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Allscripts Healthcare Solutions, Inc (NASDAQ:MDRX)

Q1 2008 Earnings Call

April 30, 2008, 4:30 pm ET

Executives

Glen Tullman - Chairman and Chief Executive Officer

Bill Davis - Chief Financial Officer

Lee Shapiro - President

Analysts

Atif Rahim - J.P. Morgan

Corey Tobin - William Blair and Company

Sean Wieland - Piper Jaffray

Sandy Draper - Raymond James

Richard Close - Jefferies and Company

Bret Jones - Leerink Swann

Charles Rhyee - Oppenheimer & Company

Larry Marsh - Lehman Brothers

Steve Halper - Thomas Weisel Partners

Operator

Good afternoon. My name is Jason and I'll be your conference operator today. At this time, I would like to welcome everyone to the Allscripts First Quarter 2008 Earnings Conference Call. All phones lines have been muted to prevent any background noise during the call. After the presentation, there will be a question-and-answer period.

At this time, I'd like to turn it over to Mr. Glen Tullman.

Glen Tullman – Chairman and Chief Executive Officer

Thank you, Jason. Good afternoon and welcome to the Allscripts first quarter 2008 conference call. This is Glen Tullman, Chairman and Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer and Lee Shapiro, our President.

Before we get started, I am going to ask Bill Davis to review our Safe Harbor statements. Bill?

Bill Davis – Chief Financial Officer

The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts management as well as assumptions made by and information currently available to Allscripts management. Wherever practical, Allscripts will identify these forward-looking statements by using words such as "may" "will" "expect" "anticipates" "believes" "intends" "estimates" "could" or similar expressions.

These forward-looking statements are subject to a variety of risks and uncertainties, including those listed in the earnings press release issued by Allscripts today and in Allscripts' filings with the Securities and Exchange Commission which could cause Allscripts' actual results, performance, prospects, or opportunities in 2008 and beyond to differ materially from those expressed in or implied by these statements.

Except as required by the federal security laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this release.

In addition, a portion of this conference call will cover the proposed business combination involving Allscripts Healthcare Solutions and Misys Healthcare Systems LLC, a wholly owned subsidiary of Misys PLC. In connection with this proposed transaction, Allscripts intends to file with the Securities and Exchange Commission a preliminary proxy statement, a definitive and other related materials.

The definitive proxy statement will be mailed to the stockholders of Allscripts. Before making any decision with respect to the proposed transaction investors and security holders are urged to read these documents and other relevant materials when they become available because they will contain important information about the company and the proposed transaction.

Investors and security holders can obtain copies of Allscripts materials and all other offer documents filed with the SEC when available at no charge on the SEC's website www.sec.gov. Copies can also be obtained at no charge by directing a request for such materials to Lee Shapiro, our President and Secretary at our corporate office in Chicago.

Investors and security holders may also read and copy any reports, statements, and other information filed by Allscripts with the SEC, at the SEC public reference room in Washington DC. Please call the SEC at 1-800-SEC-0330 or visit the SEC's website for further information on its public reference room.

Allscripts Directors, Executive Officers, and other members of management and employees may under the rules of the SEC be deemed to be participants in the solicitation of proxies from the stockholders of Allscripts in favor of the proposed transaction. Information about Allscripts, its Directors, and its Executive Officers and their ownership of Allscripts securities is set forth in its Form 10-Ka, which was filed with the SEC on April 25th, 2008.

Additional information regarding the interest of those persons maybe obtained by reading the proxy statements and other relevant materials to be filed with the SEC when they become available.

With that said, I'd like to turn the call back over to our CEO, Glen Tullman.

Glen Tullman – Chairman and Chief Executive Officer

Thanks, Bill. That has to be a record for Safe Harbor Statements. So I appreciate everyone there with us. Let me begin the call. Allscripts turned in a solid first quarter performance with some positive highlights in progress.

Just to give you a quick top-line review, #1, our sales team delivered a strong performance in the quarter that confirms Allscripts leadership. While that being carried through to the revenue and earnings line this quarter, we are seeing measurable progress with our Touchworks V-11 Electronic Health Record. Our investment is paying off and as I'll discuss, good things are happening at our client sites.

#2, our Hospital Solutions Group delivered strong sales from new product launch and further validation that we're building a long-term franchise with a strong recording relevant revenue element. And #3, our proposed merger with misys Healthcare is progressing well and we're moving aggressively towards closing this summer.

To cover the quarter in more detail, the most positive news was the strength of our sales bookings for the quarter. Sales bookings for the company were $52 million, up more than 50% over the first quarter in 2007 and were roughly the same as sales bookings for the fourth quarter of 2007.

Touchworks led the way, which when you consider the first quarter is traditionally the slowest of the year when you consider the questions surrounding our proposed merger with misys and the discussion around the work we're doing with clients on V-11 demonstrates the strength of the electronic health record market, the strength of the Allscripts brand, and the confidence our clients and prospects have in our people and in our company.

For over 10 years we've continued each and every quarter to make progress toward our machine of being a leading provider of software, information and connectivity solutions to physicians and other key healthcare stake holders. We're closer than ever to achieving this vision, especially considering our successful acquisition of extended care information network and the addition of their 400 hospitals and close to 6000 extended care facility customers.

If you also include the proposed addition of misys and there are 113,000 physicians to the Allscripts base of over 40,000 physicians its clear we are on our way to realizing our vision of an interoperable connected healthcare system, one that empowers the best physicians and caregivers in the world to safely deliver world-class patient care in cost effective way. And it’s a sign of things to come as physicians groups and hospitals continue to look to Allscripts for industrial leading solution from the company they can trust. In fact, as we suggested in prior quarters, given the stark exemption, hospitals are playing a larger role in the purchase of electronic health records. A report from M.D. by.

line, the number one online buyer's guide for hospitals suggests that when hospitals go shopping for electronic health record solutions they consistently look to Allscripts. M.D. by line went on to report that over 40% of all the requests they receive for information about electronic health records are for Allscripts products or services.

