Streamline Health Solutions, Inc. F4Q08 (Qtr End 01/31/09) Earnings Call Transcript

Apr. 9.09 | About: Streamline Health (STRM)

Streamline Health Solutions, Inc. (NASDAQ:STRM)

F4Q08 Earnings Call

April 9, 2009 4:30 pm ET

Executives

Joe Diaz - Investor Relations, Lytham Partners

J. Brian Patsy - President and Chief Executive Officer

Don Vick - Interim Chief Financial Officer

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

Scott Boyden - Senior Vice President of Sales and Marketing

Analysts

Tom Carpenter - Hilliard Lyons

Bill Bunn - Fort Washington Investment

Mark Cahill - Private Investor

Operator

Welcome everyone to the Streamline Health Solutions year end 2008 conference call. (Operator Instructions)

At this time I would like to turn the call over to Mr. Joe Diaz of Lytham Partners. Mr. Diaz you may begin your conference.

Joe Diaz

Thank all of you for joining us to review the financial results of Streamline Health Solutions for the fourth quarter and the fiscal year ended January 31, 2009. As the operator indicated, my name is Joe Diaz. I’m with Lytham Partners. We are the financial relations consulting firm for Streamline Health.

With us on the call representing the company today are Mr. Brian Patsy, President and Chief Executive Officer and Mr. Don Vick, Interim Chief Financial Officer.

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

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

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

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

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

J. Brian Patsy

Thank you Joe. Good afternoon everybody. This afternoon Don Vick, our Chief Financial Officer will summarize our financial results and then after Don’s remarks I will highlight our fourth quarter and fiscal year 2008 results and then provide some remarks regarding the dynamics affecting the business and our operating performance.

After my remarks we will open it up with our usual question-and-answer session. At this point I would like to turn the call over to Don Vick. Don?

Don Vick

Thanks Brian. I would like to highlight the more significant aspects of the financial results of our fourth quarter and our fiscal year ended January 31, 2009.

Total revenues for fiscal year 2008 decreased 2% to $16.3 million compared with $16.7 million in fiscal year 2007. The operating loss for fiscal year 2008 was $1.3 million compared with a loss of $704,000 last year. Total revenues for the fourth quarter fiscal 2008 decreased 40% to $3.4 million compared with $5.7 million reported in the fourth quarter of last year. Operating profit was a loss of $132,000 compared with a profit of $781,000 in the same quarter last year.

Systems sales for fiscal year 2008 were $3.2 million which was $233,000 or 8% higher than fiscal 2007 primarily due to a $174,000 increase in Streamline Health Software delivered in 2008 when compared with 2007. The majority of the systems revenue in fiscal 2008 occurred in the first three quarters of the year and were offset by a decline in the fourth quarter results.

Systems sales for the fourth quarter were $311,000 compared with $2.1 million in the comparable quarter last year. This decrease was primarily the result of a large system sale of nearly $1.9 million in the fourth quarter of 2007 including Streamline developed and third-party software through one of our re-marketing partners. A similar large system sale did not occur in the fourth quarter of 2008 causing this wide swing in results. The new business generated in the fourth quarter was almost exclusively application hosting contracts.

While there was a $209,000 decrease in services, maintenance and support revenues for the quarter primarily due to the timing deferral of project management revenues, the margins associated with this revenue stream remain healthy. On an annual basis these revenues remain consistent with last year’s revenue of $10.1 million. This was primarily the result of increased maintenance revenues offset by lower professional services revenues.

Maintenance and support revenues in fiscal year 2008 were $7.2 million, an increase of $481,000 or 7% over maintenance and support revenues in fiscal 2007. Professional services revenues in fiscal year 2008 were $2.8 million compared with $3.3 million or a 14% decrease of $470,000 from fiscal year 2007. The decrease in professional services revenues was primarily due to the deferral of revenue associated with one large application hosting services client where revenue including professional services for that customer was deferred until customer acceptance which is expected in 2009.

During the quarter two new application hosting contracts and one new application hosting renewal contract were signed. These will contribute nearly $1.1 million in future hosting revenues. Application hosting services revenues were $596,000 compared with $878,000 in the comparable quarter last year. This reduction in revenue was primarily due to the previously announced loss of our largest application services hosting customer. Revenues from the recently signed hosting customers in the past two quarters will begin to contribute to revenues during the next few quarters and have not yet offset the loss of this customer. It is expected by the fourth quarter of fiscal 2009 approximately 85% of the quarterly revenues attributable to this lost client will be replaced by the recently signed hosting contracts.

As previously mentioned and as demonstrated by the results above the company has experienced a shift away from its traditional purchase model of software towards a large increase in demand for our application hosting services business model. As also previously informed, near the end of the third quarter the company reduced expenses and cash flow needs to offset some of the effects of the slower revenue ramp up and up front cash needs of the application hosting model.

These actions were the primary driver to cause expenses in the fourth quarter to drop by approximately $735,000 when compared against the immediately preceding third quarter of fiscal 2008. This expense reduction amount includes reduced capitalized software expenses. It excludes any expense impact from the cost of sales.

Please remember to consider the impact of our capitalized development costs in order to have a complete understanding of our total development activities and expenditures. While our expenditures have been reduced due to the cost cutting measures noted above we continue to make significant investments in development primarily on the activities relating to the internationalization of our product to fuel the continued expected growth we see in Canada through our partner Telus Health backed by Emergis.

