Eclipsys Corporation Q3 2009 Earnings Call Transcript

Nov. 5.09 | About: Eclipsys Corp. (ECLP)

Eclipsys Corporation (ECLP) Q3 2009 Earnings Call November 5, 2009 4:30 PM ET

Executives

Phil Pead - President & Chief Executive Officer

Chris Perkins - Chief Financial Officer

Jay Deady - Executive Vice President of Client Solutions

Dave Morgan - Senior Vice President of Finance

Jason Cigarran - Vice President of Investor Relations

Analysts

Corey Tobin - William Blair

Brett Jones - Brean Murray

Michael Cherney - Deutsche Bank

Donald Hooker - UBS

Frank Sparacino - First Analysis

Josh Schwartz - Flatbush Watermill

Sean Wieland - Piper Jaffray

Gene Mannheimer - Auriga

Jamie Stockton - Morgan Keegan

Garmont Glenn - Thinkequity

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eclipsys Corporation Q3 2009 earnings release. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to President and Chief Executive Officer, Mr. Phil Pead; please go ahead.

Phil Pead

Thank you and good afternoon, everyone. With me today are Chris Perkins, Chief Financial Officer; Jay Deady, our Executive Vice President of Client Solutions; and Dave Morgan, Senior Vice President of Finance. Please note that we issued a press release announcing our third quarter 2009 results this afternoon. A copy of that release is also available in our Investor Section of our website at www.eclipsys.com.

I’m now going to pass the call to Jason Cigarran, Vice President of Investor Relations, who will read our disclosure statement.

Jason Cigarran

Thank you, Phil. Please note that our prepared remarks and answers-to-questions will include forward-looking statements. Including statements related to the company’s capital 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 benefits provided by the company’s solutions.

Actual results may differ due to a number of risk and uncertainties. Future performance depends upon achievement of various sales and performance targets that maybe difficult to meet because of market competition and other factors including client demands for pricing and financing concessions and current economic conditions are unstable and may cause hospitals and other healthcare providers to curtail HIT system spending.

Eclipsys’s cost reduction and other initiatives in response to the challenging economic environment including initiatives designed to improve operational efficiencies may not be effective and it’s difficult to predict what the company maybe able to achieve. Performance objectives might not be able to be achieved due to various risks including slower than expected sales or implementations or higher than expected costs to meet client commitments and regulatory climates and achieve our development objectives.

Cash consumption may exceed expected levels at the timing of collection and expenses that are not 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 maybe delayed due to various factors including programming and integration challenges and resource constraints.

We may change or software development strategy in response to client requirements, market factors, regulatory requirements, 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 regulatory requirements 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 Securities and Exchange Commission.

As Eclipsys has done in previous quarters and in establishing financial guidance for the year, our discussion regarding income statement performance and comparisons are based primarily on financial information presented on the non-GAAP basis. The press release and tables we issued this afternoon, which are available in the Investor Relations sections of our website, www.eclipsys.com includes a detailed reconciliation of our GAAP to non-GAAP results.

Finally before I turn the call back over to Phil, please note that we’ll be participating at the following upcoming Investor Events. First we’ll be at the Piper Jaffray Conference in New York City on Wednesday, December 2 and then next at the JP Morgan Conference in San Francisco on Monday, January 11.

Now, I’ll turn the call back over to Phil.

Phil Pead

Thank you, Jason. This is my first full quarter at CEO and as I complete my first six months as CEO of Eclipsys, I am excited to see some of the changes we have made begin to bear fruit. We are becoming a more agile and efficient organization as evidenced by our sustained double digit operating income margins. We’re becoming more responsive to market requirements as evidenced by the strong reception we’ve received at our recent user conference.

We are experiencing one of the largest pipelines in the company’s history and we are well positioned to take advantage of these opportunities with our greater focus on exceeding our clients’ expectations. In the first quarter of 2010, Eclipsys will release its most ambitious and sophisticated version of Sunrise Clinical Manager. With the release of version 5.5, we are delivering a more intuitive user interface, which will help clinicians become productive by simplifying access to critical information.

Our Margaret leading physician order entry will be even more powerful by enhancing the breadth of tools available at the point of care to improve outcomes. Our open architecture will allow for even greater opportunities for our customers to develop their own apps to customize our solutions for their own environments and finally with our speed to value implementation methodology, our clients will experience the value of our solutions in record time.

Early next year, we will learn the meaning of meaningful use as designed by the American Recovery and Reinvestment Act. As the meaning is defined today, one of the requirements will be for hospitals to provide evidence of at least 10% CPOE adoption by 2011. It is our understanding that the level of adoption could increase to 100% for 2013. Of course the rule is not final and these percentages could change.

However, if the rule does stipulate that they’ll be 100% CPOE adoption and then in order for hospitals to receive their full reimbursement under the ARRA stimulus funds in 2013, they must demonstrate that 100% of their orders are being placed electronically by their physicians. Computerized physician order entry is one of Eclipsys’ biggest strengths and we lead the market in adoption for this seventh year in a row according to the most recent class study.

