Allscripts Healthcare Solutions Q3 Earnings Call Transcript

Nov. 8.07 | About: Allscripts Healthcare (MDRX)

Allscripts Healthcare Solutions Inc. (NASDAQ:MDRX)

Q3 Earnings Call

November 8, 2007 4:30 p.m. ET

Executives

Glen Tullman - Chairman and CEO

Bill Davis - CFO

Lee Shapiro - President

Analysts

Charles Rhyee - CIBC World Markets

Corey Tobin - William Blair

Sean Wieland - Piper

George Hill - Leerink Swann

Richard Close - Jefferies & Co.

Larry Marsh - Lehman Brothers

Atif Rahim - J.P. Morgan

Steve Halper - Thomas Weisel Partners

Richard Davis - Needham& Company

Operator

Good afternoon. My name is Felicia, and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Allscripts' Third Quarter 2007 Earnings Call. All lines have been placed onmute to prevent any background noise. After the speakers' remarks, there willbe a question-and-answer session. (Operator Instructions).

Thank you. Mr. Tullman, you may begin your conference.

Glen Tullman

Thank you. Good afternoon and welcome to the Allscripts'third quarter 2007 call. This is Glen Tullman, I am the Chief Executive Officerof Allscripts. And I am here today with Bill Davis, our Chief Financial Officerand Lee Shapiro, our President. Before we begin the call, I am going to askBill Davis to read the Safe Harbor Statement. Bill?

Bill Davis

The statements made by Allscripts or its representatives inthis conference call will include certain forward-looking statements that arebased on the current beliefs of Allscripts management, as well as assumptionsmade by and information currently available to Allscripts management. Whereverpractical, Allscripts will identify these forward-looking statements by usingwords such as may, will, expect, anticipates, believes, intends, estimates,could or similar expressions. These forward-looking statements are subject to avariety of risks and uncertainties, including those listed in the earningspress release issued by Allscripts today and in Allscripts' filings with theSecurities and Exchange Commission, which could cause Allscripts' actualresults, performance, prospects, or opportunities in 2007 and beyond to differmaterially from those expressed in or implied by these statements.

Except as required by the federal security laws, Allscriptsundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events, changedcircumstances or any other reason after the date of this release.

With that, I would like to turn the call back over to ourCEO, Glen Tullman.

Glen Tullman

Thanks, Bill. I typically begin each quarterly call with anassessment of our market and this will be no exception. The market forelectronic healthcare solutions, especially in the ambulatory area in which wefocus, continues to be strong and expanding at a rapid rate across each of themarket segments we compete in. Large academic medical centers and integrateddelivery networks, what we refer to as: “enterprise accounts”, as well asmid-level multi-specialty groups and smaller independent practices. In terms ofour traction, I think the best window I in can provide into the market is, asyou would expect related to sales.

Are providers buying? And are they choosing Allscripts? The answer to both of these questions is a definitive:“yes”, and at record levels; as our team delivered excellent results in salesduring the third quarter.

I am very pleased to report recordclinical sales of $63.2 million, a 77% increase year-over-year, and the largestbooking quarter in the history of the company. And it came during the thirdquarter, which is traditionally a light quarter, not only for Allscripts, butacross the industry.

As I had promised on our Q2 call, weexpected to sign two significant enterprise agreements in Q3, and I am pleasedto report that we have delivered. Earlier in the third quarter, we announcedthe largest contract in our history with Columbia University Medical Center,one of the premier academic medical centers in the world. Under this agreement,Allscripts will deploy our electronic health record to more than 2,000 physicians.

Other than a press release, I haven't hada chance to talk about Columbia, but theprestige and size of Columbiahas been raising eyebrows and driving both interest and sales in the largestacademic and integrated delivery network systems.

Earlier today, we announced the signingof one the most prestigious, multi-specialty groups, in the country: the LaheyClinic, which was actually the nation's first multi-specialty group practice.Lahey gives us a solid footing in Massachusetts,along with our other enterprise client there, the UMass Memorial Health Care Hospital, where we aredeploying V11 as we speak.

Columbia and Lahey raise our profile dramatically and reinforce ourposition as the number one provider for both large enterprise clients and multi-specialtygroups and we're already seeing the impact.

In addition to Columbiaand Lahey, we've been fortunate to sign agreements with a number of veryprestigious organizations, for example, Albany Medical Centre will implementour Electronic Health Record for the 250 physicians in their medical facultygroup.

Butler Health System in Pennsylvania will deploy our HealthMatics EDsolution and our Electronic Health Record to 65 non-employed physicians. ABQHealth Partners in Albuquerque,which was previously known as Lovelace Medical Group, and is a part of the ArdentHealth Services, selected our Electronics Health Record for their 250multi-specialty providers, in a contract valued in excess of $3 million. And inanother big win, Ochsner Health System selected Allscripts to provide itsElectronic Heath Record.

Ochsner is not only one of the largest healthcare systems inthe Gulf Coast with 600 physicians in 7hospitals, but they are among the most technologically sophisticated, and theyselected Allscripts because, in the words of their CIO: Lynn Witherspoon:"without the architecture that Allscripts has developed, interoperabilitywould be next to impossible. It's what allows Allscripts to offer solutions ina heavily automated environment like Ochsner". This is confirmation fromone of the most prominent CIOs in the industry that our interoperabilitysolutions work.

It is also important to focus on two other areas thataddress independent community based physicians, first: in terms of direct salesto physicians in a small to mid-market. We had a very solid quarter, with closeto 100 contracts, representing approximately 800 physicians. Our ability toconnect those physicians to hospitals will become increasingly important in thesales process.

This quarter we also observed an increasing role thathospitals are playing in the purchase decisions for electronic health records,in large part due to the change in historic rules. Our efforts in this areatranslated into sales of close to $5 million, a portion of which was deliveredworking closely with our hospital partner, AmerisourceBergen. Having ABC on ourteam is important, because almost a third of the hospitals look to ABC as astrategic long term partner.

Just today, for example, we announced that Poudre ValleyHealth System in Coloradowill deploy our Electronic Health Record and Practice Management System,beginning with 200 of their non employed physicians, with a goal of hosting itfor their more than 500 independent staff physicians. Also, during the quarter,we announced that Frankfurt Health System in Philadelphia will offer our combined EHR-PMto 100 physicians. And we've closed several other stark related sales,including Blessing Health System in Illinois, St. Francis Hospital in New Haven, Connecticut and NorthwestHospital in Seattle.

Our success in selling across key segments of the market istempered by two challenges. First: during the quarter, we had one or two majoragreements with clients for add on products pushed into the fourth quarter.Those agreements would have closed the gap between the third quarter revenuesand EPS numbers we reported today versus analyst estimates. I am pleased toreport that I expect both will close during the fourth quarter.