Over the last two years no, other single vendor has received even half as many requests for information from buyers using M.D. by line. Just this morning we release news of another in a series of stock related purchases of our electronic health record and practice management solution. St. Luke's hospital in Suburban Toledo Ohio, signed a contract to purchase our combined EHR and PM solution for 100 of their affiliated physicians. It's the latest in an expanding list of Allscripts wins with hospital groups who increasingly are looking to build relationships or what I like to call an electronic dialogue with physicians by donating and in the case of St. Luke's hosting and providing IT support for the electronic health record.

Another new client announced today is Heart Center Medical Group, a 50 physician multi specialty practice in Fort Wayne, Indiana. There like St. Lukes purchased our combined electronic health record and practice management solution. Besides being one of the premier cardiology and multi specialty groups in Indiana, the Heart Center is noteworthy because they are a growing number of clients who have upgraded to a full electronic health record from our impact M.D document imaging solution which along with electronic prescribing we think our way as an on lamp to the electronic highway. The many practices who want the savings firm inconvenience of accessing scanned medical charge from the computer but on quite letting to implement a complete electronic health record.

Both St. Luke's and the heart center demonstrate again that our practice management solution has become widely excepted in the enterprise market building on the success and positive reputation we've enjoyed with smaller and mid-size practices, and we announced last month the two practice Hawaii's largest physician management company has purchased the statewide license and enterprise license for our combined EHR/P M suite.

Team practice is worth mentioning for another reason as well, we partnered with them to introduce the Allscripts clinical quality solution, a powerful new tool that automates the quality reporting requirements of pay-for-performance programs. This is an important capability that is already generating real interest among prospects, and our existing client base, because it solves a serious problem. How to make it easier for physicians to generate income from pay-for-performance initiatives? From an earnings and bottom line standpoint, we further accelerated our investments in our TouchWorks V-11 product, to allow more of our clients to realize the product promise I should say of this product sooner or challenge with me 11 is what every business want. Our clients throughout the functionality and breadth of the product can run it now. And as we discussed we continue to work to streamline the deployment process, applying some of the best talent inside and out side our company. We told you on previous calls slower than expected installs of V-11 resulted in our revenues being wider in the first quarter. The good news is that we are executing against our improvement plan and that we are seeing solid measurable results.

One recent example with our implementation deployment process was demonstrated in an email I have recently received from Michael Bush. She is Strategy Officer but now helps us in Pennsylvania which complemented us on the effort we put into making V-11 work for them. Michael writes, “Over the years I have been through many installs. But I have to say this was one of the smoothest, particularly, given them magnitude of the task to navigate. From start to go live was about fourteen weeks which is incredible. Frankly, I was holding my breath from day one waiting for the boom that never occurred. He continues, this was further confirmation of how bullish e we are concerning our partnership with All Scripts. We are confident in the next two years of rollout to our regional physicians we will truly transform the quality of care to our community while creating a more energized positive and engaged medical staff. Bubble when live with the first small group of physicians on the full functionality of the V-11 release and plans to continue deploying physicians each week. This work flow based approach cut our deployment time in half using our newly refined processes. Thomas Jefferson University, one of the premier medical centers in the United States is also in the deployment process today for the 400 plus multi specialty physicians. Its one of our largest installs and our CIO Bruce Nets said recently quote “All Scripts acts like true partner and makes the kind of customer commitments that go beyond other venders”. These are just two of the positive stories I could share from clients across for country from George Washington University Medical Faculties Associates in Washington DC the first group to deploy V-11 to Medical Rehab Associates in Louis Town Maine to well over in Washington State to community care physicians, a well line and innovative group in Alabaman in New York. Our client focuses paid off and they can see the progress we are making. That progress includes not only delivering on client initiative improvements with our Touchworks V-11.1 release delivered in March. But also providing many improvements of the full Touchworks V-11 experience, such as preconfigured certified work flows and over 15000 note forms delivered in conjunction with our client led specialty specific physician advisory boards, both of which served to accelerate deployment.

We expect to see all of these progress begin to make a financial impact in the form of backlog takedown in Q2. But the real impact as Bill will comment on will be in Q3 and Q4, when we have the combine benefits of faster takedown and less expense.

Today we have 97 clients live on V-11 these clients range from single specialty and primary care to multi specialty groups MSOs, academic medical centers and integrated delivery network. Some have upgraded from Touchworks version 10, some have converted from the competitors EMR and others are becoming electronic for the first time. Another 100 or so clients are in some stage of implementation or upgrade. And this number is growing. The bottom line is that we are very encouraged by our progress with V-11 and it’s safe to say that the bugs continue with our clients. We are also seeing strong sales of our HealthMatics electronic record and our offering is among the most advanced available today for groups with 25 physicians or less.

During the quarter, our HealthMatics HER was selected by the centers from the Medicare and medicate services that are known as CMS for our pilot project demonstrating its ability to collect and report pay full performance data to CMS. This new pilot for the physicians the reporting initiatives of PQRI will determine which electronic health records can best enable physicians to receive bonuses from Medicare for putting on quality metrics, which we think going forward will be a key differentiator as pay for performance begins to play a bigger role in physician practices. One last item on our professional offering, we proved that the small light market is really ready to take a lot, read the latest issue of the journal of medical innovation which includes a study by one of our clients Valley Medical Associates in Springfield, Massachusetts. Valley Medical is a four-physician practice that implemented our electronic health record and reported return on investment including lower payment time from 30 days to 15 days, fewer client denials and increase in revenue by $60,000 which is close to $15,000 per physician meeting docket and other pay for performance requirements and finally, reduced transcription costs by 60%.

Overall, that's about $10,000 savings per physician, just in terms of medical staff saving reductions. It's important to note that we continue to add significant and valuable functionality to our professional EHR, for example, in our HealthMatics professional EHR, we had a patient link, which eliminates many hours of staff data entry given the ability for the patient to complete the documentation and new functionality that allows scanning into the electronic health record that automatically match to discrete data elements..