Backlog for the period increased to over $26.2 million primarily due to a nearly $3.6 million increase in the fourth quarter in our maintenance backlog. The backlog for application hosting services contracts was the primary driver in the backlog for the year. It has grown from $2.4 million in April to approximately $13 million as of January 31, 2009.

During the quarter we collected a significant amount of annual, prepaid maintenance contract billings. These collections enabled us to pay down $1.2 million on our line of credit leaving the net outstanding under the line at $800,000. Even after paying this debt our cash at January 31, 2009 was in excess of $3.1 million. We continue to monitor our expenses, cash balances and receivables carefully to ensure they are on plan.

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

J. Brian Patsy

Thank you Don. Now I would like to discuss a fundamental shift in market demand that prompted us to change the focus of our business model from licensing software to providing software as a service via our hosting center and the impact on the business short-term and long-term. Also a few observations on the recently passed economic stimulus package and electronic health record initiatives and what that may mean to health information technology companies such as ours. A few highlights on our sales accomplishments over the last quarter and year, our newly launched business process managed services division and finally some preliminary guidance for fiscal year 2009 regarding our new business model. I will also discuss our recurring revenue and operating expense prospects for the coming year based on last year’s dramatic increase in hosted contracts. After my remarks we will conduct our question-and-answer session.

Regarding our Q4 and fiscal year 2009 financial performance, as Don discussed our Q4 revenue was approximately $3.4 million which was 40% behind the Q4 2007 revenue of $5.7 million. For the year our total revenue of $16.3 million was slightly behind last year’s performance of $16.7 million. In reviewing our overall performance and comparing operating results from 2007 versus 2008 it is important to understand certain positive factors and sales achievements that were not reflected in our financial results due to the market shift to our hosted solutions and as a result our concentration on the new business model that focuses on software as a service.

For example, in 2008 we dramatically increased the number of new customer contracts from four to ten. We increased our systems software sales 13%. We increased our total of all backlog 64% from $16 million to $26.2 million and our hosting backlog 330% from $3 million to nearly $13 million. We increased our research and development investment as we prepare to deliver our next generation architecture this year that includes multilingual capabilities. We grew our maintenance services revenues by 7%. We were cash flow positive from 2007 to 2008 and we ended the year with a cash position of approximately $3.1 million as Don mentioned earlier.

However, there were three extraordinary events that impacted our reported revenue and as a result our operating performance. The first event was a dramatic market shift from licensing revenue to software as a service or recurring hosting revenue. As a result, even though we enjoyed a 2.5 fold increase in the number of contracts and a 330% increase in hosting backlog not one dollar of software revenue from eight out of the ten new contracts was actually recognized in 2008. In other words, only two of our ten new contracts signed in 2008 actually contributed to 2008 software revenues. Needless to say, that revenue backlog from eight new contracts signed in 2008 will carry over into fiscal year 2009 and beyond and provide a sizeable boost to 2009 revenue and operating income.

Had the ten new 2008 contracts followed our traditional software business model, where 75% of our transactions are licensed software and 25% hosted, we would have shown double digit growth in both revenue and operating income because we would have been able to recognize the software revenue associated with those contracts upon its shipment to the customer.

The second event was the loss of a significant hosting customer who decided to let their hosting agreement expire in order to build their own locally installed solution after over five years utilizing our hosting services. That event created a recurring hosting revenue shortfall in 2008 in excess of $800,000 that needed to be made up from other sources of revenue.

The third event was the financial crisis and severe economic downturn in the second half of 2008 which effectively brought health information technology software purchases to a grinding halt. This extraordinary event impacted all healthcare information technology companies and we were no exception. We were disappointed that our Q4 results fell well short of our business plan as a large license deal was delayed due to severe economic circumstances resulting in their capital budgets being frozen. In fact, we experienced tightening of capital budgets across the board in our entire installed base of customers and our sales prospects.

At this point I would like to elaborate on the fundamental change and focus in our business model from licensing software to providing software as a service and discuss its impact on the business short-term and long-term.

Beginning in 1998 Streamline Health pioneered offering customers the ability to obtain our solution on a remotely hosted basis when we signed our first hosting contract as an application service provider or ASP. Today, remote hosting of software applications is often referred to in the information technology industry as software as a service or SaaS for short and under certain specific circumstances sometimes referred to as cloud computing.

Market adoption back in the late 1990’s was somewhat limited because many hospitals were uncomfortable with their information being housed elsewhere and unsure of the up time of the hosted model. In contrast, however, our SaaS based model boasts an uptime record in excess of 99.9% as well as an unbreached security record. Over the past nine years we signed three times more license contracts than hosting contracts.

However, early last year we experienced a dramatic shift in demand to software as a service or SaaS and in response we changed the focus of our business model by primarily focusing our sales efforts on selling SaaS. We do so for five primary reasons.

One, SaaS based hosting services are better designed to overcome obstacles in the buying decision such as large capital commitment, length of implementation and the scarcity of resources for healthcare organizations to implement new systems. The SaaS model also provides a lower total cost of ownership.