Second: while our sales in the enterprise accounts area werevery positive news, given the complexity of some of these agreements, therequired pre-planning and the sheer size, paired with our conservative approachto revenue recognition, we will recognize revenue from some of these largeragreements over longer period of time than we initially planned. While the paceof the deployment and rollout among some clients is not always optimal from arevenue recognition standpoint, this has little impact on the continued successand growth for the company.

In fact, our success story in the quarter was not limited toElectronic Health Records sales. In prior quarters, we talked about oureffectiveness in cross selling, and I can share several examples of thatbeginning with another hospital group: Butler Health System in Pittsburgh, whichpurchased both our Electronic Health Records, and our Emergency Department Information System.

Another example thatwe announced just today is: Carolina's Medical Center Northeast, a longtime TouchWorks user, with 160 physicians, that just purchased our Emergency Department product and: LakesideMedical Group in Los Angeles, who purchased our Electronic Health Recordfor 100 of their physicians and also purchased Canopy Care Management Solution.

Frankford Hospitals, which is owned by the Frankford HealthSystem, the group I mentioned earlier, as a stark related agreement forElectronic Health Record made the same decision.

The idea of suite of products that connects the ambulatoryphysician with information across the enterprise, including care management,and the emergency department, and beyond the enterprise into the community istaking [home]. And Allscripts is unique in our ability to play in the largestgroups, in the smallest groups, and in the specialties as well.

I am also pleased to report that our National ElectronicPrescribing Patient Safety Initiative, known as NEPSI has now enrolled morethan 5000 physicians, who have written in excess of 500,000 e-prescriptions.That number is accelerating, as is the number of physicians. We expect verystrong gains during the fourth quarter, and we continue to add key partners,including Quest, who will provide lab information to the growing list of NEPSIpartners.

So, overall the sales machine is working well and acrossmultiple products and service offerings. However, to build a great company it'snecessary to continue to invest in improving processes, improving R&D andin innovation.

We're continuing to invest in systems to drive quality,service delivery and efficiency. This is being spearheaded by our new ChiefOperating Officer, Ben Bulkley, who is making great use ofhis years of experience at GE, to take our deployment in client support to thenext level of quality.

Our vision is to be an indispensable partof the way physicians practice medicine. And delivering on that vision requiresinvestment today for success tomorrow.

Another critical aspect of our strategyis continued investment in R&D. For example: our version 11 Touchworksrelease, our connectivity strategies that link our products, our partners andour communities together, and our focus on adding content that will informphysicians at the point of care, with the latest care plans and updatedinformation on the patients, the diagnosis, the medication and the bestpractices to treat them.

We believe investing now in development, in resources and inquality will pay-off for our clients. Its one important reason we are numberone in KLAS, the consumer report's of heath care.

Finally, in terms of innovation, Allscripts was the firstelectronic prescribing, Electronic Health Record provider, to connect toMicrosoft's HealthVault web based solution that will enable consumers to storeinformation from many providers, devices and share that information. It's partof the next wave of healthcare, connecting patients, and where they are today.

Before Bill talks about the financials, I want to close witha few comments; first: I couldn't be more bullish on the strength of themarket, just this week, the Centers for Medicare and Medicaid Services saidthat for the first time, Medicare will pay bonuses to doctors and other healthcare providers for using Electronic Health Records in e-prescribing duringcalendar year of 2008.

CMS said a significant pool of money will be available topaying centers for using technology beginning next year. This is one moresignal to physicians in the market that electronic health care is happening andthey need to get on board.

Point two: Allscripts is the leader in ambulatory electronichealthcare, and we are making investments necessary to continue our leadership.

And finally: while it is sometimes hard to predict the exactnumbers quarter-by-quarter, the trend in our performance are clear, we'regrowing, we're setting records and we are well positioned to continue to do,and do so in a profitable manner.

Now, let me turn the call over to Bill Davis for a detailedlook in our financial performance. Bill?

Bill Davis

Thanks Glen and hello everyone. As Glen indicated, our thirdquarter included several significant accomplishments but before I comment onthose, I would like to address the obvious question upfront, why did Allscriptsthird quarter revenue and resulting earnings per share fall short of marketexpectations.

There are two reasons for this; first: we have had a deal ofsuccess in signing large enterprise agreements as Glen mentioned, while this isgreat news from a booking's perspective, it does translate in to elongated takedown of revenue, because of the complexity and size of this deployments. Whilethe pace of the deployment and rollout among some clients is not always optimalfor the revenue recognition perspective, this has little impact on thecontinued success of the company. It is important to note that we do expectsome level of ramp up to continue in the fourth quarter on several of our largecustomers.

Second: Glen also mentioned the fact that we anticipatedapproximately $3 million of additional license bookings and revenue in thethird quarter. We are hopeful that such bookings and revenue will occur thisfourth quarter.

We continue to be very encouraged by the level of interestin Allscripts, as evidenced by clinical software bookings. As Glen mentioned,we had record clinical bookings in the quarter of $63.2 million, excludingongoing support. The third quarter clinical bookings represent a 77% increaseover the third quarter of last year and a 21% increase over the second quarterof this year. Clinical bookings for the first nine months of 2007 totaled$144.4 million, representing a 40% year-over-year growth.

Our Physicians Interactive business contributed the balanceof our bookings at $1.8 million, bringing near year-to-date total bookings to$9.1 million. PI's ability to deliver on $30 million of 2007 bookings isheavily dependent on the signing of three platform transactions in the fourthquarter. We are actively working several platform transactions that are inexcess of the required three.

Our near-term concern is the well publicized challengespharma is facing, and their impact on individual pharmaceutical company'sability to make independent buying decisions. The good news is that there wereseveral platform transactions that we have confidence in, but ultimately itwill be a question of timing.

Turning now to backlog: We ended the third quarter with$246.7 million in sold backlog. The backlog breakout is as follows. License andservice fees related to our clinical software businesses were $133.4 million.Software subscriptions, which will be recognized over the next three to fiveyears, represented $33.6 million, support and maintenance fees for the next 12months is $59.4 million and Physicians Interactive made up the balance of $20.2million, again for a total of $246.7 million.

As I've indicated before, our reported backlog does notinclude anything related to our medication distribution business, even thoughwe view that medication revenue as reoccurring in nature.

So, turning now to revenue, our third quarter revenue was$73.4 million, represented an $11.3 million, or 18% increase over the samethree-month period last year. Our clinical software businesses contributed amajority of that increase. Physicians Interactive, or PI, had revenue of $3.6million in the third quarter and this compares to $2.2 million in the thirdquarter of last year. The 60% increase is primarily attributed to thecontinuation of services performed under our platform deals.