In the practice management area, we completed our common user interface with both of our electronic health records as well as our first single data base solution with enterprise practice management and important selling feature for some of our prospects. Volume on the subject that our HealthMatics electronic health records I did want to highlight the competitive scenario.

While we continued to invest to make our products better, we have mentioned before that E clinical works have become a significant competitor in terms of price. While they continue to compete on price, their clients are starting to see what KLAS, which is the consumer reports of healthcare, he KLAS has already concluded. They don't have the infrastructure necessarily to efficiently bring client live or support them. So the apparent upfront savings turnout to be illusory at best and costly in term of loss position, time and efficiency and de-installs, which the market is beginning to understand. One example this quarter was pediatric group associates and Orion healthcare corp practice in Longville Georgia which is converting to HealthMatics clinical works.

Moving on to our hospital solutions group, the quarter saw record sales from product in this newly organized business. Formed after our acquisition of extended care information network late last year, and under the able leadership of Jeff Surges, the hospital solutions group incorporates a emergency department information systems as well as care management and discharge management solutions.

I am pleased to report that during the quarter, we fully and successfully integrated ESIN and Canopy into the new Allscripts Care management product and have seen excellent results.

Our new integrated care management sales team produced the largest Q1 bookings quarter for both organizations including signing 20 hospitals from our existing Canopy client base to our new Allscripts discharge planning modules, which has been integrated into our care management product solution.

Overall during the quarter we brought 35 hospitals live and delivered several large sales in the million dollar range. At HIMS n February we announced that banner health, one of the largest nonprofit care systems in the country is implementing our care management solution at six Phoenix area and two Colorado area hospitals. You can expect to see several more announcements during the quarter highlighting our successes in this area.

As I've talked about before, we think about EV solutions has the door into the hospital and our care management solutions has the door out and we connect both electronically to ambulatory physicians in need of this information validating our vision of connecting physicians, hospitals, and extended care providers.

Finally, I want to comment on our proposed merger. Bringing Allscripts and misys Healthcare together represents a compelling opportunity for our clients and for our stockholders of both companies to participate in a combined organization with significant potential including a major cross-selling opportunity that will be an important driver of our growth in future years.

Mike Lawrie the CEO of misys PLC and I have shared a vision of where healthcare needs to go towards a safer, higher quality of care and more efficient system that is connected and interoperable. And this transaction will aggressively move us in that direction.

We have teams who are working together on plans that will make the merger as seamless as possible to our clients. And we believe the anticipated cost synergies will be quickly realized. We see this as a perfect merger, a great fit strategically with shared vision between the companies for building an interoperable connected healthcare system and a shared culture of competition and performance among the teams.

We remain confident that this business combination is the best outcome for our clients, our employees and our shareholders, and pending regulatory approvals, we're hoping to close the transaction late summer.

So let me conclude with a few comments. For years we've talked about the market for clinical software, connectivity and information services driven through physicians. That market is here today. And with the proposed merger, Allscripts will be even better positioned than in the past to capitalize on the opportunity through our broad and industry-leading product suite and our ability to deliver across the board.

At this point, I want to turn it over to Bill who will further address our financials. Bill?

Bill Davis – Chief Financial Officer

Great. Thanks, Glen, and hello, everyone. As Glen stated, we are encouraged by the bookings momentum in the quarter and the progress that we're making on Touchworks version 11 implementation cycles. And while such efforts have not fully expressed themselves in our financial performance, we are pleased with the operational progress we've made to-date and continue to believe that our progress will become more apparent to the financial markets in the second half of this year.

We are also very excited about our pending merger with Misys Healthcare which will result in the combined organization having as its customers nearly one out of every three ambulatory physicians in the United States with strong revenue and earnings growth potential. We continue to work toward the closing in the late summer timeframe and may even have an opportunity to accelerate such timing depending on the extent of an SEC review of our proxy statement.

So, turning to the first quarter specifically, first our bookings, out total bookings during the quarter were approximately $52 million. This represents a 51% increase over the first quarter of last year and is comparable to our fourth quarter bookings performance even though Q1 tends to be seasonally lower than the fourth quarter. Consistent with prior quarters, bookings do not take into consideration the 9.6 million of sales in medications.

Our clinical software businesses contributed 47.8 million in bookings during the quarter excluding ongoing support. This represents approximately 64% growth over the first quarter of 2007 and approximately 42% organic growth in our ambulatory businesses when compared to the same period last year.

Our Q1 bookings performance compares to $49 million of clinical bookings in the fourth quarter which again we are encouraged by, given the typically seasonality. We also view our bookings performance as a good indicator of the ongoing interest in all of our clinical solutions including Touchworks Version-11.

Rounding out our bookings performance is our Physicians Interactive business which had bookings during the quarter of 4.2 million representing a 23% increase over the fourth quarter.

Turning now to backlog, we ended the first quarter with $285.3 million in sold backlog. The backlog breakout is as follows: License and service fees related to our clinical software businesses represents 144 million, software subscriptions as well as ASP contractual commitments including our ECIN business is 58.5 million, and our support and maintenance fees, which are expected to be recognized over the next 12 months is 63.4 million and Physicians Interactive contributes the balance of 19.4 million, again for a total for 285.3 million.

Turing now to revenue. Our first quarter revenue of 72.1 million represents a 7.1 million or 11% increase over the same three month period last year. Our clinical software businesses contributed a majority of the increase. As I alluded to you earlier, our first quarter was impacted again by nearly $3 million of work performed that could not be recognized as revenue due to slower than expected deployment schedules of TouchWorks V-11.

We remain focused on our plan to return deployment cycle times to historical levels. We are encouraged by the progress we are making both from a development and deployment perspective including the fact that TouchWorks version 11.1 was released two months ahead of schedule. With that said, I continue to believe that it will take the better part of the first half of 2008 before you begin to see the full effect of such efforts.

Software revenue was also impacted by approximately $3 million less add on license revenue to existing customers when compared to the fourth quarter. This decline had a meaningful impact both on our top line and bottom line given its high contribution margin.