Two, the SaaS business model is especially well suited for the medium to small acute care facility marketplace as well as the ambulatory marketplace due to lower entry level costs. These are two target market segments for Streamline Health software revenue growth.

Three, the financial crisis in 2008 precipitated a credit crunch and backlash that severely impacted available capital funds for software IT projects.

Four, SaaS based solutions are now becoming more mainstream and market adoption has increased dramatically over the past few years.

Finally five, our SaaS based hosting solutions are an excellent hedge against future obsolescence and therefore provide a lower risk alternative to the large capital investment required by traditional license models.

The decision to focus on SaaS based hosting services created significant short-term revenue recognition challenges for us while positioning the company much more favorably in the long-term. For example, generally revenues from licensed, locally installed systems sales are recognized when an agreement is signed and software ships to the customer. As a result, we get a very large boost in revenue in the quarter the software is shipped.

In contrast, revenues from SaaS based hosting services are recognized as the services are delivered, on a monthly basis over the life of the SaaS based subscription agreement which is typically five years. This spreading out of revenue recognition is often referred to as the cash chasm where both cash receipts and revenue are spread over the term of the subscription service agreement rather than being received and recognized up front as it is for our license transactions. The cash chasm is created because revenues are spread while some expenses are incurred up front to provide the necessary hardware and software infrastructure to deliver the solution from our hosting center.

The trade off in focusing on the SaaS model of delivery is giving up short-term revenue recognition in return for achieving long-term revenue visibility leading to sustained and predictable growth. We deliberately chose the latter and our 2008 results reflect that fact.

At this point I would like to briefly discuss the recently passed economic stimulus package and what it may mean to health information technology companies such as ours. As you probably know, President Barack Obama called for Universal Healthcare as a part of his 2008 Presidential Campaign. The American Recovery and Reinvestment Act of 2009 or the stimulus bill was enacted by Congress and signed into law on February 17 of this year.

The provision of the stimulus bill that specifically addresses health information technology is known as the “High Tech” Act. Some highlights of the President’s healthcare initiatives and the High Tech Act are as follows:

A primary focus in 2009 will be electronic health records (EHR’s). The bill intends to modernize the U.S. healthcare system with health information technology investments to reduce costs and improve quality of patient care focusing on improving inefficient paper billing systems and preventable errors. The bill has a goal of full deployment of electronic health records by 2014 or basically within five years.

The bill provides for a $19 billion investment in high tech provisions and includes $40,000 per physician in EHR adoption incentives beginning in 2011 payable through 2016. It includes health information technology extension programs for regional adoption via regional health information organizations or RHIO’s. The bill earmarks funds to states to promote interoperable electronic health records. It provides education programs to train clinicians in EHR’s, provides for funds to dramatically increase the number of HIT professionals because of the anticipated shortage to meet aggressive EHR adoption plans. The bill will create a health information technology grant and loan program and finally the bill calls for accelerated construction of a National Health Information Network.

A recent study by the Gardner Group estimated that total U.S. health information technology investments reached approximately $26 billion in 2007. When considering the High Tech Act estimate of $19 billion in additional health information technology investment we anticipate a dramatic increase in technology investments above current levels.

Furthermore we also believe the addressable market is significant based on the Gardner Group estimates of low EHR adoption rates of 8% of approximately 5,000 U.S. hospitals and 17% of the 800,000 physicians. As a result, Streamline Health perceives greater demand and additional federally initiated sources of funding for investments in EHR’s. Our solutions are very complementary to hospital organizations plans for EHR adoption.

Now I would like to review our sales accomplishments over the last quarter and the last year. As mentioned earlier we signed ten new agreements in 2008 including two new hosting agreements and one hosting renewal in our fourth quarter. The two new agreements because they are hosted did not contribute to Q4 software revenue but will contribute to 2009 revenue and beyond. As a result of these hosting agreements we added $1.1 million to the revenue backlog.

These new hosting agreements provide monthly recurring subscription revenue over the life of the contract which in both cases are five years. In 2007 we closed four large systems sales, three purchase and one hosted, that generated $6.8 million in combined revenue and backlog. Our ten contracts in 2008 in contrast have generated approximately an additional $17 million in combined revenue and backlog, a 150% increase over 2007.

I would like to provide additional insight into the ten transactions closed this year. The eight hosted contracts were with the following customers: The Health Alliance of Greater Cincinnati, a network of five hospitals throughout metropolitan Cincinnati, signed a new five-year agreement for four additional hospitals in their network while renewing the existing agreement with the University of Cincinnati Hospital for an additional five years.

Catholic Healthcare West, a network of 41 hospitals in three western states is the eighth largest healthcare system in the nation. Our workflow solutions in production in one hospital and near completion at a second hospital will integrate with their existing hospital information systems to provide a single point of access to health information.

We have a five year agreement that was signed with one of the nation’s largest hospital organizations located in the New York City metropolitan area. As with some of our other customers, this health system has a policy of anonymity regarding their health information technology investments which prevented us from announcing the details of the contract in a press release. This is our fifth major hospital in the New York City metropolitan area.

We announced Marion General Hospital, a mid-sized facility located in Marion, Ohio. This is another hosted customer through our relationship with GE Healthcare.

