pretty gratified to see the most recent class ranking showed that we’ve moved into the number two position.

While we have ways to go before we reach the number one spot, we remain committed to improving our client’s experience and satisfaction with both our solutions and our company. We have a talented hardworking group of employees. I’m exceptionally proud how we came together as a company to make such marked progress towards this goal. I firmly believe this is what determines our current and future success of the business. I have full confidence we will have continue to progress in the coming year.

So, with that I would like to thank all of our employees for their hard work during 2008 and their ongoing commitment to our future success. That’s all we have for prepared comments. Operator, we can take some questions now.

Questions-and-Answers Session

Operator

(Operator Instructions) Your first question comes from Michael Cherny - Deutsche Bank.

Michael Cherny - Deutsche Bank

As we go through the guidance a little bit, I just want to see if there are any more details you can provide in terms of directionality. I mean, when you talk about conditions being weak throughout the year, is there any type of back half pick up you expect? First, where numbers come out, obviously for the fourth quarter it’s being an easier comp, but any more color you can give us around guidance and directionality would be greatly appreciated.

Andrew Eckert

Well, it’s a bit of an uncertain environment. I know some companies in our industry are quite bullish and some are not giving any guidance. What we felt was prudent here as to give you a floor of where we feel the performance is for the year.

I think its way premature to predict where this market will be in the second half of the year. Our pipeline has not noticeably shifted one way or another, although we continue to see some clients experiencing financial difficulty and so we are trying to be as prudent as we can with respect to where we see the profitability, kind of profile of the business throughout the year.

As Dave mentioned we’ll clearly update the guidance as we move forward if it is of substantive change. Obviously our hope is to pick up on that number throughout the year, but this is our best very studied estimate as of this time.

Michael Cherny - Deutsche Bank

I know you said that you took some steps to realign your cost structure to bring it more in line where you see business being. Can you talk about kind of how much of an impact that would have or is that detail you’re not ready to provide at this time?

Andrew Eckert

Not really; we took out a significant piece of capacity in our services business. We saw utilization kind of drop off in the second half of the year and clearly it’s been the right move, because we’ve seen a pretty strong first part of this quarter in terms of project management and resource utilization and so we’re just trying to continue to not get ahead of ourselves and size this business appropriately.

So, clearly we are not in hiring mode. We continue to hire in certain areas of the business. We’ll continue to invest. If you had my job, you would invest in the businesses that are clearly growing incredibly rapidly and there are pieces as Jay and I described of our portfolio that really fit today’s marketplace.

So we’re going to invest heavily there and we’ll invest as needed in other parts of the business, and most importantly I think continue to leverage Eclipsys’ India as a way to drive capacity in a marketplace where that is important, given the broad solution suite that we market.

Operator

Your next question comes from Corey Tobin - William Blair & Company.

Corey Tobin - William Blair & Co.

First, I just want to get a clarification question. On the backlog numbers you gave Andy, do those include MediNotes and Premise or are those before the contribution for MediNotes and Premise?

Andrew Eckert

Those do not include MediNotes or Premise.

Corey Tobin - William Blair & Co.

Both the $1.45 billion and the 1.145 in the software number, right?

Andrew Eckert

Yes.

Corey Tobin - William Blair & Co.

Second question, just relates to new customer adds. It was good to hear Jay’s commentary regarding sales to new customers. Can you give us a feeling for how many new customers adds you booked in 2008 and how does it compare for the number in 2007? I’m referring to core clinical ads as opposed to ancillary products.

Andrew Eckert

Sure. The number was relatively flat Corey. I don’t think we talked about exact numbers that I recall, but the number was relatively flat. I will tell you as well, there were a number of pretty significant add-on deals where in fact, some are I think two of the top five in terms of individual deal sizes that we consummated in 2008 were add-ons of significant functionality to existing clients.