Physicians interactive had revenue of 3.9 million in the first quarter and we also saw another solid quarter from our Med's business with revenue of 9.6 million. In terms of revenue mix, our software related services segment represented approximately 81% of total revenue in the first quarter.

First quarter revenue by segment was Meds again 9.6 million, our clinical software businesses delivered 58.6 million and our information services rounded it out at 3.9 million again for a total of 72.1.

Looking now to gross margins. Overall our gross margin was approximately 50% in the first quarter versus 49% in the fourth quarter. Margins by segment were as follows. We saw medication margins going from 13% in the fourth quarter up to 21% in the first. Our clinical software business was fairly consistent with prior quarter at 56% and a slight improvement in our information services business going to 35% again for a total of 50%.

The sequential change in our Meds business is attributed to the mix of drugs being sold. Principally driven by the decrease in lower margin bulk sales and less flu vaccines sales that typically take place in the third and fourth quarter.

Turning now expenses. Operating expenses excluding the amortization of intangibles and stock based compensation for the first quarter were 29.8 million. This compares to 25.5 million of expenses in the fourth quarter. The increase is attributed to the inclusion of approximately $2.7 million pre-tax of transaction related expenses. Taking that into account our normalized operating expenses were approximately 27.1 million again compared to 25.5 million in the fourth.

The increase over the fourth quarter is primarily due to addition of recent operating expenses in certain marketing expenses related to our presence at HIMs conference in the first quarter.

With regards to capitalized software, we had 2.4 million in the quarter. This amount compares to 2.8 million re-capitalized in the fourth quarter and is reflective of the investment we continue to make in the development of both our TouchWorks and our HealthMatics EHR EMPM products. We capitalized an additional 1.6 million related to our ongoing work with Walters core for a new product content. And as I discussed in the past we see this content development work being significant differentiator in the marketplace.

Please note that total capitalized software amount will fluctuate from quarter to quarter depending on our product development cycle. Stock based compensation was approximately $2 million for the quarter and deal related amortization was approximately 3.4 million both amounts reflect the consummation of recent transaction at the end of the fourth quarter.

Net income for the quarter was approximately $100,000 or break-even on a per diluted share basis. Excluding the $2.7 million of transaction related expenses our net income would have been approximately $1.7 million after tax or $0.03 per diluted share. The $0.03 per diluted share includes 2.1 million or $0.04 per share of acquisition related amortization net of tax and $1.2 million or $0.02 per share of stock based compensation also net of tax bringing our non-GAAP Pro forma adjusted earnings for the quarter to $0.09 per diluted share. Basic shares outstanding quarter were $56.5 million and diluted shares were 57.5 million. The 7.3 million shares issuable under our convertible debt offering were not dilutive to our GAAP earnings per share in the first quarter. Therefore, those 7.3 million shares are excluded from both our GAAP and non GAAP adjusted earnings diluted share computation for our first quarter.

With regard to overall head count, we ended the quarter with approximately 1,157 employees which compared to the 1,155 employees we reported in the fourth quarter. Turning now to our balance sheet. We ended the quarter with 61.4 million in cash and marketable securities, which is reflective of us generating approximately 14.9 million in cash from operations in the quarter. The strong cash flow from operations were offset by approximately 7.8 million of capital expenditures in capitalized software, as well as approximately 8.9 million of cash that was used in January to fund in the balance of our $19 million purchase ESIN. Account receivable on March 31st were approximately $81 million, which includes approximately $6 million in receivables related to ESIN. Deferred revenue increased 9.6 million when compared to our December 31 balance due to a meaningful amount of our annual softening and as well as subscription fees being build in the first quarter.

I would like to close by making a few comments regarding the balance of 2008. As part of the Misys announcement, I reference the fact that Misys PLC is a publicly traded company in UK and is subject to UK listing and disclosure requirements. We have specific requirements related to the disclosure of forward-looking information that limits our ability at to what we were able to say. So with that, I did want to make a few specific comments that help you think about Allscripts standalone performance for the rest of the year.

As I mentioned last quarter, our ability to deliver our previously communicated guidance is dependent on our efforts to improve V-11 deployment cycles over the course of the year. While we do anticipate quarterly sequential revenue growth the rest of this year, we expect some pressure on such anticipated growth, way and our ability to achieve the 20 to 25% top line growth previously communicated. I want to note that we do believe Allscripts has the ability to grow at those levels. It is simply a function of timing and given the need for most of the required growth to occur in the last six months of this year.

Working off the $5 million of adjusted earnings we generated in the first quarter. We do continue to see an opportunity to achieve the lower end of the previously communicated earnings guidance. Assuming, we are able to deliver a visible amount of sequential revenue growth in each of the last three quarters, and we are able to continue the maintain tight controls over our cost structure.

As both Glen and I had mentioned before, we are encouraged by the progress we are making to improve deployment cycle times in our Touchworks business. We expect to benefit to such work to become more apparent to the financial community over the coming quarters. We are equally encouraged by the growth potential of all our businesses and look forward to all of our businesses to contribute to our continued success in the future.

So with that I would like to turn back over to Glen for some closing remarks.

Glen Tullman – Chairman and Chief Executive Officer

Thanks Bill. Allscripts has great products that we are providing to the industries most impressive set of clients with new prospects looking to us first among the all other vendors.

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We expect to make continue progress in the business throughout 2008 and continue to deliver on our promise of moving HealthCare forward. I want to thank first and foremost our clients who are driving our growth and our success and we confirm to them that delivering low cost solutions that work is job one. I also want to thank our employees who do the work the millions of little details that make our clients successful everyday and who I believe are the industries best. And last but not least, I want to thank those investors who stood by us going some rocky times. We are all shareholders and committed to deliver shareholder value. So thank you and will now open it up for questions.

Question-And-Answer Session

Operator

(Operator Instructions).

Your first question comes from Atif Rahim from J.P. Morgan.