We announced Columbus, Ohio Public Health Vital Statistics Offices serving one of the largest counties in the state of Ohio. The Vital Statistics Office will use our document workflow solutions for storage and retrieval of birth, death and other vital documents to process their large volume of document requests to assist in protecting their clients against identity theft and fraud, to provide better traction of HIPPA accounting disclosure and to reduce labor intensive document searches.

We also signed Massena Memorial Hospital, a small hospital located in upstate New York. This new hosted customer is our first implementation of our workflow solutions integrated into the Meditech Health Information system environment.

We signed a new hosted contract with the Department of Surgery at a large University Hospital on the west coast and again their policy precludes disclosure.

Finally, we extended an agreement with the University of California San Francisco who renewed their hosting agreement for an additional four years.

Collectively, the eight new hosted contracts contributed $14.2 million to the total revenue backlog but because of the fast model of delivery only one of the eight hosting contracts, the hosting and renewal contracts, contributed any software subscription revenue in 2008.

The two new license contracts were with the following customers: The first license contract was announced earlier in the year when we added a significant new international customer through our partnership with Telus Health backed by Emergis in signing a contract with McGill University and the University of Montreal Health Centers. The implementation is well underway as well as the development of our next generation software solution that provides multilingual capabilities as a part of the contract deliverable. We are currently planning to deliver the beta version to the customer this summer and are targeting a go-live before the end of the year. Revenue recognition this year is contingent on achieving general release status for this software.

The second license contract was a large healthcare organization located in the Great Lakes region of the U.S. signed through our re-marketing partner, GE Healthcare. Again, the hospital’s policy precludes disclosure. This contract calls for us to integrate our enterprise document management and workflow solutions with the hospital’s existing GE Centricity Enterprise Systems.

Collectively, the two new license contracts contributed approximately $1 million in revenue in 2008 while also contributing approximately $2.1 million to the revenue backlog.

Earlier today as a part of our reporting of our Q4 and fiscal year 2008 results we announced we have signed another major new international contract within the past 30 days to implement our next generation workflow solutions at another large public sector health network in Canada. This is the second major contract with the government of Canada obtained through our partnership with Telus Health. We are very excited about our expanding international opportunities through our Telus Health relationship and we hope to announce specific details concerning this impressive win in the very near future.

At this point I would like to introduce our newly launched business process management services division. We established this division to take advantage of what we believe is a significant growth opportunity to provide custom document workflow solutions and business process management consulting services. Many industry consultants including Gardner Research believe healthcare organizations face an ever increasing demand to improve business processes and reduce costs especially in the current economic climate. Business process management (BPM) is a proven discipline which allows organizations to improve their business operations by identifying, automating and optimizing existing labor intensive business processes that cause bottlenecks and inefficiencies.

BPM solutions are quickly rising to the top of the technology spending priorities across many healthcare organizations. A recent CIO study by HIBB Analytics place BPM solutions as the number two spending priority on corporate IT budgets. Additionally, according to Forrester Research by 2011 the global market for BPM solutions is expected to reach $6.3 billion. This is a significant increase from the under $1 billion in 2006.

We have already created and called custom workflow base BPM solutions at one existing large customer who is focused on streamlining their patient financial services, human resources and administrative document centric processes. Although our revenue goals for our new BPM services group are modest this year as we get established we anticipate this group will complement our existing portfolio of workflow solutions and help drive incremental revenue.

Let me conclude my remarks by providing some further information regarding our recurring revenue and operating expense prospects for 2009 based on our new SaaS based business model which focuses on hosting services.

When considering revenue backlog from the eight new hosting contracts signed in 2008 and the revenue backlog from our two new purchase contracts and without considering any potential new hosting and purchase contracts our incremental new hosting revenues in 2009 factoring in the expected implementation time during the year should be in the range of $500,000 on top of our 2007 hosting customer recurring revenue amount of approximately $2.9 million.

We anticipate revenue backlog of approximately $1.6 million in recognizable software as a result of delivery and achieving general availability of the multi-language support to our Telus Health customers, McGill University, The University of Montreal Health Centers and the large new public sector health network contract signed last month. It is important to note that revenue recognition is contingent upon successful completion of the beta process and announcing general availability which is anticipated within our fiscal year in January 2010 timeframe.

Next year recurring maintenance services revenues should be consistent with 2008 results or in the $7-7.4 million range. Regarding professional services including associated recoverable expenses we anticipate revenue in the $3.6-4 million range contingent on the timing of system implementation and potential project delays.

Our operating expense run rate exclusive of cost of sales should be on average in the range of $2 million per quarter net of [cap] software. Our cost of goods sold excludes third-party hardware and software which is a variable expense should be in the $2-2.4 million range per quarter. Finally, we expect that next year’s operating expense growth should be very modest in a range of 5% or less.

Our anticipated recurring revenue backlog fulfillment and predictable professional services revenue in 2009 when totaling all the previously mentioned revenue streams is in the $16-17 million range. Again, exclusive of any anticipated new business. In other words, based on contracts already signed recurring revenues and backlog fulfillment will contribute between $16-17 million for the year before we include any new contracts or add-on business obtained in 2009. Obviously we plan on signing many new contracts in 2009.