It is not surprising that hospitals striving to achieve the highest levels of quality of care and patient safety, site their physicians’ use of computerized order entry as the foundation to achieve better outcomes. It is why we believe that 40% of the top 20 hospitals in the U.S. is ranked by U.S. News and World Report including the number one in the nation, Johns Hopkins Hospital uses Sunrise Clinical Manager.

For hospitals seeking a replacement or new clinical system and who are expecting reimbursement under ARRA, their risk of losing reimbursement is lower with Eclipsys because we have such a high percentage of our clients with 100% CPOE adoption. Another significant strength is Eclipsys’ open architecture. While others are talking about becoming more open, Eclipsys leads in client developed applications.

Almost 2000 mini applications or apps are being developed by our clients using our MLMs or scripts or our object plus technology. It allows our clients the freedom to customize their configurations to meet the particular challenges of their environments without having to rely on Eclipsys for those changes. These apps can be shared among our clients that may have similar requirements, which makes our solutions even more exciting.

We recently concluded our annual Eclipsys User Network Conference where we experienced one of our largest attendances. Some of our clients said it was a moving experience for them to witness the enhancements we were making to our solutions and how pleased they were with our strategic direction. Not only did Sunrise Clinical Manager 5.5 garner significant applause, but many of the sessions were standing room only including those featuring our performance management solutions.

Chris Perkins will review the results of our third quarter, which were in line with our expectations and then Jay Deady will provide performance about our sales performance and market overview, but before they do so I want to highlight that we had very strong new business bookings in Q3, which is bookings excluding renewals and what is especially exciting Jay will reiterate is it approximately 40% of our bookings as measured in dollars was for competitive new enterprise client wins.

Finally, our professional services bookings were very strong in the quarter. In fact, it was the strongest result since Q3, 2006. While I’m encouraged by our momentum and our market opportunity, we are focused on execution. Our objective is to take advantage of our current market position and grow our market share, particularly in the over 150 bed market category. I look forward to sharing our success with you in future periods.

I’d now like to turn the call over to Chris Perkins, our Chief Financial Officer. Chris.

Chris Perkins

Thanks Phil. First I’m going to provide more detail on project drive, which is the internal name for our initiative to improve our operating income margins and better align our business to drive higher client and employee satisfaction. On this call I’ll discuss some different areas of the business we are targeting and then on our fourth quarter call I’ll provide more details regarding our expectations for the final impact and associated timeline.

On the Q4 call we will also provide our overall financial guidance for 2010. In the third quarter we launched project drive, which resulted in costs of approximately $800,000 related to our outside consultants engaged in the project. We did begin to realize some cost improvements in the third quarter from the initial phase of the project, although it did not exceed the outside consultant cost in the quarter.

Going forward we expect to incur outside consultant expenses of approximately $1 million per quarter through the second quarter of 2010. We also expect cost improvements from our drive initiatives to increase in the fourth quarter and going forward into 2010.

As I mentioned earlier, we’ll provide more specific financial information about project drive on our year end conference call. However we are confident that drive will deliver an annual run rate and savings by Q2, 2010 that will meaningfully exceed the total investment for the project. An area of significant opportunity for us in terms of cost savings is in procurement.

Our focus here is to have a centralized procurement with greater rigger around policy and procedure related to contract, management and terms. Our procurement spend throughout the company is approximately $190 million annually through relationships with approximately 2000 vendors. We are implementing policy and processes to evaluate every vendor contract in relationship throughout the company and have already identified significant savings opportunities.

We will achieve these benefits by more professionally managing these relationships and negotiations and by reducing the number of vendors in order to create pricing leverage. Additionally, we have already made changes to our professional services business which included improved processes and accountability to better plan and management our professional service engagements with our clients as well as improve project and resource management tools.

These processes and tools enable us to increase utilization of billable resources, reduce our overall cost structure and have clear project ownership for both internal accountability and an improved client experience. Another major initiative within professional services is to strengthen our relationship with key third party implementation consultants.

Our goal is to move from our existing stable of well over 20 partners to four or five certified partners that are well trained and have deep domain expertise on how to implement Eclipsys solutions. By having expert partners we can ensure and in fact certify a level of training and expertise being brought to client engagement. This collection of partners has the ready capacity to help us scale up as necessary to manage incremental opportunity associated with market demand.

Finally, we implemented some reduction in our professional services headcount in the third quarter, in particular non-billable headcount and established an operating structure with more clearly defined roles and accountability. The primary change in product development has been the implementing a formalized strategic investment process which gives us sufficient information to management in determining whether or not to execute on a project.

This enables us to allocate resources to projects that we believe will provide the greatest potential return. While there is no immediate dollar savings associated with this initiative, we anticipate a significant return over the next several years. Secondly, we are doing a comprehensive analysis of our current systems and tools we use to manage resources, projects and the division.

Our goal here is to optimize process in reporting by standardizing on a corset of tools that are used across the various product teams. Another area of focus is our product support division. We have made solid improvements in our class scores over the last several years any software company benefits from providing incrementally better and more efficient client service. A few of the specific adjustments we are making include providing automation and tools that help our employees perform better and feel empowered to make the best decisions.