Moving to our meds business, we saw another solid quarter ofrevenue of $10.9 million. This compares to $10.4 million in the third quarterof last year. Revenue for the first nine months of 2007 totaled approximately$208.5 million. Our clinical software businesses contributed approximately$164.9 million of such year-to-date amount, representing 32% year-over-yeargrowth.

In terms of revenue mix, our software and related servicessegment represented approximately 80% of total revenue in the third quarter.Our third quarter revenue by segment is as follows. Our medication businessagain delivered $10.9 million or 15% of total revenue. Clinical softwaredelivered $59 million or 80% of our total revenues, and information services orPhysicians Interactive delivered the balance of $3.6 million for a total of$73.4 million.

Looking now to gross margins, overall our gross margin wasapproximately 50% in the third quarter of 2007, versus 49% in the third quarterof last year. Margins by segments are as follows, our medication segmentdelivered 15% gross margin, our clinical software business delivered consistentgross margins of 58% when compared to the second quarter, and we saw a declinein our information services segment from 40% in the second quarter to 32% inthe third quarter, for a total of 50.1%.

The sequential change in the medications gross margin isattributed to the lower gross margin revenue in the quarter related to fluvaccine, and a mix of drugs that were sold in the quarter. Our PhysiciansInteractive sequential gross margin change was a result of certain hiring andplatform development cost being incurred or lower revenue base in the quarter.

With regards to expenses, operating expenses, excludingamortization of intangibles, and stock-based compensation for the third quarterwere $25.9 million. This compares to $24.9 million of expenses in the secondquarter. The increase is attributed to the cost incurred related to our AnnualUsers Conference held in August, and less capitalized software in the quarter.

With regards to capitalized software, we had approximately$2.2 million in the quarter. This amount compares to $2.9 million in the secondquarter. The decrease is reflective of the general release of TouchWorks version 11 that occurred in June. As we'veindicated in the past, this amount will in fact fluctuate from quarter-to-quarterdepending on the product development cycle.

Stock-based compensation was approximately $1.5 million forthe quarter, and deal-related amortization was approximately $2.8 million. Theanticipated increase in stock-based compensation is due to the full quartereffect of grants approved in June and certain additional grants that were madein August.

The slight increase and deal-related amortization is relatedto our $11.5 million acquisition of a maintenance stream related toapproximately to 600 ambulatory practice management customers, from SourceMedical in Birmingham, Alabama, which was consummated in July. Aswe mentioned last quarter, this transaction is a part of a broader strategicwith the leader in systems for ambulatory surgical centers.

Net income for the quarter was $4.1 million or $0.07 perdiluted share. This compares to $3.3 million or $0.06 per share in the thirdquarter of last year. Please note that the net income for the first threequarters of 2007 reflect a full tax provision, using a 40% effective tax rate.

Our GAAP earnings of $0.07 per diluted share, includes $1.7million or $0.03 per share of acquisition-related amortization net of tax and$900,000 or $0.01 per share of stock-based compensation, also net of tax,bringing our non-GAAP adjusted earnings for the quarter to $0.11 per dilutedshare.

This compares to GAAP earnings of $0.06 per share in thethird quarter of last year, which includes $1.9 million or $0.03 per share ofacquisition-related amortization net of tax and $400,000 or $0.01 per share ofstock-based compensation also net of tax, resulting a non-GAAP adjustedearnings of $0.10 per diluted share in the third quarter of last year.

Basic shares outstanding for the quarter were 56.2 millionand diluted shares were 65.2 million. The 7.3 million shares issuable under ourconvertible debt offerings continue to be dilutive to our GAAP earnings pershare in 2007 and therefore included in both our GAAP and non-GAAP adjustedearnings diluted per share computations for the third quarter as well as forthe full nine months.

The 7.3 million shares were excluded from last year'sresults due to the shares being anti-dilutive. It's important to remember toadd back net interest expense related to the convertible debt to net incomewhen computing dilutive earnings per share, given that we added the debtunderlying shares to our dilutive share count. That quarterly amount ofinterest was approximately $523,000 in net of tax.

With regard to overall head count, we ended the quarter withapproximately 1,062 employees. Which compares to 1,036 employees we reported inthe second quarter.

Turning now to our balance sheet, we ended the quarter withapproximately $75 million in cash and marketable securities, which isreflective of us using approximately $11.5 million to fund our previouslymentioned Source Medical acquisition. And approximately $3.2 million of capitalexpenditures in capitalized software. Such outflows of cash were offset by cashfrom operations of approximately $2 million, and approximately $700,000 ofoption exercises in employee stock purchase plan contributions.

We ended the quarter with approximately $81.2 million inaccounts receivable and day sales outstanding of approximately 99 days. Theanticipated increase was primarily due to several large milestone billings thatoccurred in September, and is partially reflective of the increase you see indeferred revenue. We expect both our day sales outstanding and accountsreceivable balance to come down in the fourth quarter.

Turning now to the balance of 2007, as I mentioned at thebeginning, we are seeing some near-term impacts on revenue associated with theramping up of resource on some of our largest clients, while we believe it'spossible to mitigate that exposure with add-on license sales in the fourthquarter. We believe it is appropriate to recalibrate market expectations forthe full year.

We now expect total revenue for the year to be in the rangeof $286 to $288 million, a 25% increase over last year. And GAAP earnings pershare of $0.34 to $0.35 per diluted share, a 55% increase over last year.

The 2007 GAAP EPS guidance contemplates $0.10 per share, taxaffected of deal-related amortization and $0.4 to $0.5 cents per share ofstock-based compensation also net of tax.

It's important to note that we remain confident inAllscripts' positive outlook. So, as we look into 2008, we continue to see abusiness that is positioned to grow revenue, approximately 20% to 25% fueled by25% to 30% growth from our clinical software business.

Given the operating leverage in the business, we see thattop-line growth translating into 40% to 50% earnings per share expansion. Thistakes into account an expectation that deal-related amortization will remainfairly consistent with 2007 levels and stock-based compensation will movecloser to about $10 million next year or $6 million on an after-tax basis.

In terms of our bookings guidance, we continue to see a lotof strength in our clinical software pipeline, both for our Electronic HealthRecord and our practice management offerings. We expect the fourth quarter tobe another record quarter for Allscripts

Finally, we have also gotten lot of questions regarding anInvestor Day. We are looking to schedule an Investor Day in the first half of2008. In the mean time, both Glen and I are scheduled to present at severalanalyst conferences over the next several months. With that I'll turn it backover to Glen for some closing remarks.

Glen Tullman

Great, thanks Bill. So, let me conclude with a few thoughtsfor investors. If you believe that healthcare will continue to eliminate thepaper and become electronic like every other sector, you want to be in thisspace. And if you believe that healthcare is moving outside the four walls ofthe hospital, to the ambulatory space and into the hands of physicians, as wedo, you want to invest in companies that are the leaders in the ambulatoryelectronics space.