Our stated goal over the next 12-18 months is to increase these recurring and predictable revenues to the point that they cover all of our total operating expense and cost of goods exclusive of variable third-party component costs. We hope to do this by greatly expanding our hosted customer base such that any net new system sales or hosted contracts will drop directly to our bottom line.

This concludes my formal remarks. I would like to turn the call over to Joe for the question-and-answer session. I have asked Joe Brown, CIO and VP of Client Services, Scott Boyden, our Senior Vice President of Sales and Marketing and Don Vick, our Interim Chief Financial Officer to be available for this quarter’s discussion to give you an opportunity to hear from our executive team and to ask them any specific questions.

Joe and Scott will be participating remotely. Gary Winzenread, our Senior Vice President of Product Development and Strategy is not available due to a prior commitment.

Joe Brown

Operator will you give instructions for the question-and-answer session?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tom Carpenter - Hilliard Lyons.

Tom Carpenter - Hilliard Lyons

Your other large re-marketing partner is U.S. based, it looks like it was a slow year for them. Are they undergoing a product transition or is it just an even slower marketplace for them in the U.S.?

J. Brian Patsy

That is a good observation. A couple of things are going on. I think candidly our primary re-marketing partner, GE Healthcare, has had what I would describe as a transition year. As you may know they are in the process of developing their own next generation solution and it is going to be world-class. We met with their senior leadership frankly this week at the HIMSS conference and we are really encouraged by the fact that they said everything is coming together and they will actually be going into production later this year with their solution. So I think what we have witnessed over the last frankly two years was kind of a static market while they get that new product out. That has of course impacted Streamline Health because they are a significant partner of our revenue.

Tom Carpenter - Hilliard Lyons

You used to get a large deal or two in the fourth quarter every year from them.

J. Brian Patsy

In fact, the deal that was delayed was a GE partnership deal. It was a purchase deal and capital dollar drain which brings me to the second point. The second half of the year literally mostly in Q4 the buying group prospects really came to a screeching halt. That isn’t just the prospects but even our installed base of customers our capital dollars shrunk and it was really interesting that earlier in 2008 we had of course a pipeline of prospects that were both interested in hosting SaaS based hosting and purchase. The large transaction in Q4 that really hurt us that was delayed was a purchase deal. When everything dried up in Q4 they literally had their budget pulled and capital dollars were frozen and it was really interesting and frankly a positive outcome is now we are talking with them about hosting because an operating expense model is much more palatable for them. So those are the two major impacts in terms of what happened last year.

Tom Carpenter - Hilliard Lyons

Scott, can you hear me?

Scott Boyden

Yes I can.

Tom Carpenter - Hilliard Lyons

Would you characterize the state of the sales environment today if there has been any change since the stimulus package was passed? I would imagine there is a lot of digestion going on and also maybe differentiate between what is going on with the over 100 bed hospital market and the under 100 bed hospital market.

Scott Boyden

I think there has been a dramatic change to be networked in with GE and other EHR vendors. I think definitely people are trying to figure out their spend and what they will receive. That market has been frozen to a certain degree. That impacts us through our partners. I think the most dramatic change though is the opportunity we have with our new SaaS based ASP offerings. A lot of the deals we were able to execute in 2008 were obviously because of that advantage and we see more of that coming here in 2009. So, I think the capital freeze has hurt those organizations that just offered solutions that are purchase deals while I think it offers us an opportunity to further leverage our ASP offering. Have the deal cycles been impacted? Sure. They have been impacted but I think we have a real competitive advantage.

Tom Carpenter - Hilliard Lyons

Have you seen a change since the stimulus bill was announced or are hospitals waiting to see the fine print before they sign on the dotted line?

Scott Boyden

It is variable. We have seen some hospitals freeze budgets and we have actually seen others actually increase some solutions steps into their budgets because they foresee they will have an opportunity for some additional spend they weren’t planning on before the bill was enacted so it is almost deal-by-deal.

J. Brian Patsy

We are also noticing that obviously every hospital organization is extremely interested in the “how” of the stimulus package. How they get their hands on the $2 million in additional IT investment and it is across the board. I believe that starting next year the market will pick up. Some folks are getting ready now and starting to have some budgeting questions relative to what can we provide. Some are waiting which is probably due to in terms of the market in those regards but I think over the period of the next two years I think assuming the capital markets cooperate to complement some of those earmark dollars I think that bodes well for us.

Tom Carpenter - Hilliard Lyons

Don, I don’t want to leave you out. I have a question for you. In your modeling what type of revenue run rate do you see the firm achieving break even? I know it depends on the mix a lot but it is clear which way the mix is going so when you are doing your forward modeling what do you see as the break-even run rate?

Don Vick

As Brian alluded to in his comments, we are looking at around a $16-17 million range for the year for break-even.

J. Brian Patsy

I will weigh in as well. I know you are anxious to do some modeling. If you go back over my comments in detail you should have everything you need to do your modeling. I will say this, even though our budget earmarks between $16-17 million in total expense we hardly ever spend all the expense that we budget. That is why we are giving you a range here. Obviously we do that so if market conditions change we have the opportunity to scale back some of our spend. Some of those dollars are kind of slated towards the second half of the year to just make sure we match our spend to our revenue growth.

Operator

The next question comes from Bill Bunn - Fort Washington Investment.