For instance, we have implemented a formalized escalation process that efficiently delivers cases to the support resource best capable of quick resolution. This provides us support team a clear framework that define how to route individual cases which eliminates any potential uncertainty or confusion around this key part of the support process. This should reduce the number of touch points required per case to help drive margin improvement within our support organization.

We are also implementing an improved knowledge management tool, yet another step towards providing our employees with the right tools to help them be successful. I have touched on just a few areas; project drive is going to deliver meaningful improvements in how we operate in many areas of our business. With the expected increase of business volume we are anticipating over the next several years, we need to make sure we are operating with optimal efficiency and capability to ensure we execute effectively.

Now I’ll go over our financial results in more detail. Non-GAAP net income for the third quarter of 2009 was $8.2 million or $0.14 per diluted share compared to third quarter 2008 non-GAAP net income of $16.3 million or $0.30 per diluted share. As you recall, in the third quarter of 2008, we reversed our deferred tax valuation allowance and as we discussed in our last quarter, our income tax provision rate for the full year 2009 is expected to be in the 38% range and was 39% in the third quarter.

For competitive purposes, if you apply the third quarter 2009 tax rate to the third quarter 2008 non-GAAP results, non-GAAP net income would have been $10.4 million or $0.19 per share. We currently have net operating loss carry forwards of approximately $188 million and we expect our 2009 cash tax paying rate to be approximately 7%. Revenues on a non-GAAP basis for the third quarter were $126 million compared to GAAP revenues of $132.4 million for the quarter ended September 30, 2008.

More detail on individual line items in our non-GAAP revenues is as follows. Non-GAAP recurring revenues were $89.6 million a year-over-year increase of $4.8 million or 6% compared to Q3, 2008. This increase is related to greater subscription software license and maintenance revenue as well as increased remote hosting revenue. On a sequential quarterly basis, recurring revenues decreased by approximately $800,000 or 1% compared to the second quarter of 2009.

This sequential decline was primarily the result of recurring revenues in the second quarter being positively impacted by a few international clients where we recognize revenue only after cash payment is received. These international clients made their annual maintenance payments in the second quarter. Therefore, the second quarter included recognition of maintenance revenue related to the previous quarters as well. We expect Q4, 2009 non-recurring revenues to show sequential improvement over the third quarter.

Non-GAAP professional services revenues were $25.6 million compared to $34 million in the prior year quarter, a decrease of $8.4 million or 25% and a sequential decrease of $6.6 million or 21%. As we mentioned on our second quarter conference call, we expected to decrease in our professional services revenues in the third quarter due to one, a lower number of large enterprise deals booked in 2008 and the first half of 2009 and two, due to revenues that were recognized in the second quarter of 2009 that earlier in the year we had previously expected to be recognized in the third quarter.

While we had good professional services bookings in the third quarter, these bookings are not expected to meaningfully impact fourth quarter revenues due to the typical lag of three to six months between signing and startup of implementation. We expect fourth quarter professional services revenues will be below third quarter levels. As Jay will talk about in more detail later on in the call, the high tech act is starting to drive increased demand for our enterprise solutions and we expect our professional services business to improve in 2010 if we are successful in closing a good percentage of these opportunities.

Non-GAAP periodic revenues for the quarter totaled $8.8 million compared to $8.8 million in the prior year’s quarter. Periodic revenues consisted of non-GAAP software license revenue, excluding subscription revenue, which totaled $7.4 million. This includes approximately $1.2 million of licensed revenues related to the Q4, 2008 MediNotes and Premise acquisitions.

Third party software license revenue which totaled $1.4 million was a decrease of 800,000 compared to the third quarter of 2008. Hardware revenues were $2 million, a decrease of $2.8 million compared to the prior year. Non-GAAP gross margins in the third quarter were $58.9 million or 46.7% of revenues. Gross margin increased 280 basis points year-over-year compared to 43.9% in Q3 of 2008 and a decrease of 60 basis points from 47.3% in Q2, 2009.

Amortization of capitalized software development costs, which is included in the cost of systems and services, totaled $3.9 million in the quarter, up $100,000 sequentially and a decrease of approximately $700,000 year-over-year. Total non-GAAP operating expenses were $46 million or 36.5% of non-GAAP revenues in the quarter. This compares to $42.3 million or 31.9% in the third quarter of 2008 and $49.2 million or 36.9% in the second quarter of 2009.

The increase in operating expenses compared to the prior year is primarily related to, one higher labor costs associated with the acquisition of MediNotes and Premise, which again was completed in the fourth quarter of 2008, and two, higher accrued annual incentive competition costs. The sequential drop in operating expenses is primarily related to lower sales and marketing expense due to the occurrence of two major events in the second quarter, HIMSS an executive forum, as well as managing lower costs in certain general and administrative expense areas.

As I mentioned previously, operating expenses included approximately $800,000 of outside consulting costs related to our project drive initiative. Non-GAAP gross research and development expense for the quarter were approximately $20.7 million, flat sequentially and an increase of $1.6 million year-over-year. In the third quarter capitalized software development costs were $8.1 million or 39% of gross research and development expenditures compared to $7.4 million or 36% in Q2, 2009 and $5.5 million or 28% in Q3 2008.