Finally the results demonstrate that quarter after quarter Allscripts continues to lead, to grow, to satisfy our clients, andto do so in a profitable manner.

So, I want to conclude the call today bythanking our employees for another solid performance during the third quarter.To thank our clients for there continued support, and to thank our investorswho are helping us to provide the tools for a better future of healthcare inthis country. Thanks very much and we are happy to entertain your questions.

Question-and-AnswerSession

Operator

(Operator Instructions). Your firstquestion comes from the line of Charles Rhyee with CIBC World Markets.

CharlesRhyee - CIBC World Markets

I had a quick question about the quarter,itself. You guys had an existing backlog as it were, and I know that you guysspend a lot of time hiring and training a lot of implementation staff. Can yougive us a sense on there productivity in the third quarter and there ability topull revenues and margin into the quarter?

Bill Davis

Sure, Charles. It’s Bill Davis. We actually saw close toabout a 25% increase in the production of our resources, in terms of overall[bill blowers] in the quarter. And we had anticipated that, by virtue of lot ofresources being dedicated to version 11, our efforts earlier in the year andthe like. So, we absolutely saw a very nice improvement, in terms of overallproductivity. The challenges we tried to highlight in terms of that conversioninto revenue was where those efforts were focused on in term of ramp up of someof our larger customers.

And given the long duration and the overall number of hoursinvolved in those implementations, what that translated into, your overallrevenue. So, we absolutely are seeing the capability being there in terms ofthe production capability, to pull the backlog through, but also recognizingthat we are moving some large customers into production at the same time.

CharlesRhyee - CIBC World Markets

So, is it fair to say that when we are talking about theselarge deals, these are deals that were signed earlier than the ones that wetalked about in the last quarter or so?

Bill Davis

It's a combination of both, actually, and we absolutely havehad enterprise deals--it’s part of our bookings--going back to the fourthquarter of last year. We always did in the third quarter, but it is alsoindicative of the fact on some of our largest, Columbia included, they were committingresources, have committed resources, even starting in the third quarter.

CharlesRhyee - CIBC World Markets

Okay. Great, thanks a lot.

Glen Tullman

This is Glen, let me just add to that, because this isreally critical, the point here is that we are spending resources. We have moreresources, but those are going in part to support the V11, in part, to some ofthese large clients, that we are not yet billing for. And there is one otherpiece, and that is in the sales process, as we are working with many new largeenterprise clients, they are requesting, and we are deploying, some peoplepre-sale, to do some analysis of implementation and the like, and that is alsodrawing on resources. So, we have more resources. Training was successful. Someof that work that we are doing--we will build for--it's just the timing isn'tworking for us this quarter, and we are concerned that as we ramp up on some ofthese larger deals, there is going to be a delay.

CharlesRhyee - CIBC World Markets

Great. Thank you.

Operator

Your next question comes from the line of Corey Tobin withWilliam Blair.

Corey Tobin - WilliamBlair

Hi. Good afternoon. A couple of things, if I could, please.On the guidance, can you guys give us a bit of a feeling here? Would youcharacterize the guidance for 2008 with respect to the amount of cushion thatyou have in there versus your internal goals? Would say it's sort at acomparable level to which you had in '07, more or less? In term of, again,cushion, compared to the internal plan.

Bill Davis

I would say it's a more cushion, Corey, than what we feel wecame into this year with and, again, trying to appropriately calibrate what webelieve to be some of the risk factors that we highlighted through our preparedremarks.

Corey Tobin - WilliamBlair

I am assuming when you say on account of that, there is morecushion on both the clinical software business and the overall revenue line.

Bill Davis

Yeah. Again, I mean our outlook, just to kind of break thatdown, the meds business, we continue to talk about that one as being a veryconsistent performer for us. We are expecting continued improvement from ourPhysicians Interactive business. But, you think about it in terms of overall orabsolute dollars, it's not going to drive the significant portion of ouroverall increase. So, the reality is that our growth engines are our clinical softwarebusinesses. And so, as we talk about 20%-25% growth in expectation that ourclinical software businesses going are be driving 25%-30% growth from thatsegment perspective. So, it is indicative of what we see in terms of relativerobustness of the marketplace. And it's also indicative of the strength of thebacklog that we continue to build.

Corey Tobin - WilliamBlair

Okay, great. Switching gears for just a second here onbookings, I think in previous calls, we've talked about, roughly, $40 millionor so from your enterprise sales force. Just curious as to how that team istracking to that goal, and where you expect it to end up of the full year?

Bill Davis

Yeah, what we've actually talked about, is that we expectsomewhere about 20% of our clinical bookings to be driven by our enterprisesales force. We have been very encouraged by the work that they have done todate. I will tell you that by virtue of our outlook for the fourth quarter,it's possible that they may contribute more than that 20%. And again,indicative of what we believe to be a very robust market in terms of richopportunities.

Corey Tobin - WilliamBlair

Okay, great. And finally last question on the cash flow, orthe operating cash flow more specifically. I understand the ramp in DSO thisquarter, but do you expect that number to come down? It sounds like in Q4 andin turns should we expect to see a ramp in the operating cash flow in thefourth quarter?

Bill Davis

Absolutely. I mean, I can tell you that some $14 million-$15million increase specific to the TouchWorks business and, again, we--I think,95% of that. And certainly close to 90% of that is sitting in the currentcategory, indicative of the fact that it was built in September. A lot of thatwas these milestone billings in terms of the upfront deposits and what not, insome of these larger deals, but also just in terms of where the timing of someother billing milestone fell. So, I am absolutely expecting a reversal of thecash flow from operations in terms of a pop in the forth quarter and acorresponding decrease in overall receivables and DSOs in the quarter, as well.

Corey Tobin - WilliamBlair

Okay, great. Thank you.

Operator

Your next question comes from the line of Sean Wieland withPiper.

Sean Wieland - Piper

Hi, thank you. My question is around the reduced outlook in2008, and Bill if I understood you correctly, it's because of some of theselarger deals were taking a little longer to implement. Is this related at allto the version 11 that's being sold in the market? I mean, could you give us anupdate on early success stories with version 11? How many customers areadopting it? Is it a longer sale cycle because of that version or because ofthe nature of the market, or something along those lines?

Bill Davis

Yeah. If I can comment to first part of your question, andthen I trust Glen will answer the second in terms of the uptake of V11.

First and foremost, this is the first time we've comeforward in terms of providing a perspective on 2008. And what we are attemptingto do, Sean, is recognizing the dynamics, but also recognizing the dynamics interms of the backlog and some of the considerations that we highlighted. Wewant to be very considerate of kind of the expectation setting process, andmaking certain we're setting realistic expectations that the market can fullyunderstand, and expect that we will deliver upon.