Bill Bunn - Fort Washington Investment

I have too many questions. The first has to do with liquidity. It seemed to be pretty excellent for the quarter. It looks like you added about $3 million in real cash because you grew the cash number from October through January. You also paid down debt from $2 million to $800,000 so about $3 million. Does that represent the high watermark for the year or will you continue to improve your liquidity through the year?

Don Vick

Certainly we have some seasonality in the year because of the way that our annual prepaid maintenance falls. In the last earnings call we discussed what a great fourth quarter it was just in terms of the cash coming in. So that was certainly one high side as far as orders go. As we go forward doing our cash flow modeling what we really look for are the big pops of cash which typically come from those prepaid maintenance streams. Fortunate there are some chunks pretty much every quarter during the year. They certainly are not as significant as they were in the fourth quarter but it looks encouraging.

J. Brian Patsy

Don is absolutely right on. The seasonality is something we obviously monitor and we have done modeling, or Don has done modeling, through the end of the year and if you look at our seasonality the trough in cash receipts is typically the same time every year and it is just prior to us sending out all these invoices for annual prepaid maintenance. So it is in the late July/August/September/October timeframe and then it picks up significantly after that.

Bill Bunn - Fort Washington Investment

So at this point is it fair to say your debt should probably only continue to fall through the course of the year because you draw down from time to time on the cash that is there? Is that what you would anticipate?

Don Vick

It really depends month-to-month just because of the way the chunking is if you will of the prepaid maintenance deals. I know we have a couple here coming up soon. Then there is a month or so where there aren’t those type of billings to collect and then we get into that time during the year that Brian is talking about from a seasonality perspective, that fall time period, where there is not the big receipts. So I’m sure we will be tapping into the line there. But then once again forecasting as we get into that fourth quarter again later in the year there are some very sizeable receipts. It really just depends on the timing during the year.

J. Brian Patsy

Keep in mind we are focusing on the SaaS model and in theory if we had 100% of our net new contracts SaaS that creates some cash chasms for us. But frankly, Scott Boyden and his sales team and their forecasting there are some purchase deals out there still even though most of them should be SaaS based. We are still selling both models and those would really help our cash situation. Clearly we are real excited about the SaaS model and what it will do for us and what it will do for me in terms of sleepless nights to know and have predictable revenues that are consistently growing. But it sure wouldn’t hurt to have a couple of pops of purchase deals this year to just mitigate the cash flow.

Don Vick

And obviously it certainly helps the P&L too.

Bill Bunn - Fort Washington Investment

With regard to maintenance it was flat year-over-year and service maintenance before was down about 10% or so for the third quarter. How does that work again? Did you actually lose some maintenance customers through the year? If you were flat, is there a cost of living escalator in those contracts?

Don Vick

There is a cost of living escalator in most of those contracts and going forward and this year we see that increasing. I’m trying to remember if there was a specific client that we lost.

J. Brian Patsy

The professional services tailed off last year because of delays in implementation and that was part of it. Maintenance, that fluctuates. We bring on new customers. I think we negotiated a lower rate with one customer due to some circumstances but for the most part that should grow modestly year-to-year.

Bill Bunn - Fort Washington Investment

Did you indicate something like a 10% in the coming year?

Don Vick

It’s not quite that much.

J. Brian Patsy

I think it was 7% year-to-year and I don’t know if I commented on expectations this year.

Bill Bunn - Fort Washington Investment

I was scribbling notes when you were talking about what you expected there.

J. Brian Patsy

If you go back and look at the transcript and add up all the numbers you will get to the right place. It looks like Don has it now. Go ahead Don.

Don Vick

It looks like $7.4 million or so is what we are estimating right now.

Bill Bunn - Fort Washington Investment

With regard to backlog in some contracts you can recognize revenue and some you can’t. Is the backlog an accounting backlog or a cash backlog? I’m sure it is a combination of both but if I look at the backlog does that represent accounting earnings you will recognize later but cash has already been received?

Don Vick

It is somewhat of a mixture. On things like our prepaid maintenance that is where we have gotten cash up front. Like we were saying in the fourth quarter we had a lot of receipts from that program. So that is cash we have received but from an accounting perspective the revenue will be earned as we go forward. On the hosting contracts obviously that is both cash and accounting going forward. Then you have got kind of a mixture based on the other items within our revenue mix. So you have a little bit of both going on there.

J. Brian Patsy

One of the things we are trying to do to mitigate the cash chasm is where we can on net new hosting contracts we are trying to negotiate some prepays like we do on the maintenance side and I think that will help us manage our cash flow much better.

Don Vick

Even we are throwing out the idea of even in existing clients if they would like to prepay we will certainly allow that.

Bill Bunn - Fort Washington Investment

My final question with regard to that second and new Telus contract was that also a contract that involved the dual language capability?

J. Brian Patsy

That is correct.

Operator

The next question comes from Mark Cahill - Private Investor.

Mark Cahill - Private Investor

What does your gut say about the capital budgets freeing up today or in the next quarter?

J. Brian Patsy

That is subject to speculation. Wishing and hoping, I would like to see as the economy thaws budgets will unthaw. My hope is that by mid year we will see a definite thawing. I haven’t seen it yet to be candid. That is creating opportunities for us on the flip side in terms of hosting and why Scott Boyden is so jazzed about the fact that we have an advantage in the marketplace and we are moving our solutions down the food chain to smaller and smaller healthcare organizations who really don’t have the capital. Right now it still needs to thaw.