We continued to have an escalated level of development work as we approached the release date of Sunrise Clinical Manager 5.5. Third quarter non-GAAP operating income margin in quarter was $12.9 million or 10.2% of non-GAAP revenues. Operating income margin decreased 180 basis points compared to Q3, 2008 and decreased 20 basis points compared to Q2, 2009. In the quarter we sold $23.6 million of our auction rate securities purchased through Goldman Sachs.

As noted in our non-GAAP reconciliation, we took a charge of $1.1 million based on the sale of the securities at 95.5% of par. We continue to hold $55.4 million of auction rate securities purchased through Goldman Sachs and $36.3 million of auction rate securities purchased through UBS. As we have previously discussed, we entered into a settlement agreement with UBS which gives us the right to sell the auction rate securities purchased through UBS at par value starting in June 30, 2010.

In the third quarter we generated free cash flows of approximately $19.4 million and have generated $29.9 million in free cash flow for the year. This compares to $8.7 million in free cash flows generated through the third quarter of 2008. We define free cash flow as the operating cash flows less capitalized software and capital expenditures. For the third quarter operating cash flows were $32.4 million, CapEx was $5 million and as I mentioned earlier, capitalized software was $8.1 million.

We ended the quarter with approximately $122 million of cash, $86 million in long term investments and $60 million in long term debt. In the quarter we repaid $45 million in debt on our credit facility. During October we made an additional $10 million payment to further reduce this debt. After these payments, the current balance of outstanding long term debt on a credit facility is $50 million.

The payments to reduce debt were funded through available cash, operating cash flows and proceeds from the sale of a portion of the company’s auction rate securities. DSOs in the third quarter were 76 days, up slightly from 75 days at the end of Q2 and down from 81 days in the prior year quarter. Finally, as mentioned in our press release today, we are maintaining our 2009 non-GAAP EPS guidance of $0.55 to $0.60.

Now I’ll turn the call back over to Phil.

Phil Pead

Thank you, Chris. I will ask Jay Deady to provide a review of the market activity. Jay.

Jay Deady

Thanks Phil. Our sales and service team is executing quite well in the quarter. We signed one of the largest deals in the company’s history and also closed a few ARRA related deals as well. For new business we signed in the quarter measured in dollars excluding renewals approximately 40% came from contracts for new core enterprise solution clients.

We had solid bookings in the quarter in fact, non-renewal bookings were nearly double the amount of those that were in the third quarter of 2008 and sequentially we more than doubled our second quarter performance as well and as Phil mentioned, we had very strong professional service bookings in the quarter which were the highest amount since Q3, 2006.

Now I’d like to review two significant deals that we signed in the quarter in more detail. First, we issued a recently in the last 30 minutes a press release regarding the signing of north Mississippi medical center which is one of the largest contracts we have signed in the past few years and includes most of our enterprise clinical solutions including Sunrise Acute Care, Sunrise Pharmacy, Sunrise Clinical Care, Sunrise Emergency Care and Sunrise Clinical Analytics.

We have had a 26 year successful relationship with North Mississippi medical center and a track record of delivering on time, on budget implementations for that organization. We are very excited that they saw so much value and continuing our relationship that they were going to make such a significant financial commitment to implement our SCM solutions.

Second, the Brooklyn Hospital center, an existing Sunrise Clinical Manager client who significantly added to the footprint of our solutions and services in order to leverage more automation to help improve the quality of care it delivers and achieve meaningful use. The hospital added our pharmacy, clinical analytics and clinical documentation solutions as well as our clinician portal.

The hospital is utilizing our accelerated speed to value implementation approach along with our remote hosting services and IT outsourcing services to help receive the maximum ARRA reimbursement opportunity. We have several similar deals in the pipeline and anticipate that number to grow significantly over the next few months. In terms of new business market opportunity, we are actively targeting 600 healthcare organizations of 150 beds and above that either have a legacy or no enterprise clinical system.

We have sized this opportunity at approximately $6 billion in opportunity. As we previously have stated, we have a software license and professional services bookings opportunity within our existing client base of $300 to $400 million that is tied to getting our clients to the 2011 criteria for meaningful use. Over the last few months we have built a good sized pipeline spanning all of our primary businesses.

We are currently very well positioned to have exceptionally strong bookings in the fourth quarter which would position us well for 2010 and beyond. We have also gotten some positive news on the competitive front including several large deals domestically as well as internationally where we have recently been named vendor of choice. We issued a press release back in October announcing that according to HIMSS Analytics and the publicly available US department of health and human services data, Eclipsys clients ranked number one in composite performance across all CMS quality measure scores.

We also recently saw some of our clients receive recognition for their Eclipsys implementations including Phoenix Children’s Hospital, who according to the 2009 leapfrog survey received perfect scores in the prevention of medical errors, ICU staffing and reducing ICU infections and near top scores for taking steps to avoid harm.

The survey showed that Phoenix Children’s successful activation of sunshine clinical manager with 99% CPOE adoption helped the organization earn its top score in prevention of medical errors. Another client, Singapore Health Services also received recognition for its deployment of Sunrise Clinical Manager with its EMR project winning Asia IT Excellence award, which recognizes IT organizations and CIOs for management excellence and for the original and creative use of technology to help attain quantifiable business goals.