And in light of current year performance, in light of therelative robustness of the backlog, and also the prospects in terms of that backlogcontinue to be replenished, in terms of strong bookings next year. We believe thatwe're being prudent in terms of the guidance that we've provided. So, with thatI'll ask Glen respond to the V11 question.

Glen Tullman

Yeah. I'll just add to what Bill said. Again, I think theearlier answer we gave, more cushions in those numbers. And frankly, Sean,there have been a variety of your counterparts who said to us, we are makingour lives more difficult than we should by pushing these numbers. So, we'vetaken some of that guidance. We try to give very realistic numbers with solidspace to allow for error and for delays, realizing we may have more of thelarger deals, for example, in 2008.

Relative to version 11, we continue to see good progressthere in rolling it out. We see very strong demand. And again, in some respects,the demand has outstripped what we expected because of the positive response.And that means that we've taken some of our resources and deployed them toversion 11, to rolling out version 11. Those upgrades are profitable, but theyaren't as profitable as implementing a new client. So, we've seen a numbers ofdecisions that they are the right decisions for our clients, but they have hadtiming impacts in term of revenue recognition and that is yet another one. But,we are talking about, it’s dozennow, of version 11 installs that are underway and that have beencompleted.

Sean Wieland - Piper

Okay. So, I think I understand but, just want to make surethat when you are going and sell and installing a net new client, and you guysare no to selling and installing large deals. Are the deals taking longer toimplement or there is higher mix of version 11 upgrades in there?

Glen Tullman

Well, I think, it’s all of the above. I think that some ofthe deals are more complex. I mean, we were talking with larger and largersites, that's number one. In terms of sites, some of them had revenuerecognition milestones that mean that we do more of the work upfront, before webuilt for it. In terms of version 11, clearly on the version 11 deployments,where they take people, those are less profitable than a net new customer. Thatsaid, they are profitable, and that said we need to do them to move the basealong. So, it's a combination of factors. And the last factor, very importantwas, not unlike the prior quarter, one or two of these deals that we expectedto be signed, which were license expansion deals from existing customers wouldhave driven those numbers, but didn’t get signed with the right timing.

Sean Wieland - PiperJaffray

Okay. That’s helpful, and one other question related toCCHIT certification, what is the plan to get the '07 certification done?

Glen Tullman

We have, and again it's a little awkward, because I amtrustee on CCHIT, the initial plan with CCHIT was that you have three yearcertifications, and that’s still the plan today. And, in fact, both of ourElectronic Health Records, HealthMatics, was the first to be certified, andboth were certified very early on. That was great in the first nine months,subsequently now, people have said, but what about 2007. And I think CCHIT andwe are clearly struggling to say is this a yearly certification or is it a onceevery three years?

To the extent that it becomes a yearly certification, that’sgoing to put a reasonably large drag on a variety of folks. That said, we aremoving both products along to 2007 certification, the products themselvesactually have the requisite attributes in them to be certified today. We justhave to go through the process and in fact, some of the 2008 certification thatwe have seen, the products already have that functionality in there.

One other note, the 2007 certification has not been a buyingrequirement, a prospect for us. We've seen very little of it, other than insome of the smallest accounts where we have seen the issue come up, but thelarger, more sophisticated accounts understand the three-year process, and theyunderstand the interoperability aspects of the product. They are really in thenext phase in certification and we are leader there.

Sean Wieland - PiperJaffray

Okay. Alright, thank you.

Glen Tullman

Thank you.

Operator

Your next question comes from the line of George Hill with Leerink Swann

GeorgeHill - Leerink Swann

Hey, guys. I guess the firstquestion, I didn't hear you guys speak to this exclusively. Glen are youguys backing off the $230 million number for the full year clinical softwarebookings?

Glen Tullman

No. We didn’t. We are not backing off that number, so that'sthe one piece of the guidance we didn’t change. We still see, the messagecontinues to be, and you saw this quarter, we see very robust sales. And theissue this quarter was one of turning those sales into revenue.

GeorgeHill - Leerink Swann

Okay. And then I guess, we started to talk a little bitabout preliminary 2008 guidance. Can you talk about where you think the marketis from a market penetration perspective? You guys continue to see robustdemand right now, but is this a market that continues to grow at close to 40%clip in 2008 from a bookings perspective, or we are get in to a point where theincremental sale is harder to get?

Glen Tullman

No. I think the growth is going to continue to accelerate. Ithink you will see a little more competition in the various markets. Clearlythe entry of hospitals as a buying entity will accelerate growth for thesmaller clients who were previously very difficult to access. But we seecontinued very vibrant growth across each section of the market. The largestacademic medial centers in integrated delivery networks, the mid-sized,multi-specialty groups.

And again, even in the smaller groups, because based on thechange in the stark rules, hospitals are stepping up to equip those physicians,that paired with our NEPSI initiative, we are going to drive more and more ofthe individual independent physicians, and very small groups in to theautomated world.

GeorgeHill - Leerink Swann

Okay. Can you talk a little bit about, what I call, demandmix, and how much can you talk about demand mix for the health…HealthMatics products versus the TouchWorks product?

Glen Tullman

We focus both of those products on separate segments, so thedemand mix has been strong in both cases. It’s a different fire in both cases, so HealthMatics is typically the smaller independentphysicians, and stretching up to some of the small to mid-size mnlti specialtygroups, and that’s where they've been focused.

It is, I will admit, a little bit blurred when hospitals getinvolved, because depending on whether the hospital wants to host theapplication or what the hospital is using, TouchWorks is unique in being anapplication that a large group could use, but it could also be deployed to asmaller group. So, we see robust demand in both products.

GeorgeHill - Leerink Swann

I have two more brief ones; I'll be real quick. First,seeing any material pricing pressure in the market?

Glen Tullman

I think we are seeing some pricing pressure in the low endof the market. And there you see some segments that are on the very smallestgroups, they are buying on price. And that’s something we're watching veryclosely, and we are making sure our folks sell on value.

I think that, in the larger groups, we haven't seen that,and in fact I would call it pricing stabilization. The issue is the largergroups are so focused on simply making sure that physicians used it, that theyare actually willing to invest more in certain cases, to make sure that thetechnology works, and is used by physicians, because there's millions ofdollars at stake in pay-per-performance and pay-per-quality programs. So,again, small markets yes, larger markets we see stability.