Atif Rahim

Hi thanks. Glen, could you perhaps give us some more clarity on whether there were any outsize deals this quarter that drove your bookings – perhaps anything some of the enterprise deals we have seen in past. And then secondly for Bill, could you quantify the pressure that you expect to see on ’08 revenues, I know you said the 20 to 25% is kind of a stretched outlook but any updated forecast there?

Glen Tullman

Sure Atif. Let me first take the enterprise question. I was very encouraged that while we continue to have a strong pipeline of large enterprise wide deals and I am talking about deals kind of in the Colombia size range. This quarter we did not include any of those which I think speaks to the strength of the pipeline that we could deliver, the quarter that we did deliver in the first quarter and not depend on any of the larger agreements. We've said in the past that it's important not to base the quarterly numbers off of those large agreements and hopefully used on dice and that was the case this quarter. So this quarter does not include any of the larger kind of mega deals that we’ve talked about. Bill?

Bill Davis

Yeah, relative to the revenue question, I do think that it would premature to do that and I think we will benefit from a little bit more time. And again just to reiterate, I understand that the revenue will likely come under some pressure and it would be challenging to get to that level but would intend to kind of update the market as we have some more experience behind us.

Atif Rahim

Okay understandable. And then just one quick clarification for the transaction related expenses that you highlight those e are all related Misys right and none related to ESIN?

Bill Davis

That’s correct.

Atif Rahim

Okay thank you.

Operator

Your next question comes from Corey Tobin from William Blair and Company.

Corey Tobin

Hi good afternoon guys. Quick question on bookings, should we expect to see the same traditional ramp that we have seen in bookings in the past which is to say should we expect bookings, so there is a pipeline support bookings ramping from the level that we saw in Q1?

Bill Davis

Yeah Corey this is Bill. We have as you know in the fourth quarter indicated an intention not to provide guidance specific to bookings and so, we are not prepared to comment in terms of our outlook there. I would just say qualitatively that again we are very encouraged by the level of activity in the marketplace, the number of opportunities that available to Allscripts. So we continue to execute against those opportunities but getting into specifics we are not prepared to at this point.

Corey Tobin

Bill I understood. Let me just try one other thing then, post merger should we expect the fourth quarter in terms of booking to continue to be the strongest throughout the course of the year. Again not asking you if that’s going to be case, but is that the typical pattern that’s being seen in the past and it looks you might have any demonstrate that pattern?

Bill Davis

Corey I think that’s a industry kind of indication that we have seen throughout this industry and so, I think it’s reasonable to assume that the fourth quarter in the healthcare business is going – in the healthcare IT business will be strong for most of the businesses here. So again without violating that principal of giving quarterly guidance I would say that we expect the end of the year's is generally a strong part of the year.

Corey Tobin

Okay great. Thank you very much.

Operator

Your next question comes from Sean Wieland from Piper Jaffray.

Sean Wieland

Hi thanks. Bill on your comments on the outlook on revenue guidance for this year. Is this predominantly because of lower booking expectations going out the rest of the year or longer implementation cycles that you’re seeing therefore taking longer to recognize the revenue?

Bill Davis

It is – it is almost exclusively just recognizing the Q1 performance and the relative ramp that would be required to in affect to achieve that level of growth. And the backlog conversion required to do that. The reality is that we have sufficient backlog to deliver on that, but because of the deployment cycles being what they are and expectation that we are not going to see kind of meaningful improvement on those cycles for a little while now is really what's giving you reason to state that perspective and this is a -- it’s a tinning issue as it pose its clearly not a backlog issue or sales booking issue has to do with how quickly we can make all the changes related to the more rapid deployment of the V-11 to realize that revenue.

Sean Wieland

Bill, on the recognition milestones you need to head, are they specific to product deliver deliverables, service deliverables, is it a bandwidth issue or is it getting a product taxes out of the door this year?

Glen Tullman

Again I wanted to be clear it’s not products it is per se, it really has to do with getting the cycles in place as you would do with any new products its just, this one happens to be bigger and offer more functionality to our clients. The good news is that they are taking advantage of it, the good new is that they wanted and we are learning along with them as we implement some of these products. We see as I mentioned in my earlier comments we see where it works and where the new process as we put in the place we start to finish much more rapid implementation times but we won't get that through the whole base and as Bill said, we really will start to see the impacts of that in the second half of the year. So then the question is how quickly you know can you do it and how much can you do and it is just too early I think for us to give more visibility on that right now.

Sean Wieland

Okay. The second question, what's the plan to get Touchworks certified on version 2008 TTHIT?

Glen Tullman

On 2008?

Sean Wieland

Yes, I am sorry 2007.

Glen Tullman

Well good news is it is certified on 2007.

Sean Wieland

Okay. Alright thank you very much.

Glen Tullman

Okay.

Operator

Your next question comes form Sandy Draper from Raymond James.

Sandy Draper

Thank you. Question Bill and I know you are going to stay away from giving any specific guidance but I am just trying to think about the gross margin and the clinical solutions business you reported in first quarter talking about you know holding cost steady you know, is it -- when I think about building out of model, should I think about, you’ve got a pretty fix, pretty god fixed cost basis there and whatever the revenue ramps up. The majority of that is going to flow through the gross margin or and how should I would be thinking about incremental margins in terms of relative to revenue ramp?

Bill Davis

Yeah I think Sandy, really implicit in our result and the fact that we are carrying cost and recognition cost that we’re not in a position where we’re recognizing corresponding modal revenue because of the project plan expansion and what have you. So, as we see those project plans first stabilized and then ultimately begin to improve I do expect that incremental revenue that comes through will be at very high and very high margin so that will provide for some margin expansion opportunity in that segment. Secondarily, I might need reference to the fact we did in the first quarter, you had decline or we had a decline of add-on sales to existing customers order magnitude of about $3 million, we made a tool that tends to be higher margin revenue and so, as we see -- and not really surprised by that given kind of buying behavior in the first quarter versus some of the other quarters. So as that increases in subsequent quarters as I would expect it would that will add for some additional margin expansion opportunities as well.