Seeing health one for its mission to improve clinical outcomes by having Sunrise Clinical Manager have standardize clinical work flows across sing health nine medical institutions and provide a unified patient record wherever a patient goes across the healthcare continuum.

The fact that our enterprise clinical client base is comprised of such prestigious high performing organizations, including eight of the top 20 hospitals listed on the U.S. news and world reports’ list of best hospitals, differentiates Eclipsys among clinical information system vendors and provide supporting evidence that we can help our client meet meaningful use criteria and maximize there are stimulus dollar opportunity.

With recent class studies indicating CPOE adoption success as the No. 1 criteria in the new business market, we expect our proven track record of on time, on budget clinical deployment with the highest rain CPOE adoption in the industry will continue to provide differentiation for us as we compete for that business opportunity.

In summary, our field teams executed very well in the quarter but the hard work is really just beginning as we start moving deals forward in the pipeline and preparing for the impending services work required to get our clients to meaningful use. This is an incredible time to be part of this industry and my team is extremely excited about the opportunity in front of us.

With that, I’m going toe pass the call back to Phil.

Phil Pead

Thanks Jay. Before we begin the Q-and-A as a courtesy to the large number of individuals who want to ask questions, we request that each person in the queue limit themselves to one question and one follow-up. Thank you.

Operator, please begin the Q-and-A now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Corey Tobin - William Blair.

Corey Tobin - William Blair

Just a couple here if I could, we are excited to hear about project drive and the potential for cost savings there. Any sort of information you can give us with respect to the impact that will have longer term on either operating margins? I know you mentioned that it will return savings in excess of the cost. But what are you thinking, how that translates into operating margin expansion?

Chris Perkins

Again, we are going to get more details on the financial elements and the savings that we expect from that as part of our 2010 guidance, but I can assure you, I think when we talked about the level of costs that we plan to invest with outside consultant support on that initiative, we are very confident there’s going to be a tremendous return on that investment.

We think it will have meaningful impact starting at the beginning of 2010 and will progress each quarter such that we think we can get to the run rate for those initiatives we discussed by the end of the second quarter. So we expect to achieve meaningful savings and it will come out quarter to quarter and we will get our run rate midyear.

Corey Tobin - William Blair

Then one for Jay very quick if I could. Jay, based on your commentary, it sounds like things are really moving on the sales front. I know you said you’re well positioned for Q4, but is it safe to say that you expect at this point the Q4 2009 will be a record bookings quarter for the company?

Jay Deady

That might be a tad aggressive for me to predict that in advance, but I will tell you is compared to the last seven or eight quarters, we entered this quarter with a metric that we track very carefully that does predict success which is surrender of choice selections and being an active contract negotiations and enterprise deals and we entered this quarter with the highest number than we had entering the quarter in the past couple of years. So we certainly have the opportunity to achieve what you mentioned but I’m not going to guarantee victory here at this point in the quarter.

Operator

Your next question comes from Brett Jones - Brean Murray.

Brett Jones - Brean Murray

When you talk about the bookings and it being a record I just want to make sure I understood. Was this the highest total booking since midyear of ‘06 or the highest professional services?

Chris Perkins

Specific comment around that and the reference to ‘06 was the professional services bookings and this was the strongest quarterly performance since that time in ‘06.

Brett Jones - Brean Murray

Is that mainly related around your base?

Chris Perkins

Actually, we had a nice spread between the client base and net new and both add-ons as well as enterprise transactions, both of which have carried in the quarter significant services revenue with them, which is why we achieved the high level we did. It wasn’t just one factor.

Brett Jones - Brean Murray

Then just a question for Phil, when you look what kind of guidance or how you’re looking at the company now that you’ve been on board for one full quarter, is there any intention to provide more definitive bookings numbers or bookings and backlog on a quarterly basis or are you against providing that guidance and also along those lines, when you look at the stock option expense historically Eclipsys has run higher than its peers. I was wondering if you had a chance to review that and if there’s a reason as to why it should remain so high? Thank you.

Phil Pead

I’m going to have Chris answer that, but let me tell you philosophically, I’m open to sharing more information about the company, so that the transparency in our opportunity and or margin opportunity is available to you all of you. So with that, I’ll have Chris give you a little bit more guidance.

Chris Perkins

First, we are currently evaluating the disclosures and the information that we will be disclosing beginning in 2010 as it relates to bookings, backlogs and other financial metrics, so we will be talking about that in our fourth quarter call. So we are still evaluating that today.

As far as the stock based compensation expense, we are going to be evaluating and paying close attention to what we expect that to be going forward. I’ll just say that it is what it is as far as when we got here. So we’re going to be focused in making sure that we are doing the right things to motivate management inline with the expectations of our shareholders.

Operator

Your next question comes from Michael Cherney - Deutsche Bank.

Michael Cherney - Deutsche Bank

I just want to dive into a little bit more into what you’re seeing in some of the acquisition areas that you had made both Peak Practice and MediNotes. I know you talked about record bookings for some of the enterprise deals. Can you talk about the tracks you’re seeing in a little more detail in terms of those type businesses?