So it wasn’t just kind of a renewal, it was significant add-ons. In one case, a major revenue cycle added to a clinical client which was one of our biggest deals of the year. So, we are competing hard out there and I think obviously always I want to pick up our win rate for sure, but nobody’s sweeping the decks out there. Despite what other companies might say, there is no one winner takes all deals in this marketplace.

Corey Tobin - William Blair & Co.

And just as a follow-up on that Andy, given what you are seeing in the pipeline right now, would you expect the absolute number of new wins to increase in 2009 over 2008?

Jay Deady

Corey, this is Jay. So, we’re hopeful that that will be the case, but we historically have booked most of the net new wins in the second half of our year, as Andy talked about. That certainly is a little bit of crystal ball territory, but these are extended sale cycles of anywhere from 12 to 18 to 24 months. There’s a tremendous amount of activity in terms of site visits, demonstrations, pricing requests, way passed the RFP stage. Most of all of which have not been put on hold.

So we are competing in a large volume. We think we were competing well and if our current trajectory holds, we will sign more net new deals this year versus last, but that’s all about execution and the market continuing to hold, in terms of people making decisions and writing checks.

Corey Tobin - William Blair & Co.

And one final one if I could; with respect to cash flow from this here; you have some debt now so a little color if you could. Do you plan on using cash flow to pay down the debt balance or given where the stock is, do you think at some point it may make sense to buy back stock? How would you allocate cash flow at this point? Thanks.

Dave Morgan

This is Dave. With regards to that, I mean obviously we are continuing to monitor our liquidity very tightly. We’ll continue to watch it as we go throughout the year, both from how our sales in 2009 shake out with regards to what we are planning. So, at this point we are keeping all of our options open at this point, but kind of with of a bias towards liquidity at this point. That’s about as much as we can share right now.

Corey Tobin - William Blair & Co.

And just remind me, if you could; you currently don’t have a stock buyback authorization, is that correct?

Andrew Eckert

We do not.

Operator

Your ext question comes from Bret Jones - Leerink Swann.

Bret Jones - Leerink Swann & Company

I was wondering if we can get into some of the coast overruns in some of the large implementations. I was wondering if you could give us an update on where you those deployments currently stand.

Dave Morgan

Yes. I mean what you saw in the fourth quarter, like I mentioned, it impacted our margins as we did have some of those overruns. Obviously when you get into those types of situations you take a hard look at those projects and you get them focused and operating at the level of efficiency that you want, and you’re also in negotiations with clients as well.

So, I mean we feel like based on where we are right now and the actions that we’ve taken in the fourth quarter relative to the engagements that we are in good shape with regards to those ones that negatively impacted our margins in the fourth quarter.

Bret Jones - Leerink Swann & Company

But those deployments are underway?

Dave Morgan

Yes.

Bret Jones - Leerink Swann & Company

It sounds to me like you think you’ll be able to renegotiate additional contract extensions or work around? Is that the case or is there future exposure potential in these contracts?

Dave Morgan

I wouldn’t describe it as future exposure. I think what you saw in the fourth quarter was more of us adjusting where we were from a completion perspective and getting the project back in line as to where it needed to be. I wouldn’t describe it as we’re in a position where we have additional exposure on the now continuing engagements.

Bret Jones - Leerink Swann & Company

And it doesn’t sound as of -- I’m just trying to reconcile the statements of reducing professional services. It doesn’t sound like this is a problem that you can throw more bodies at or how do you go about correcting the issue I guess?

Dave Morgan

Well, obviously when you look at these larger implementations, I mean you’re going to look at scope; you’re going to be looking at the wind tube executed on the project. You’re in discussions with your client around what they bring to the table. I guess the way I would describe it is it gets back to kind of basic accountant client management and that’s what we’re focused on these larger engagements is making sure that we are managing these engagements as effectively as possible and also managing the expectations of our clients as effectively as possible.