GeorgeHill - Leerink Swann

And Bill, one last question, the growth of revenue onearnings on the income statement is obviously not keeping pace with thereported bookings growth. From a modeling perspective, do you think, investorsshould think about what I will call the waterfall effect of the backlog istaking place, at a slower pace now, as it seems the deployment cycles arelengthening and may be you guys --

Bill Davis

George, that's exactly what, we try to communicate andkeeping with our thinking around our outlook for a way, by virtue of addingsome of these larger transactions. Some of the other factors that Glen talkedabout in terms of version 11, being incorporated in those deployments arealike, we are seeing a little bit of elongation there. And again, we're tryingto incorporate that into our thinking, in term of outlook, not only for thebalance of year, but also into next year.

GeorgeHill - Leerink Swann

Okay, thank you.

Operator

Your next question comes from the line of Richard Close withJefferies & Co.

Richard Close - Jefferies & Co.

Great, thank you. With respect to theclinical bookings, did you give a specific guidance number for '08 and if not,why?

Glen Tullman

We have not, Richard, because so muchof kind of that momentum is build on kind of how we exit this year. Ourfourth quarter represents, as we have talked about many times, some 35%-40% ofour annual bookings amount. And in order to kind of perfect that outlook,really want the benefit of having completed this year. And so our expectationis, is that we would be in a better position to provide early part of '08.

Richard Close - Jefferies & Co.

Okay. And then, with respect to, I guess, the third quarterrevenue, I know everyone, and we seem the go around and around on this. But, Iwould suspect that you weren't really anticipating a much revenue contributionfrom the Columbiaand Lahey. So, when did you just, I guess come to the realization that some ofyour existing customers weren't going to be deploying on schedule and if youwere to break it down, how much do you think it's internally an Allscriptsimplementation situation, or how much your clients are putting the breaks on alittle bit?

Bill Davis

Yeah. I guess I would characterize it a little differently.It was the conscious decision on our part to redirect resources and/or allowsome of these larger ramp ups to consume those resources, as opposed to itbeing kind of opportunistic by virtue of some of our customers stopping ordelaying. We don't mean to convey that sentiment, because that's not what'soccurring. So, that was the consideration. The dynamics that play kind of inthe quarter as were evaluating it, really gets to the second consideration thatI highlighted, and that is this that we saw an opportunity to in effectmitigate that by virtue of some add-on sales that we were anticipating. Thatwould have immediate revenue recognition impact, enable us to kind of fulfillwhat we thought was the right business decision in terms of moving some ofthese larger deals forward, maybe sooner that what was originally anticipatedand those ultimately didn't materialize. So, quite frankly, in terms ofunderstanding its full implication on the quarter really went up the very endof the quarter in terms of I have fully understanding where those add-on dealsare going to ultimately shake out.

Richard Close - Jefferies & Co.

And then…

Glen Tullman

We really made a client-focused decision about acceleratingand investing in certain of our existing clients, thinking that, as Bill said,we would be covered by one or two of these agreements that frankly went to thelast minute and ultimately didn't sign for variety of reasons. They will signthis quarter, so we are comfortable with that.

Bill Davis

If I could add one more thing, because its critical pointand that is we actually believe that we have more actionable backlog today thatwe have actually the requisite resources in terms to deploy in the near-term.And so, we are constantly making those business decisions in terms of where weare dedicating those resources, obviously with desire to maximizing revenue.But, we also want to make certain that we are balancing that with kind of thebroader business objectives that we are focused on at the same times. So, Idon't think it’s fair characterization to suggest that we moved resourcesbecause either clients delay or some other factor. The reality is that we havevery actionable backlog and are focused on maximizing as much as we can.

Richard Close - Jefferies & Co.

Okay. I know this smaller comparison, but you made somereferences to Physicians Interactive and something with regard to threeplatform deals and all that. Can you go over what you said there?

Bill Davis

Absolutely. What I did say was that, our ability to deliveron the guidance that we provided of $30 million is heavily dependant on signingthree platform deals in the quarter. The good news is, that we have more thanthree platform opportunities before that are being actively worked. I continueto be concerned at the kind of general state of affairs in pharma and therepreparedness to move is, quite frankly, is quickly as we need them to in orderto us to be able to deliver on that.

The reality is that we had anticipated one of those deals tooccur in the third quarter and move to the fourth quarter, and so I amhighlighting the realities in terms of what we're up against there. We've notmoved off of that, but are clearly trying to communicate to the market in termswhat is going to be required in order for us to deliver on the previously madecommitment on the booking side.

Richard Close - Jefferies & Co.

Okay. And then, just as a one follow-up, and sorry forjumping around here. But, going to back to implementations and all that, Imean, you did have a great bookings quarter. Is there anyway we run into asituation where we were oversold in the marketplace and then we can't deliveron the sales that we have succeeded in landing, and thus chaining sort of thewhole market. We've heard about people going out there and selling a wholebunch of business and not necessarily executing. And how would you gage your positionwith respect to I guess that comment?

Glen Tullman

Let me take that one. This is Glenn. Part of the reason thatwe made the investments and it was commented on earlier. I think it was prettyevident to everyone that we hired a healthy amount of implementation specialistand we spend a good deal of the quarter training them. So, we feel like we areadequately prepared for that. There is always an outlet and that is, we have anumber of consulting firms we work with. Some of those firms are right now onimplementations, managing them and the like.

They had said to the extent we outsourced the implementationprocess, we feel it's a higher risk to the client depending on who it is andmoreover, our margin gets impacted. So, we are, again, trying to manage that asopposed to just dumping it off to third parties.

Richard Close - Jefferies & Co.

Okay. And you mentioned the new COO and you mentioned focuson customer service. Have you had any issues on customer service that may be,has changed significantly from first or second quarter to third quarter?

Glen Tullman

Well, I think the biggest thing that we're finding is, one,we talked about being indispensable to our clients. And what that really meantis that we want to say they couldn't practice without our software, and thatwas great. And in the past when we had any kind of software interruption,people would go back to their paper based files or they would go back to theirscript pad.

Today, our clients increasingly don't have anything to goback to. They are truly paperless. And that puts an added responsibility on usto make sure we are up 24/7. To make sure that our level of responsiveness iswhat it needs to be. So, again, we are making investments now to protect ourclients and to make sure we are prepared for that.

Similarly, we want to make sure that as we add clients, wedon't keep adding support people and the likes. So, as you grow a company yougo through stages and that requires investment in systems and the like and thenbrings experience in helping companies make that transition, so again, much ofwhat we are doing is preparing just as we prepared in hiring implementationfolks, preparing in advance and making the investments to accommodate, both astrong fourth quarter as Bill called it, and I was happy to hear him say that arecord fourth quarter that we expect in terms of sales, and then furthermorevery solid guidance that we have given for nest year. We need theinfrastructure to deliver that. That’s our promise to our client, and that’swhat we intend to do. So, that’s where Ben is focused.

Richard Close - Jefferies & Co.

Okay. Thank you.

Operator

The next question comes from the line of Larry Marsh withLehman Brothers.