Phil Pead

Let me take that one. The MediNotes and Peak Practice acquisitions, I would say got off to a slow start at Eclipsys after the acquisition. Primarily, I would say resulting from how the businesses were integrated into Eclipsys. The idea here was that they would be kept as separate businesses with a separate focus and I think as a result of that, they tended to be little outposts within Eclipsys.

So one of the first things we did was take a look at that business and recognize that the opportunity for us to make, what is in essence a community ambulatory sale part of our enterprise sale was going to be much greater if we brought those businesses into Eclipsys and made them a part of our overall company and we did that fairly quickly and as a result, we are beginning to see significant momentum now in our ambulatory sales for both MediNotes and for Peak Practice.

So I’m very encouraged by that. They are now being part of our general sales force, they are part of support, they are part of implementation, and they part of development, part of QA, as opposed to sitting out there as a separate organization. So I think they’re going to start to meaningfully contribute and we are already seeing that for our existing clients as our hospitals look to offer an ambulatory solution to the community physicians particularly those that refer to those hospitals.

EPSi has been a stunning success, very, very strong, leads in its category according to class and we’re seeing significant new business from EPSi both from our existing base as well as new clients. So we’re actually getting net new hospitals using our decision support EPSi solution and which will allow us, obviously, to create a relationship with those hospitals and our intention is to clearly to sell them additional services and solutions as we move forward.

Patient flow, again, we’ve got opportunities there. Slowed down, I would say, in 2009, primarily for two reasons: One is that there’s such an intense focus on clinical systems and as you know, the budget dollars are not plentiful at the moment, so folks are choosing their priorities very carefully, but I still think that the patient flow, EPSi and our clinical analytics solutions brought together under our performance management sweet of products, I think are going to be a very strong offering for Eclipsys in 2010 and beyond.

Michael Cherney - Deutsche Bank

Just going back to Jace Collins for the competitive environment and the fact that you’re winning deals in very competitive situations, is there any specific metrics that customers are grading you on in terms of allowing you to win these deals or is it just kind of the comprehensiveness of the offering you’re going to market with.

Chris Perkins

It’s a great question. CPOE has definitely moved up, well, it’s always been there and it’s been important ARRA has certainly helped us and put a spotlight on that and some of the recent publications from people like class and others have just assisted that to be a more important decision criteria. So that’s put us in a very good light.

Our clinical analytics and capabilities of that solution has helped us out as well. Content assets and having a codified infrastructure and platform, that is very differentiated from the typical candidates that we compete against in the marketplace.

We’ve had that for a while. I think we’re getting better of effectively telling that story and demonstrating it and that’s helped and then our speed to value implementation where people are confident that we’re going to be able to deploy these assets in an ARRA compliant form and an on time, on budget install and they’re more confident of that when they do their resource and reference checking than when they look at our competitors so it’s a combination of our service capability as well as our strong solution capability.

Operator

Your next question comes from Donald Hooker - UBS

Donald Hooker - UBS

Just kind of interested in this you laid out sort of a $6 billion opportunity. Is this mainly, I would assume, replacement sales? Are you assuming any kind of pricing pressure, are you seeing any pricing pressure in there or is that sort of just maximum prize?

Phil Pead

No, no. So to answer both questions, first, it’s a combination of replacing modules off of legacy HIS systems where you would say that hospital system is probably never invested in a dedicated modern clinical enterprise clinical system, combined with some that have invested in some systems that now are 10 to 15 years old and have not achieved the type of nursing and physician adoption that our Sunrise Clinical Manager application has.

It’s a depreciated asset and they never got to nurses and docs who were using it. So they are becoming replacement targets as well and then there’s still some home grown applications that are out there as well, so it’s kind of a cross of all three of those categories.

In terms of pricing, I think we took a reasonable and conservative approach, where historically 150 beds and above, you probably could have expected a number of years ago to be used in kind of $15 million to $20 million target for an average selling price and we’ve conservatively estimated that more are down around $10 million. While we’re certainly hoping to exceed that on an average transaction basis, I think it’s prudent given what is a highly competitive marketplace today that’s out there in order to take share.

Donald Hooker - UBS

You mentioned that the trend towards subscription pricing last quarter. Is that still valid?

Phil Pead

Absolutely, both within our client base where they’re opting for large solution and service packages for ARRA as well as certainly and it’s been a trend for quite sometime, for net new clients, absolutely opting for our subscription pricing model.

Operator

Your next question comes from Frank Sparacino - First Analysis.

Frank Sparacino - First Analysis

Jay, just curious on renewal discussions as some of your clients come up in the third quarter, kind of what the discussions are what their thinking is about moving forward today versus waiting, anything you think might be relevant there.

Jay Deady

Well, there’s the combination of those in the client base that are looking at a renewal as well as those that, have multiple years left on their current term, but are looking at an upgrade process in order to get additional applications and upgrade to in order to achieve meaningful use. This organization had some very substantial SCM sales growth around 2000 and 2001.

We actually over the past couple of years in the past quarter we have been renewing quite a few of those clients and at the same time they are opting for the additional solutions and upgrades. So we are through a lot of the renewals. Now, what typically is happening for a client that might have three or four years left is they are opting to extend that term in addition to committing to new applications and services committed to ARRA, so while they are not necessarily up for renewal they are agreeing to extend the term at the same time.