Given the nature of these engagements, in other words throwing bodies at the situation is not the right solution. These are large sometimes multi-year implementation that just require course correction and that’s kind of what you saw in the fourth quarter.

Bret Jones - Leerink Swann & Company

If I could change gears and talk about the increasing amounts of counts; I was wondering if you could quantify that and if you could talk about the procedures you have for really setting the allowances for the asset class.

Dave Morgan

Well, I mean you’ll be able to see from our release. I mean our bad expense in the quarter was about $3.3 million. As I said in my comments, it was related to specific clients. It is not something I would describe as a pervasive problem in our receivable base. That’s the one thing that’s not. Even with regard to how we look at our accounts, I mean we monitor the aging just like any normal finance function was.

We rely very critically on the information from our implementation teams, as well as our account management teams, as well as just monitoring the overall credit quality of our hospitals, of our clients as we move through either the sales process or as we move through our implementations.

Bret Jones - Leerink Swann & Company

So, are you trying to say that you had previously reserved a portion of these accounts as they have started to age, is that a correct statement?

Dave Morgan

Some of these yes, we would’ve reserved a portion of them as they had aged, yes and then some of them I would also describe with the economic upheaval that happened in the fourth quarter, I think that obviously contributed to some of these specific client situations.

Operator

Your next question comes from Leo Carpio - Caris & Co.

Leo Carpio - Caris & Co.

Good afternoon gentlemen, have you seen any new pressures or is anyone becoming more price aggressive in the market, but it’s just a mater of the client situation.

Jay Deady

Thanks. We definitely saw in the second half of this year, particularly in areas of the country where some of our competitors have historically not been very strong that they got very, very aggressive on price, particularly post the September timeframe in order to try to gain share in those geographic areas.

So, there were isolated cases of extreme price pressure. I would say overall, over the course of the year, it generally increased, but nothing to an alarming rate that we did however see in a couple of transactions, particularly in the Northeast.

Leo Carpio - Caris & Co.

Okay and then in terms of the hospital capital spending environment, I think we’ve talked about it a couple of times already, is there any changes at all in the last few weeks since you provided your ‘09 guidance or it’s just pretty much the same?

Jay Deady

Well, this is Jay again. I can tell you that I’ve I been in this business for 20 years and of course this is almost on an account-by-account basis, but in the past couple of months, I personally have been in meetings and have seen in large enterprise opportunities where at least four or five times that capital spending projects for new buildings and other types of construction were put on hold and yet the intended expenditure for their HIT expenditure went forward as a higher priority.

Typically, I can tell you that in my years of experience in this business that has not been the way the prioritization has always worked, where the money got allocated between an income producing piece of capital equipment or expanding the emergency room or building a new wing on the hospital, and then came the HIT project.

So, certainly in those accounts I’ve been encouraged that again while their capital budgets are certainly under pressure in almost every account. In at least a number that we’re seeing, HIT continues to be a high priority despite the economic pressure. So, we are dealing with it on an account by account basis.

Leo Carpio - Caris & Co.

And then turning to the guidance, I mean I’m trying to sense in terms of the guidance; is it truly a conservative guidance that is if things change in your favor during the year, especially in the second half where there is this new deal activity, there is a bias toward a positive revision or this is one that is still sensitive to new changes in the credit crunch?

Jay Deady

Leo, it’s our best estimate, knowing the information we know as of today. We’ll continue to monitor our expenses carefully. We’ve got like most companies, several different cases that might happen out there, but for us we feel based on the level of recurring revenue, the profit profile of our services business, what we think our pipeline looks like, the level of investment necessary in our new acquisitions, as well as the rapid growth we expect to see from those acquisitions, all this factors into what we believe is a pretty scientific approach to give you a floor on those numbers.

Now as the world changes, again as I’ve said before, hopefully we’ll be seeing favorable results of this, but in terms of trying to be over scientific and give you some kind of precise range, I just don’t feel like today’s world really lends itself to that. If I think back how rapidly the world changed from November 15 to December 25, if that type of change happens again, it’s tough to be more precise than what we are today.