Larry Marsh - LehmanBrothers

Thanks, and good afternoon, Bill and Glen. First, onlyquickly, Bill, basically it sounds like you are guiding to about $85 million orso in clinical software bookings in the fourth quarter, and I know you are notbeing that specific. But I just wanted to also make sure are you giving anybreakdown of expectations of revenues, with the change in everything guidancefor this year or is that something you would hope to give for your early '08?

Bill Davis

I think your computation is right, in terms of what bookingsare required to deliver on our previous commitment on the booking front of $85million. I am not sure I followed the second question.

Larry Marsh - LehmanBrothers

Okay. I wasn't clear at all. Let's see. In the past, and atthe analyst day last year, you gave us a breakdown of expected revenues in theprepackaged medications business, software business and information services,PI. You are giving us an updated view of total revenue guidance. Did you or areyou in a position to give us a breakdown of the expected revenues by the threedivisions for '07 or '08?

Bill Davis

For '07, the delta, in terms of where we were at previouslyto our outlook now, it's principally being borne by the clinical softwarebusinesses. So, no reason to believe that our meds business won't be in the $44million-$45 million range, and physicians interactive close to the $16 million.So, I think you can work your way back into the clinical software revenuenumber by virtue of that.

Relative to next year, I made mention of this in response toanother question. Again, for planning purposes, we are thinking about the medsbusiness continue to be a solid contributor at or maybe slightly higher thanthe levels that we've enjoyed last couple years. We are expecting some moderateamount of growth out of physicians interactive, call that, too, kind of 20%-25%.And that, resulting in large percentage of the growth being fueled by theclinical software businesses.

Larry Marsh - LehmanBrothers

Okay, very good, thank you. And then just (inaudible) grossmargin sort of thoughts as well, too premature to go in that level detail atthis time.

Bill Davis

It is and again the one dynamic and I've talked a lot aboutthat over the course of this year that I've always been attempted to be aconservative one in terms of, there is lot of reasons to believe that thebusiness at the gross margin level should enjoy gross margin expansion.

The one reason quite frankly, why I held that in reserve issome of the pricing dynamics that we've experienced at the lower end of the market.And at this juncture just given the landscape being what it is. That's aprudent thing to do. With that said, we see tremendous operating leverage inour operating expense structure and it's for that reason, why we even atmoderately flat or may be a slight up tick in gross margins, we see the levelof expansion at the bottom line that we conveyed in our guidance.

Larry Marsh - LehmanBrothers

Got it. Two other quick things in, first great to hear aboutthe second mega deal, I'm assuming they were both showed up as bookings in thethird quarter. I'm also assuming you are not being as specific, I'm assuming collectivelyabout $15 million-$20 million, and you don’t have to comment specifically onthat I want some way off. But, I'm just curious, over what period of time doyou expect to recognize revenues, as you do PUC with these two, and when doesit really start to kick in for both of these on the revenue line?

Bill Davis

So, all I have said relative to the Columbia deal, inkeeping with prior quarters, it was a deal in excess of $10 million. It isimportant in recognizing that that’s a 2000 physician practice, that like allacademic settings, those tend to get priced on an FCE basis. So, the pricingwould in affect equate to a fewer number of docs than 2000, in terms ofcalibrating that against our typical per doc price of about $10,000 per doc.

Relative to them substantively showing up in our results, asI commented last quarter on expectation of Columbia as well from Lahey, we'll see a verysmall amount in the fourth quarter, but much more fulsome contribution in nextyear.

And I'm not familiar with the Lahey rollout plan in terms oftotal duration, but it pertains to Columbia--we are talking about call it 18months and 24 months type of period, in terms of the substantive work been donethere.

Glen Tullman

Lahey will be a little bit faster than that?

Bill Davis

I would expect that to be, yes.

Larry Marsh - LehmanBrothers

Okay, then, just, I just want to make sure, I am clear onthe discounting you mentioned on the lower end, is that really impacting yourHealthMatics business more, sort of booking here is kind of still what youhope? And is [Greg Short] is still set to take over for David in January?

Glen Tullman

Yeah, Greg Short is already on board, he has no otherresponsibilities other than running the sales force now, so he's down there,moving his family down there. And so, that's all gone, that transition hasoccurred, even though David is still there, working the quarter. And so, wehave kind of two folks for these entire few months as that transition happens.

We see the pricing pressure that I talked about, andcompetitive environment, we do see primarily in the HealthMatics' accounts,that's correct. And in terms of the number of sales, I'm not sure it’simpacting at all the number of sales, in fact, increased competitiveness there,we will hope drive the number of sales, I think, we are watching very closely,in terms of any impact on margins.

Bill Davis

I would just add to that, actually the volume oftransactions in the HealthMatics space have outpaced our expectations. But thatoverage from the volume perspective, we've given some of that back from apricing perspective.

Larry Marsh - LehmanBrothers

And then just you are still have about 37-38 salespeople inTouchWorks and high 40's in HealthMatics, Bill?

Bill Davis

Yeah, that's about right, we added a few more in totalacross both those sales forces but those are very close.

Larry Marsh - LehmanBrothers

Then, just very quickly…I mean, you layout still a veryinteresting growth, projection for '08. Clearly, Glen, just you probablyalready talked about it, but in summary, as you talk about the opportunities,what's your biggest concern as you look at the market in the next year?

Glen Tullman

In terms of biggest concern, right now I think this quarterjust the revenue recognition. We know how to grow the company. We will continueto do that. We know how to grow it rapidly. We know how to grow it profitably.Frankly, I think this year our challenge has been managing the market, managingsome of the market expectations. So, from an investor standpoint, as we guidedthis coming year, as I think Bill replied earlier, there is more cushion in thenumbers and we have a lot more focus relative to that.

In terms to the market itself, we expect that the marketwill become more competitive and that's not just from a pricing standpoint, weexpect that some of the folks that have not been able to compete in theambulatory environment, we will be able to compete, we will become morecompetitive. We hope that doesn't happen, but our expectation, our planning forit, we are preparing for that. That said, all that will happen at the same timethat the market is going to expand dramatically. So, we are very comfortablefrom a business perspective in terms of where we are. It is really all aboutexecution. The markets there and we would just continue to execute and franklythat's what we are pretty good at doing.

Larry Marsh - LehmanBrothers

Very good. Okay, thanks.

Operator

Your next question comes from the line of Atif Rahim with J.P.Morgan.

Atif Rahim - J.P. Morgan

Hi. Thanks, guys. Good job getting those two deals, forinstance, unfortunate it's not playing on for revenues as expected. But, as welook out to '08, do you expect the mix of these larger enterprise deals withkind of longer deployment cycle to increase or decrease?