Frank Sparacino - First Analysis

Jay, when you talk about net new wins, I’m assuming you’re talking about net new clients or are you including in that an existing client that’s adding new applications?

Jay Deady

No from a net new perspective we are talking about net new enterprise SCM fingerprints.

Operator

Your next question comes from Josh Schwartz - Flatbush Watermill.

Josh Schwartz - Flatbush Watermill

Given, that you’re discussing the business, the pipeline is growing, we are signing deals, can you just discuss at all when what timeframe you think you can start seeing revenue growth? Thanks.

Phil Pead

Clearly the revenue growth is predicated on when we start implementing the solutions, the timeframe of how long the install is going to be, and it can range from fairly short for some of our more simple solutions to very lengthy depending on the enterprise, but if we, having had what I consider to be a very strong Q3 bookings.

Jay is optimistic about Q4 and then, of course, as meaningful use becomes truly defined in the first quarter of next year, there will be leaving no doubt as to what hospitals are going to require to prove for future periods. Our expectation is that 2010 should see some meaningful revenue improvement based on the bookings that we realize in this third quarter and Q4 and going into the first half of next year I think are other ones that are going to have the most impact in our 2010 revenue.

Josh Schwartz - Flatbush Watermill

Jay, you mentioned the codified architecture as being one differentiating point. I’m wondering if you could just really be more precise on what you mean by that.

Jay Deady

So the platform that SCM or enterprise clinical applications part of, we thought about what the back end should be first and how to get the data out versus just how to get the data in and this has been the case for some period of time and the reason it’s becoming more and more differentiator is because our clinical analytics product can’t extract that data and given the fact that ARRA has preliminarily and we think in final rule draft form will be requiring the submission of a multitude of quality indicators.

In addition to joint commission and other quality initiatives that our clients and all hospitals in the U.S. have to track, that’s putting more emphasis on the evaluation of system’s ability to fairly intuitively correlate the data, extract it and present it both for use of the caregivers to take care of the patients while they are in the bed, but certainly in a retrospective form, both to define best practices and a go forward basis and to submit that data as part of the ARRA requirements.

Operator

Your next question comes from Sean Wieland - Piper Jaffray.

Sean Wieland - Piper Jaffray

I’d like to ask a little bit more about the investments in project drive. It sounds like they’re going to show up in the fourth quarter. Where do they show up and then is that the reason, I guess the implied guidance for earnings per share for the fourth quarter would be about $0.08 to $0.13? So is it project drive that’s contributing to those excess costs?

Chris Perkins

Yes, Sean. We did have about $800,000 that we incurred in the third quarter and that is included in our GAAP and non-GAAP general and administrative expenses. We expect that to be an additional $1 million for each of the next three quarters in those costs so they will be reflected in our GAAP and non-GAAP operating expenses.

Sean Wieland - Piper Jaffray

Is that $1 million in addition to the $800,000 or is that…?

Chris Perkins

In addition, incrementally in each quarter, that’s correct.

Sean Wieland - Piper Jaffray

So it will be like $1.8 million for 2009?

Chris Perkins

For 2009 for the full year, that’s correct.

Sean Wieland - Piper Jaffray

Then what do you think about revenue mix here, the trend towards the subscription model? Where does the onetime or I guess period software license sales fit into that?

Chris Perkins

For the third quarter?

Sean Wieland - Piper Jaffray

No. I’m just thinking long term in Q4 and beyond. How should we think about the growth and onetime software license sales?

Chris Perkins

As I think we talked about at our last quarter call, our focus is on getting the business and getting the contract closed for Eclipsys and not pushing our client towards upfront license or subscription. It depends on their preference as their financial situation and their capital availability will allow. So we are focused on getting the business. We do have some trends in seasonality historically from a quarterly basis.

I think we will always have a degree of caution as we look forward and trying to assess what is the ratio of up front license versus subscription. As Jay said in the current business that we are working today and seeing our pipeline, there does continue to be a and an interest focus on the subscription opportunity and we think that’s good for us and good for our client in the long term.

So I would say while we are very positive about the activity that we have going on, the opportunities we are working and the way that everybody in the business and our clients are responding as we look through Q4 and as we begin to give information on 2010, we will probably make sure that we are cautious in being descriptive on the assumptions that we have as it relates to a mix of subscription versus license.

Operator

Your next question comes from Gene Mannheimer - Auriga.

Gene Mannheimer - Auriga

I just wanted to see if you could discuss a little bit more regarding the upgrade path to version 5.5, specifically does 5.5 contain what you expect to be the requirements for clients to get to meaningful use? Must clients have that version in order to qualify for stimulus dollars and then finally, is there a charge to migrate to that version? Thanks.

Phil Pead

I’ll let Jay add to my comments, Gene, but we are encouraging our clients to move to 5.0, which is our current version of SCM. By doing that, we hope, provide them with a solid platform to roll into 5.5 with a solid platform to roll into 5.5 with a minimal migration timeframe. The upgrade to 5.0 if they are on previous versions will also include applications that we believe will help them meet the definition for meaningful use.