Operator

Your next question comes from Sandy Draper - Raymond James.

Sandy Draper - Raymond James

I apologize, I’m in an airport so if you get any background noise, I apologize for that ahead of time. Two questions, I guess first Andy, I don’t know if you are willing to give us a sense for what you just quantified sort of whatever, November 15, the world started to change.

Maybe up until the third quarter, what’s your year-over-year change in bookings or backlog would have been and so to a sense that how fast things fell off. I was thinking maybe even though the revenues weren’t as good in the fourth quarter, you indicated that the bookings were pretty good and so I was just a little bit surprised to see software backlog up only 7% with some of the deals being shifted to longer. So, any commentary that just clarifies that will be helpful.

Then the second question maybe for Jay. Jay, if you had a chance to look with the whole stimulus plan and I realize there are a lot of undefined terms about what meaningful user is; how much more do customers typically have to buy from you to meet that meaningful user test or is it really just using your product and using what they already have versus actually buying incremental products from you? Thanks.

Andrew Eckert

Okay, thanks Sandy. With respect to a year ago or nine months ago on this call, we made some statements to the effect that the pipeline that we are seeing had not been affected anecdotally or kind of on a gross basis by the economic deterioration. The first real visible sign of that was at the end of September where we had a couple clients’ prospects; one in particular which definitely deferred a deal on the day of signing, based upon tough end of September market performance in their investment portfolio.

As the fourth quarter proceeded and obviously knowing a number of senior hospital administrators, I can tell you the number of times I heard that we have a capital freeze or we are only allowed to spend our depreciation, I heard that kind of story a lot and people are pretty creative at getting what they want, so we saw obviously some deals flip and deferred and anyone who says they didn’t is not being frank with you, I don’t believe, but we saw a number of deals that were slotted to be period revenue or a short term milestone basis type revenue recognition stretched out in the longer subscription type bookings.

We try to manage the pipeline carefully, but the nature and context of the booking profile changed pretty significantly in that period of time. I’d like to think it’s not just us being sloppy. It was rather a pretty strong wave across the client base. I mean there are a number of clients out there and it’s no secret, the hospital marketplace is under tremendous financial pressure.

So we’ve got folks that we are working with closely and the good news is the collections continue to be strong in this company. We had good cash flow in the fourth quarter. It’s a little different than 15 years ago when people stopped buying and stopped paying all at once. This time, they are slowing down on the buying front, but continuing to pay their bills generally on time which is good, and so we need to respond accordingly.

As Dave mentioned in our go forward plans, we expect there will be a higher percentage of term based revenue type structured deal than we had originally planned. I’ll pass it to Jay for the second part of your question.

Jay Deady

Thanks Andy, thanks Sandy. Meaningful adoption, to the second part of your question, needs to ultimately be a bit better defined and I’m sure it will be, but some of the areas of discussion that have come out have been around CPOE, so physicians placing orders, documentation and clearly having access to on-line results, those being both discreet results such as lab data, as well as documented results such as clinical documentation.

Directly to your question, the majority of our client base have very thoroughly deployed our solutions for first, certainly the results that we just mentioned and then from a CPOE perspective, we have twice as many physicians and orders electronically flowing through our systems than our closest competitor. So, we think that our base as an entire client base is the closest of any major vendor out there being the closest to “meaningful adoption.”

We will monitor how that definition continues forward and we will certainly continue to progress for those clients that aren’t quite aren’t up to the standard of our best in practice will focus on driving higher levels of adoptions with them and continue our successful net new installs, but between CPOE documentation, online access to results etc, which seems to be the prevailing definition, we think our client base is in a great state compared to the balance of the industry.

Andrew Eckert

Thank you all very much and we look forward to updating you in the months to come. Thanks again.

Operator

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

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