Glen Tullman

I expect everything to increase. So I think across theboard, we are going to see more agreements in the large market, in themid-market, and then in the smaller market. Bill did mention that we may see inthe fourth quarter a stronger mix from the enterprise group than we expected,in terms of delivering the numbers. So, from that standpoint, the enterpriseand the willingness of the enterprise organizations to move forward isaccelerating. I think we are also starting to see the first replacements marketin the enterprise group.

The other area that's very strong is practice management forus and that continues to be a very positive for telling of what's going tohappen for next year. So…

Atif Rahim - J.P.Morgan

Okay. So, if I were to just to dig deeper into that, if thedeals with longer deployment cycles are increasing. Your revenue growth isabout 30% this year in the software segment, and you are guiding to about 30%next year. How do you see the revenue growth coming in about the same line,given that some of these deals have the mix of the larger, longer deploymentcycles is lengthening?

Bill Davis

Yeah, I guess I would, if I were to answer that questionlittle bit differently, and that I don't believe, as you look at our overallbooking expectation next year and the relative contribution from enterprisesales, I don't expect on a percentage basis to be materially different thenwhat we will deliver this year. So, I think the relative compliment ofenterprise deals, large deals, mid market deals, what you have will remain.It's also important to note that a very large percentage of what we actuallyrecognize in revenue next year will be drawn from the backlog that we carryinto next year. So, in some respect to the extent that mix where to shift onus, it actually would express itself more fulsomely in '09 than it would in2008.

Atif Rahim - J.P.Morgan

Okay. And in terms of the hiring that you've done, lookslike most of it is on the implementation side. Is that resulting in a netbenefit near-term, or is it just the heck on cost, just showing up in the SG&A in terms of the insourcedversus outsourced implementation. Do you have any costs saving from that?

Bill Davis

Well, we classify all those deployment resources, actually,as cost to sales. They don't actually fit in SG&A. So, I think about thebenefits from that in a couple of respects. Firs,t is that, obviously, theyhave become more productive--our ability to pull through more of the backlog.There is benefit with no incremental cost associated with it. Second, is that,to the we are able to absorb more of that work and less in the reliability onthird-party resources, that's more profitable for us, as well. So, both createbenefits for us and that's how I think about it.

Atif Rahim - J.P. Morgan

Okay. But can we expect an increase in gross margins fromthat or not?

Bill Davis

Again, in response to the earlier question, I mean, I thinkthat that's one factor that I would point to, to say that gross margin shouldabsolutely expand within the clinical software segment. I am hesitant to offerthat up for the reason I stated before relative to the pricing dynamics at thelower end of the market. So, at this juncture I am thinking about those beingwithin some reasonable range in terms of what we've delivered on in thatsegment till date.

Now, overall, you are going to see gross margins continue toexpand, because as the software segment continues to become a larger percentageof our overall revenue, it's going to create natural margin expansion just byvirtue of the mix shift in overall revenue. But, at segment level I would bevery hesitant at this point to be offering up a lot of gross margin expansion.

Atif Rahim - JP Morgan

Okay, understood. And then lastly on the NEPSI initiative,so you had about 5,000 physicians downloaded. Can you give us an idea of whatthe uptake has been in terms of physicians actually buying your products?

Glen Tullman

Relative to the NEPSI initiative, first of all, we've got5,000 physicians, more have downloaded it, but we have 5,000 actually using. It'sprescribed, which I think is the kind of material number. In terms of the fullElectronic Health Record up sale, while we've seen a limited number of those;number one, it’s very early; number two, we've not dedicated any real marketingfocus on that, we said we wouldn't, we surely didn't want to spook people, tohave anyone think, that initially, that was simply a marketing tactic. We arevery interested in having it deployed widely for use in electronic prescribing.So, we've not focused on that. That said, I think, a few people have come tous, but it’s a relatively small number, I wouldn't say it's significant at thispoint.

Atif Rahim - JP Morgan

Okay. Do you have any idea on when you expect that to kindof accelerate?

Glen Tullman

I wouldn't speculate on that right now, we continue tosupport and expect the NEPSI initiative to expand, and because of that, morephysicians who get using electronic tools, similar than more upgrades.

Atif Rahim - JP Morgan

Okay. Thank you.

Glen Tullman

Why don't we take two more questions, since we are trying tomanage the timing on the call?

Operator

Okay, your next question comes from the line of Steve Halper with Thomas Weisel Partners

SteveHalper - Thomas WeiselPartners

Hi, Glen. Could you just update us on how you feel aboutmeds business, you know these days, if they are as good, it generates cash flowbut strategically, how does it fit today?

Glen Tullman

Sure, I would pair it to your words, it’s there, it generatecash flow, it's a consistent performer, and while it's not particularlystrategic, we are not rushing to make any changes with it. That said, it isinteresting, because in some respects we have more people asking aboutdispensing medications now than ever before, in part because there are all newsources of retail clinics that are out there providing that service. But thatsaid, I think our guidance is the same and there is no impending decision.Bill, you want to add to that?

Bill Davis

Yes. Well put.

SteveHalper - Thomas WeiselPartners

Thanks.

Glen Tullman

Sure.

Operator

Your next question comes from the line of Richard Davis withNeedham & Company.

Richard Davis - Needham & Company

Thanks. With regards to your partnership with Microsoft,Google has also kind of made some commentary that they would like to doelectronic health records, at least on the consumer side. Would you partnerwith them? Or do you have a point of view as to what they are doing? Or is itjust so early days it's almost impossible to tell?

Glen Tullman

Sure. Google is a strategic partner of Allscripts today, andI would expect that to the extent that anyone wants to be operating in thisbusiness if they want physician participation in their partner, then we wouldbe working together. That said Google has been tight lipped about what they aredoing and maybe asked their partners to also maintain that confidentiality. So,unfortunately, I am not at in a position where I can comment on that.

Richard Davis - Needham & Company

Got it. Okay. Thank you.

Glen Tullman

Well, thank you very much. Again, I will just conclude thecall by saying that, to kind of paraphrase the statement I made earlier, wehave been very good about knowing how to build the business that’s very client-focused,that meets our client needs, that continues sales, revenue and bottom line expansion,and we will continue to do that. We don’t feel great about the quarter in termsof the fact that, there were analyst expectations out there that were in excessof what we delivered. That said, we are very, very focused on continuing to dothe right things for our clients, continuing to invest in the business, andcontinuing to build the business in a very profitable way. I think that'sspeaks to the guidance that Bill gave for 2008.

So, again, I want to thank all of our employees forcontinuing to make Allscripts successful, to thank our clients. We think wehave the best client base in the business, and finally to thank our investorsfor helping us to build the business. Thanks very much and we look forward totalking with you next quarter.

Operator

Ladies and gentlemen, this concludes today's conferencecall. At this time, you may disconnect.

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