The 5.5 upgrade then from 5.0, as I said should be a much lesser event for them. Again the definition is still influx, but we believe we will have the functionality necessary for them to meet the ARRA meaningful use definition and be certified for them moving forward. So it’s a twofold opportunity. It’s one for our customers to get an enormous amount of new functionality that they’ve been asking for and that the market has been trending towards. Then number two is, that will be the certified version for ARRA.

Operator

Your next question comes from Richard Close - Jeffries & Co.

Richard Close - Jeffries & Co.

Just a couple questions here, when you talk about the renewals, when you renew the subscription agreements, do those roll into bookings? Are those counted as bookings?

Phil Pead

No, when we talk about, and again we haven’t given our bookings numbers at this point, but we look at it I client renewal for their maintenance agreements and other agreements is not part of what we call our bookings business. We would talk about that as a separate element of bookings that really is more of a focus on what is the level of our backlog that we have.

Richard Close - Jeffries & Co.

Just to be clear, if a contract runs five to seven years, you come up at the end of seven years and it’s a hosted contract, the re-upping of that contract does not go into the bookings?

Phil Pead

No. The specific to that in terms of typically when we have people renewing, we’re up over 90% now where they’re taking particularly, and I think it’s going to go even higher with ARRA, where they are taking additional applications and services in addition to the renewal of the base term that they already had. So what we’re tracking is the additional applications and services of going into backlog, but just taking the maintenance as Chris talked about, as a separate line item for just the maintenance backlog is how we tracked that.

Richard Close - Jeffries & Co.

Did you say, what percentage of the bookings were from new clients?

Phil Pead

Yes. That was…

Richard Close - Jeffries & Co.

Is that the 40% number?

Phil Pead

That was 40%.

Richard Close - Jeffries & Co.

With respect to professional services margins, could you tell us what those were in the quarter and I apologize if I missed that, but what the professional services margins were in the quarter versus, I guess, the second quarter in the year ago period?

Chris Perkins

Yes, our professional services margins continue to hold in the mid-20s percent range.

Operator

Your next question comes from Jamie Stockton - Morgan Keegan.

Jamie Stockton - Morgan Keegan

First one is so 5.5 is going to be the version of Sunrise that gets certified. Do you have a certification plan right now, or are you going to go after one of these CCHIT Certifications or wait until all the details come out and then see what other organizations might be approved to certify software out there?

Chris Perkins

Yes, we had the option of essentially going in for preliminary certification or certification on 5.0 but given 5.5 is so close to release at this point. It didn’t make any sense for us to go with that option, so 5.5 is going to be our ARRA certified release and we’re also going for CCHIT certification with that release also.

Jamie Stockton - Morgan Keegan

So you’re going to go for the 2011 certification?

Chris Perkins

Yes.

Jamie Stockton - Morgan Keegan

Then the other question I have was a housekeeping one for Chris, which you got a gain on the sale of assets on your income statement, I think it was 809,000 this quarter. What is in there and how sustainable is that? It seems like it’s been there for the last couple of quarters.

Chris Perkins

Yes, that was a gain related to the sale of the CPMRC business that we sold in the fourth quarter of 2007, I believe. I think close to the final tale end of the very end tale of some earn-out related to that transaction, so we’re not projecting that to be sustainable.

Operator

Your next question comes from [Unidentified Participant] - Banc of America.

Unidentified Participant

You mentioned in your plan to move from 20 partners down to four or five. Could you provide additional detail on which areas will see the largest impact and specifically what that could mean for your relationship with Athena?

Phil Pead

This is really related to professional services or implementation consultants in relation to our professional services business. So it really has to do with organizations that we party with and contract with to support us in our implementations of our solutions.

Jay Deady

In regards to Athena, clearly we had a preannounce relationship with them. We have a number of enterprise clients that are shared where we continue to work with them, and at times in different scopes of deals it makes sense to partner and at other times we certainly compete and both organizations are mature enough to understand that, but where we do have shared clients and have gone to market together, we have very high levels of client satisfaction in those relationships.

Operator

Your final question comes from Garmont Glenn - Thinkequity.

Garmont Glenn - Thinkequity

Just quickly, I can appreciate how the subscription model is a competitive advantage for Eclipsys. Just wondering, do you come across clients that are showing some interest as a result of the stimulus that may want to defer any sort of payment until they start to receive stimulus funds themselves and is that a compromise that you’d be willing to make? Thanks.

Jay Deady

So we certainly have seen some of our competitors try to influence the market where they haven’t had a competitive offering to our subscription model to try to apply fairly high rates of financing through a third party in order to put this in place and thus far we haven’t lost any transactions as a result of what I might term gimmicks by some of our competitors.

In fact once it starts to get pealed back that what they are really doing is charging a fairly exorbitant interest rate to try to compete with our subscription model, it generally has worked against them. So our subscription model spreads payments out over a seven year period. We’ve been having great success with that in the marketplace and have not been in any way competitively hurt as a result of some of the efforts of our competitors more recently with some of their financing models.

Phil Pead

Thank you all very much for joining us on the call today and I look forward to speaking to you in the near future. Thanks again for participating.

Operator

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

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

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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