Glen Tullman

I think that part of when you heard Bill talk about some pressure on revenues you didn’t hear I have talked about the bottom line and I think in part that has to do with what you identified and what Bill just talked about which is as we come into the second half, as we benefits from these improvements and can those recognized work has been done that can bring in more sales, license sales and the like and all that comes in higher margins, so it’s appose to bottom line and the question is whether you can get the top line as well and that’s where we see some pressure.

Sandy Draper

And then just quick followup Bill. So are there actually some expenses in cost of goods right now, I wouldn’t say onetime in nature but could actually go away once you finish with some of these projects?

Bill Davis

I wouldn’t characterize in that way I mean, again you think about the composition of our cost of sales a large percentage of them are deployment resources. So what you’re really getting that is how much revenue is able to generated on a per consultant or per deployment resources basis. And so, the expectation is as those project plan or cycles stabilize and then improve, their revenue generating capability will naturally improve with it and that’s what will really drive the margin expansion I spoke to.

Sandy Draper

Okay, great. One follow-up and I will jump back in. Once we strip down to the 27.1 million of SG&A outside the charges, are there any higher expenses in there relative to special work project, anything else, or is that sort of a good normalized base to be building off of in terms of SG&A?

William Davis

Yeah, again, the one thing that I try to highlight to is the first quarter takes on, you can think about it, it's somewhere between 0.5 million to $1 million of cost that’s associated with our HIMMS participation. We also have annual sales service meetings and the like. So I actually think the base that we should be working off is certainly lower than the 27.1, we take those into account.

Sandy Draper

Okay, great. Thanks.

Operator

Your next question comes from Richard Close from Jefferies and Company.

Richard Close

Yeah, Richard Close here. Glen, I was wondering you talked a little bit about Butler, if you could give us some more information there, how many modules do they -- are they running now of TouchWorks or is it the full TouchWorks suite?

Glen Tullman

Yeah, they are on the full suite. I will say that they've had great success. They are on the full suite. That said, they are rolling -- they have a number of smaller practices. It's not one big practice, it's number of smaller, I should say not practices but groups that are practicing like many of the large practices as you see and they are doing one a week. But that said, they are rolling out the full electronic health record.

Richard Close

Okay. So right now in the doctors that are live they have the full suite, they have nodes, so it's not just e-prescribing or anything?

Glen Tullman

Absolutely. Well, that’s true of a number of other sites as well.

Richard Close

Okay. And then if you looked at the 37 customers, I think you mentioned on Version 11, how many of those are being started off, of the 37 started off on the module Version 11 now with the hopes of adding additional modules down the road or are they on the full suite?

Glen Tullman

Well again, what most people do is -- I don’t think anyone ever starts with one module, but typically they will start with a base and then they will add on groups of modules and that varies. It's an integrated product. Just so we are clear, the benefit of the product is that you are allowed to unlike many of the other ones, you are allowed to kind of phase them in. So what we see is probably something like a third of them are taking advantage in the real life phase with all of the modules and another third are about a little more than halfway through and another third are probably about third of the way through. That will be pretty typical of that. The challenge frankly for all these practices and the biggest changed behavior for physicians is when they go to a full note product because that's where they can both gain the most efficiency, but it's also a change in behavior as you noticed one of the things we released was certified workflows and 1,500 additional notes, all of those things make it easier for physicians to instantly adopt and to get to play it very quickly.

Richard Close

Okay. Just a couple of more questions on this. Of the 37 customers, how many of those are new customers, essentially a new customer came to you and bought Version 11 versus someone that had Version 10?

Glen Tullman

Yeah, I don’t have an exact breakout on that, but I think and again one of the -- I think there is a sampling of all of the above. So there is some Version 10, as I mentioned some are coming to us from our IMPACT.MD product. Some are Version -- some have come to us that are brand new that are conversions from other clients. So there is a mixed bag and then within that we have everything from cardiology or orthopedic to multi-special to pediatric to integrated delivery networks and that does add some complexity because the product is broad enough that it can address all of these different specialties. But each time you go out in some cases it's our first time on Version 11 upgrading those practices. But there is a solid number of those that are using Version 10 very successfully and there is a lot of folks using Version 10. But frankly don't want upgrade right now because we’re having so much success with Version 10.

Richard Close

But if I look at the 37, about 20 as those 37 were TouchWork Version 10's that are now Version 11?

Glen Tullman

Can't really tell you, I haven't them broken that way.

Richard Close

Okay thank you.

Operator

Your next question comes from Bret Jones from Leerink Swann.

Bret Jones

I just want to kind of dove tail off Richards question there. I just want make sure that I am clear one third of the TouchWorks 11 are they – they are running TouchWorks notes and the rest would be on TouchWorks 10 notes?

Glen Tullman

No there is probably a third e working with TouchWorks 11 note and then the other ones may not have adopted – see in other words there's a whole bunch of new customers. They may have not gotten to note yet. And then others may be running Version 10 note. So there's a mixture in there.

Bret Jones

Okay. And when you look at Butler's success, would you say that that's predicated on the fact that were primarily smaller groups making up the larger system?

Glen Tullman

Butler was the really the first to go through our accelerated deployment process that was just redesigned. So its one of the first beneficiaries of the investment that we’ve been making in Version 11. And just a great guy we brought on Jay who is leading that process has got a first class job of helping us redesign that process and make it much faster. So to the extent that now that becomes our standard again we will start to see the benefits there.

Bret Jones

Okay and was that Version 11 is that the process that you are referring to, the new Version 11 with the pre-configured work flows?

Glen Tullman

That’s correct.

Bret Jones

Okay. Alright can you give us any sense of how much compression you have had in the deployment cycles for Butler Health compared to some of the sites that were out there earlier?

Glen Tullman

My figure was about 50% faster than comparable implementations before that. But again we had the benefit of starting from scratch with Butler and that was a terrific benefit. You don't always get that.

Bret Jones

Okay and that’s why you don't expect the turnaround to happen until really – to see that sort of the dam break until the back half of the year?