Mark Cahill - Private Investor

Regarding the government assistance for the EMR initiative, will Streamline have to get its products certified by whatever government certification commission is?

J. Brian Patsy

We don’t anticipate getting certification as a stand alone. We have been certified in conjunction with GE Healthcare and we will follow that same path with our other partners including Telus Health. The reason we don’t seek certification is there are certain elements that we do not provide in our mission on our software that are required for certification. That would require an EHR like medication tracking and medication errors and things like that and order entry. So we really don’t qualify for certification because of the niche we are in. What we are is a complementary solution and technology to the EHR. So in combination with a clinical information systems provider we can enable certification if that makes sense.

Mark Cahill - Private Investor

Could you give us an idea of the implementation for the ASP deals at Massena and Catholic Healthcare where we stand on implementation?

J. Brian Patsy

Sure. Massena is well underway and we expect to go live some time in the early summer timeframe. So we are well down the path there.

Mark Cahill - Private Investor

That is an important one because it is Meditech, right?

J. Brian Patsy

That is correct. We are actually right on target with that one and so it is exciting. I think Scott Boyden is probably jumping up and down in his remote location anxious to get that one going so we can really aggressively pursue the Meditech market. Catholic Healthcare West again good news. We are in production in one facility and very near, today is Thursday so let’s just say any moment now we will be in production in two facilities. I also mentioned the Health Alliance of Greater Cincinnati. We are in production with a new facility there. There is a large healthcare organization in metropolitan New York which should be going live next month.

Mark Cahill - Private Investor

Regarding the Greater Cincinnati, you had four new ones under contract. Is it going to be one hospital at a time over the next 1-2 years?

J. Brian Patsy

That is correct. It is a staged approach. I think we can hopefully accelerate that but we want to digest the first one we have. By the way, they are on our newest version of our software and it is going very well. Then I mentioned in the New York City metropolitan area going live in May. Very large. Very large site. Columbus Vital Statistics are in the process of installing right now. Frankly I don’t have a go-live date on my notes here but it will be this year certainly. Then the Canadian hospitals are in the summer timeframe which is the beta version and then we will go through a beta process and our target is to get them actually in production before the end of the year and general availability by the end of the year. The end of our fiscal year as opposed to the calendar year.

Mark Cahill - Private Investor

The next generation architecture is going to be completed hopefully by July?

J. Brian Patsy

It is on track. It is in July so we are still being cautious but it is on track. Our people are working very hard here. I am excited. When you click a button and it jumps up in French Canadian it really is exciting to see. It isn’t just the multilingual aspect. Clearly we had to deliver that are part of our contract but this is truly, and I know it is an overused term, but it is state of the art. It has some capabilities in it that again the sales force is really jazzed about. A word of caution here is that we have to go through a beta process in Canada. We also are in the process of selecting some beta partners in the U.S. Those would not commence until early or the first half of 2010 and of course any net new deals after general arability would be on the new architecture but then we would have to go back and upgrade all of our existing customers and that will be a several year process.

Mark Cahill - Private Investor

How about new products under development?

J. Brian Patsy

Obviously the big gorilla is the new architecture and if you look at the architectural diagram for that it is like Star Wars. We also have a series of departmental and module workflows. This year we are in the process of delivering several. A new release of our referral order workflow on the new architecture is complete. We have also on the schedule and well underway and actually in beta is preoperative workflow. We are waiting for that to finish the beta process. We also have an exciting new workflow that we are cranking out and getting the planning stages to deliver and that is called RAC Audit workflow and that stands for Recovery Audit Contractor. We believe this market is enormous because it is a federally mandated program and it is entirely paper based. I just came back, as I mentioned earlier from the HIMSS conference and everybody is talking RAC.

We think we have a real advantage in terms of our workflow solutions because its configurability and its flexibility. So that is another workflow. Then there are others that are further down the pipe that we are very excited about that are not out of the production line yet such as Contract Management Workflow and Correspondence Workflow. So we get the workflow team and obviously it really tracks very well with my comments on the growth of BPM services. The last thing I will say is what we are really excited about is the introduction of our new division. I literally established a new division within Streamline to focus exclusively on custom workflows where it is not a product that you ship off the assembly line like a GM car. It is more of a custom thing like a hot rod if you will, to use the car analogy, where you go out into healthcare organizations and look for applications that need process improvement or streamlining that are document centric that don’t lend themselves to your standard automobile or workflow.

So it is not a product as much as a configurable product. This was so important that I actually carved out some of my top people including in this organization to focus exclusively on that. The neat thing is we already have numerous of these custom workflows built, installed and ready to go and so this group will focus on really penetrating our existing installed base and new opportunities where it just doesn’t lend itself to off the shelf solutions. The neat thing is we can turn these around in weeks rather than months. Again, the goal this year is very modest but I see this as one of our highest growth areas in the future.

Mark Cahill - Private Investor

The pre-op workflow, wasn’t that supposed to be finished last quarter?

J. Brian Patsy

It is done but the beta process is dependent on the customer and there has been some resource challenges there. So it has been long since completed. Again, our methodology is very rigorous and requires a great deal of customer testing in production and that has been a challenge.