Glen Tullman

Well that’s right you have a number of implementations that have already started on without the benefit of the brand new process. So there is some conversions. Some of those will keep going they are half way through or what have you. Then we’ve other sites that they were the perfect size to use that process for the first time. So we know we will get there and the issue is again we are sticking with the estimates that Bill had given to really start to see the benefit in the second half of the year.

Bret Jones

Alright. Two more quick questions. Version 11 1,1 did that ship in March also?

Glen Tullman

No I think Version 11 1 shipped in March. 11 1,1 comes out next month I believe.

Bret Jones

Okay great. And then the finally question would be on pricing. The last quarter you discussed pricing and on specifically for the practice management component. I was wondering that being fairly liberal with pricing is that rebounded or have you guys been more conservative with your pricing there?

Bill Davis

I don't think that we saw any material difference in terms of pricing specific to PM. The comments that we made on the fourth quarter were really specific to kind of the high end in the TouchWork's customer base. And I would without having the specific data in front of me don't believe it was really materially different Q1 versus Q4. The general comment was we haven't seen tremendous price pressure at the high end. In fact what we see is clients understanding that the biggest cost to an electronic health record is having a failed implementation. So we actually seen clients ramp it up give us more resources to make sure the implementation is done well. We are also starting to see that and that related to my comments in the smaller practices. And that is if customers really understand that just buying the least expensive software isn't the best decision for them. We are starting to see good data that’s speaks to making sure that your with somebody whose going to be around to deliver on what they sold is really important.

Bret Jones

Okay. I just want to clarify, on the practice management, I believe there was discounting in the practice management in Q4 and I was wondering is that -- it sounds like that was going on in Q1 also?

Bill Davis

I think that's fair. I think Glen's comments are absolutely appropriate, especially if you think about from the electronic health record side. The comment we made in the fourth quarter, which I still believe to be true is that you do see a little bit more commodity pricing dynamics on the practice management side at that higher end. But still respectable margins are being realized by that work. But when you compare it to the electronic health record counterpart there is more commodity pricing pressure there.

Bret Jones

That's great. Thank you very much.

Operator

Your next question comes from Charles Rhyee from Oppenheimer & Company.

Charles Rhyee

Hi guys thanks for taking my question. You talked about the book, a couple of questions actually. The first one, you've mentioned on the bookings that on the bookings that -- and I think in response to an earlier question, you were able to hit it without having some of the large enterprise deals and if I recall in the fourth quarter, you know relative to what you had originally expected, you saw some of those big deals slip. Is there anything that you're seeing in terms of why those deals might be – may not come through yet?

Bill Davis

You know, what I really think is, and we -- I think we learned this in one or two quarters last year that these are very-very tough to predict, even if you're a vendor of choice. And so we've just basically said we're going to just use those. We're not going to build them into our internal forecast, and when they come, they'll be added value, and that's the way we've changed in the way we've managed the business because they're difficult to predict, given their size, given that normally they have to go to boards of directors and the like.

That said, I think the market for those larger deals is as strong as it has ever been. So we don't see any degradation or weakening of that market. It is just that we're feeling good that we don't have to depend on that to deliver on the kinds of sales numbers you saw in the first quarter.

Charles Rhyee

Okay that's fair. And then you talked about the 37 customers on V-11. If I recall it correctly last when you reported the fourth quarter, you said there were 31. So, is this basically a net six more since February? Is that the way to think about that?

Bill Davis

Yeah, I yes, I said it was 30, but, yeah, that's about, that's roughly – we slowed things down to make sure we would get it right and again, I think there's a lot of demand for this, and frankly, it wasn't easy to slow some of our customers down, even with some of the challenges, because they see such benefit in the functionality. But we were kind of carefully managing that as best we could in the first quarter.

Charles Rhyee

Does that mean that all of 37 are on the 11.1?

Bill Davis

No, no. All 37 are on V-11 or V-11.1.

Charles Rhyee

Okay and then I guess my last question here, you know, Bill, you talked about the challenge of maybe hitting the high end of the revenue. I think I missed your comments there at the end you kind of how you related that to the EPS line as well?

Bill Davis

Yeah, I just indicated that working off of the 5 million of adjusted earnings that we generated in the first quarter, we do in fact see an opportunity to potentially achieve the lower end of the previously communicated range. It is dependent -- our ability to do that is dependent on some reasonable amount of sequential revenue growth over each of the last three quarters as well as ongoing tight control of our expenses, and the expense side really equates to, you know, are there any incremental investments that need to be made, or we choose to make and potentially accelerate some of the things that need to be done on the V-11 side. At this point, we don't believe so but that's what I really was alluding to in terms of notion of tight cost control.

Charles Rhyee

Great and then the final question; am I right to consider the break-even point -- not the break-even point, but the point at which the convert is sort of not dilutive, it is basically this $0.09 level?

Bill Davis

I actually haven't run it – I haven't run it recently. I think it is actually a little bit lower than that, somewhere closer to $0.07 but we can rerun that. I think, it is fairly easy to rerun but I think it is closer to about 7 cents, 7.5 cents.

Charles Rhyee

Okay, thanks a lot.

Operator

Your next question comes from Larry Marsh from Lehman Brothers.

Larry Marsh

Thanks and good afternoon. Just a couple of quick follow-ups to Bill. Bill. I think you said some of this in the prepared comments on ESIN. Bill, I think you had said 6 million of revenues in the first quarter. Is that right?

Bill Davis

I don't think I broke out their relative contribution specifically, Larry

Larry Marsh

Okay, I guess you had…

Glen Tullman

I think we talked about the segment.

Larry Marsh

Okay, I am sorry.

Bill Davis

No, I am sorry, the 6 million that I refer to is actually how much of our receivables related to ESIN. I didn't mean to imply that that was revenue.

Larry Marsh

Okay. No, that was my fault. So, I mean, I guess just ballpark, I know they generated a little less than 20 million last year. Do you have a sense of ballpark of revenue contribution in Q1?

Bill Davis

Well, we did -- what I would encourage you to do, we talked about an expectation that they would deliver about 20 million for the year.

Larry Marsh

I got that.

Bill Davis

And again e we are very pleased with our performance. I think it's reasonable to assume that they're tracking against that on a quarterly basis. So you ought to be able to get somewhere close.

Larry Marsh

Okay. I think you had also said assume some dilution in the first quarter of a penny or two. And is that consistent with what you saw in the quarter.

Glen Tullman

It is. We did have some integration costs that we had anticipated, as well as the incremental deal related amortization interest expense and stock comp, all of which I highlighted in my prepared remarks. So it worked out. That business performed as expected in terms of its first quarter performance.

Larry Marsh

Right. And just -- I know you had said look for deal-related amortization expense to be up 4 to 5 million versus last year, if you look at the first quarter maybe a little less than. But I mean is that still, again, I don't want to get to you repeat yourself, but is that still the right ballpark?

Bill Davis

Yeah, I think we're going to end up towards the lower end of that range because we did finalize our valuation work, and in the first quarter, and so our deal-related amortization came out slightly better than what we originally anticipated, but not by a whole lot.

Larry Marsh

Analyst I got it. Just remind me ESIN, on the discharge planning software business, was that a contributor to your bookings in the first quarter?

Bill Davis

It was. It was

Larry Marsh

Ballpark, do you have any sense of ballpark?

Bill Davis

What I did, what I highlighted for you to try to give you a flavor of that as we talked about overall clinical bookings of 64%, but then I also highlighted the fact that our ambulatory bookings, so I was excluding hospital, and I would exclude ECIN, organic growth was closer to 42%.

Larry Marsh

Okay, got it. Two of this quick things. I guess you're communicating today just the message that guidance is still dependent on stabilizing the deployment cycle as V-11 had a portions around that, and I think, when you talked about somebody being pleased with all assets you're making. I guess as you think about, this part of the year, is the message here today that you feel like that you are still seeking stabilization? Is it getting a little bit more challenging for you? Or due feel like, hey, it is stabilizing in the next two months, and therefore we're very encouraged to sort of think about the second half of the year?

Glen Tullman

I think we've made – we try to make it very clear that we're seeing very good progress, we're very pleased with the progress, and that's why I used some specific examples to demonstrate the upside opportunity, number one. Number two, I think Bill commented that the expense that we've undertaken this quarter will be less we expect next quarter, vis-a-vis Touchworks V-11. So we see a continued ramp down from fourth quarter last year, first quarter, second quarter, then by third quarter we'll see a positive result coming in

Larry Marsh

And then finally, in Columbia, you called that out, I think, in your prepared remarks, Glen. As we think about that as a large customer, and you're mentioning there could be other opportunities here in the next year or so, where do you stand specifically there? Have you been able to recognize any revenues? Where are you in the installation? Is it still a process of rolling out?

Glen Tullman

Well we're at Columbia we're in very good shape. We're making great progress there. I was there a week and a half ago, and moving nicely through the deployment process, its obviously been one of the largest and most preterit's obviously been one of the largest and most prestigious academic medical centers in the world it's you know – fair amount of complexity, but we are on schedule. Again the timing for someone like Columbia works very well because you know we move past these few months of challenges into a very nice timeframe of when they need, what they need, we'll have it and it'll be sufficient to deploy very efficiently. And the answer is yes, we are recognizing revenue in Colombia.

Larry Marsh

Okay, very good thanks.

Bill Davis

Why don't we take one more question and then we'll ask people to get off the phone.

Operator

Your final question comes from Steve Halper from Thomas Weisel Partners.

Steve Halper

Guys, so with the release of version 11.1 in March, were you able to bring any of the deferred revenue in to the income statement?

Bill Davis

No we really were not. Again as Glen alluded to, in the month of March in particular we had a few customers that were deploying that product specifically for the most part what was deployed in the first quarter was 11.0 and so we really didn't see any sort of meaningful kind of P&L impact from 11.1 coming in March.

Steve Halper

But that incurs in the second quarter?

Bill Davis

Well, again you are going to potentially start to see that. Again, I want to be very cautious because of Glen's earlier point, we've a large number of customers that are in varying stages of deployment and it is going to take us some time to in fact work through that backlog of deployments, some will benefit from some of the learning like we've obtained from a Butler type of experience, others will not. And it is for that very reason why we do think it is going to take some time to ultimately work through and start to see it express itself in our P&L.

Steve Halper

Sure, and just as a followup, you know you talked about the top-line pressures and your ability to get to the low end of the 20 to 25% guidance as predicted on some reasonable level of sequential revenue growth. I am assuming the top end of the range is basically not achievable at this point.

Bill Davis

I think again given our intent to try to manage expectations is appropriately as we can. I think based on our first quarter performance and what would be necessary to do that, I think that will be – I mean, I think that will be challenging and there will be a lot of pressure on that. With that said, I want to remind everybody what I said in my prepared remarks and that is, I see the growth potential of this business being one that can deliver 20 to 25% top-line growth, it merely is a function of timing and the reality is that concerning whether it’s going to run out of runway in terms of our ability to do it within calendar '08.

Glen Tullman

Yeah, the real issue is simply how quickly some of those new software and processes get deployed in V-11, how quickly we can move them in to the market, and based on that that's what determines it. We've tried to be very conservative about that. You know, in part due to not wanting the risk of running out of time but the business is there and we've no doubts that we've the solutions now and moving forward those solutions and many of these clients, now it is a function of timing.

Steve Halper

Great, thanks.

Glen Tullman

Again, I want to thank every one for joining us on the call today and for your continued interest and support. Thank all of our clients and our employees and we are looking forward to a very strong quarter in the second quarter and continued progress on V-11 and continued progress on all of the issues that Healthcare faces. So, thanks everyone. Have a great evening.

Operator

That concludes today's teleconference. You may now disconnect.

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Source: Allscripts Healthcare Solutions, Inc Q1 2008 Earnings Call Transcript
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