Mark Cahill - Private Investor

The BPM does that involve hiring new staff or is it going to be all existing staff?

J. Brian Patsy

Yes. Right now it is seeded with existing staff but we have requisitions out for additional staff. Again, I want to make sure that we match our expenses to our revenue growth. We are starting with a core group of highly experienced people who have been here and then we will add to that when there is budget to do that.

Mark Cahill - Private Investor

Regarding your comment regarding GE developing its own, is that in conjunction with Intermountain?

J. Brian Patsy

Yes it is. At long last. I mean it was a monster project. I think some estimates I heard it was $150 million and it has been several years but we are at the end of the rainbow now and that is exciting for us as well.

Mark Cahill - Private Investor

Do you think they will have a beta by the end of this year?

J. Brian Patsy

I think, and again I am not qualified so you can’t quote me in terms of being an expert on GE but my understanding is that they will be in production by the end of the year. That is exciting. I actually didn’t realize that. But again I don’t want to be quoted on that because I am not a spokesperson nor do I have the specific knowledge of the GE timeframe.

Mark Cahill - Private Investor

They aren’t creating their own document management system, they are just tie yours on?

J. Brian Patsy

No, we were their enterprise choice for centricity enterprise.

Mark Cahill - Private Investor

And the new one coming, whatever that name is I don’t know.

J. Brian Patsy

The new one is actually an extension of Centricity enterprise if I understand it.

Mark Cahill - Private Investor

Standard Register, where do we stand on that?

J. Brian Patsy

We love Standard Register. I have been embarrassed to say I have been talking about Standard Register for far too long. There were some challenges. I have been very candid about those challenges. We are jazzed and they are jazzed and we are out there. As you know we closed a very large seven figure transaction with them and now their sales force is tuned. Again, just to briefly recap we are now selling Standard Register’s forms technology, forms on demand technology embedded into our solutions where required. That makes Standard Register very happy and we are doing a good job of that. When we announce deals you will hear e-forms and when you hear that understand that is Standard Register technology under the hood.

What is exciting to me and where Scott Boyden is jazzed as well is that we are getting them up to speed on re-marketing on their paper our stand alone workflow. You are going to say what took so long? Well, we had some stops and starts. Frankly, we wanted to have them sell our new architecture as opposed to our old architecture and so we called a time out so that Gary Winzenread and his team could move the workflows over to the new architecture for lots of reasons including supportability and cost. Because when you sell through departments you really need to be efficient in terms of configuration.

I am happy to say that referral order workflow is the first product out on new architecture so it is ready to go. We are putting together, Scott has worked very hard to put together the marketing collateral and get them up and out there hitting the streets with that new solution. Shortly behind that would be preoperative workflow once it goes GEA and after that there will be other stand alone workflow. So we are finally, finally, finally at a position where Standard Register is going to pay off some dividends this year.

Again, I want to make sure you understand modest returns this year but we are off and running.

Scott Boyden

The other thing I want to add to that is that we met with their senior leadership team while at HIMSS and I think the other difference is that both organizations anteed up resources in order to put these plans together and help each other be successful. I expect there will be pretty significant improvements in terms of both sides helping to sell each other’s solutions.

Mark Cahill - Private Investor

Here is my real last question, in terms of sales and marketing are you happy with the balance the direct sales force and the sales force through the re-marketing partners?

J. Brian Patsy

Scott, I will hand that hot potato over to you.

Scott Boyden

I’m sorry, please restate your question.

Mark Cahill - Private Investor

Are you happy with the balance in your sales and marketing staff? The direct sales force was cut by 50% last quarter. Let’s just call it a spotty year at best. Are you happy with the current balance or do you think you are going to have to hire more direct sales guys?

Scott Boyden

To answer your question in terms of the channel, and I think you have seen the results of our focus and alignment around the channel so I am very happy with that in terms of what we have done together with Telus. I think we are right on the cusp with Standard Register. There may be a few select others that we may choose to add but I think that is moving in the right direction and we have got full alignment to exploit that. In terms of direct we did reconfigure our client sales organization. We basically added an SPE and brought in some talent so I don’t think that team has ever been stronger.

Mark Cahill - Private Investor

What is SPE?

J. Brian Patsy

Full time equivalent of bodies. A resource. That is a healthcare term we tend to use those same terms.

Scott Boyden

Sorry about that. We basically have added to support our customer growth. Then in terms of what I view in new system sales we have recently added a very talented individual who joined our team roughly about six weeks ago and has already had an impact and we will be diligent about adding others. I do expect to add others progressively as we move throughout the year and we are in recruitment mode so you will hopefully see the benefit of that and we will as well.

Mark Cahill - Private Investor

Did you hint at the possibility of new partnerships?

Scott Boyden

We are always evaluating partnerships. I think the ones that we have are very strong and I think with our alignment and focus we expect to do more with what we currently have but we are always evaluating.

Operator

There are no further questions at this time. I will turn the call over to Mr. Brian Patsy for closing remarks. Go ahead Sir.

J. Brian Patsy

Thank you operator. Again I am grateful for your participation and interest in the company. Stay tuned for what we think will be a very exciting year.

Operator

This does conclude today’s conference call. You may now disconnect.

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