Eclipsys Corp Q1 2008 Earnings Call Transcript

May. 6.08 | About: Eclipsys Corp. (ECLP)

Eclipsys Corp. (ECLP) Q1 2008 Earnings Call May 6, 2008 8:30 AM ET

Executives

Andy Eckert - President and Chief Executive Officer

Bob Colletti - Chief Financial Officer

Jay Deady - Executive Vice President of Client Solutions

Analysts

Corey Tobin - William Blair & Company

Frank Sparacino - First Analyst

Sandy Draper - Raymond James

Leo Carpio - Caris & Company

Sean Wieland - Piper

Charles Rhyee - Oppenheimer

Richard Close - Jefferies & Co.

Glenn Garmont - Broadpoint Capital

Anthony Vendetti - Maxim Group

Operator

Thank you for standing by. Welcome to the Q1 2008 Earnings Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and the instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded.

I'd now like to turn the conference over to our host, Mr. Andy Eckert, CEO of Eclipsys. Please go ahead.

Andy Eckert – President and Chief Executive Officer

Thank you very much and good morning. Joining me today are Bob Colletti, our CFO and Jay Deady, our Executive Vice President of Client Solutions.

Please note that we issued a press release on our first quarter 2008 results earlier this morning. A copy of that release is also available on our website.

Before we get started, I would like to remind our listeners that our prepared remarks and answers to questions will include forward-looking statements. These include statements about the company's capital position, backlog, and anticipated financial performance including revenue margin, cash flow and profit expectations, our business plans including plans related to software development and capitalization, sales and marketing, business development and cost control initiatives, client relationships and contracts, scheduled implementations of the company's software, benefits to the clients of the company's solution and marketing competitive information.

Actual results may differ due to a number of risks and uncertainties. Financial performance targets might not be achieved due to various risks including slower than expected sales or implementation or higher than expected costs to meet client commitments and achieve our development objectives.

Cash consumption may exceed expected levels at the timing of collections and expenses is not in-line with out forecast or strategic opportunities require cash investments, software development may take longer and cost more than expected, and incorporation of anticipated features and functionality may be delayed due to various factors including programming and integration challenges and resource constraints. We may change our software development strategy in response to client requirements, market factors, resource availability and other considerations. Competition is vigorous and competitors may develop more compelling offerings or offer more aggressive pricing.

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

So with that said, I would like to thank you all for joining us on the call today. And I will first provide some very brief comments and then turn it over to Bob who will review our financial results, and then Jay will comment on progress with our sales and marketing efforts, then after a few more remarks from me we'll open the call up for your questions.

Of course we’ve had a good start to 2008. Revenues for the first quarter were 124.4 million, an increase of 11.4 million from the first quarter of 2007. Non-GAAP net income for the first quarter of 2008 was 8.1 million or $0.15 per diluted common share compared to non-GAAP net income of 6.2 million or $0.12 for the first quarter in 2007. This represents a 25% growth in non-GAAP EPS and 32% growth in non-GAAP net income year-over-year.

I am pleased also to note that the EPSi acquisition we completed midway through the first quarter is of to a great start, and just two months since the acquisition EPSi's employees are relevant greater into Eclipsys. Our sales force is trained on the EPSi solutions and we’ve closed a few new deals.

With EPSi best-in-class business performance improvement solutions we expect to increase the number of net new clients we sign. This is important that to give you some new meaningful relationship at healthcare organizations to help with cross selling opportunities in the future. This was the most significant acquisition since I joined Eclipsys, and I am excited that are employees and the standard EPSi will retard and will such grew to successful combined in two organizations. I am also happy to look forward that we settled the derivative litigation that resulted from the voluntary stock option review announced in 2007 subject to court approval.

Bob will revise some additional details. On that note, I will pass the call over to Bob.

Bob Colletti – Chief Financial Officer

Thanks Andy. We are had a very solid first quarter in 2008. We’re extremely pleased with our revenue generation in the quarter largely driven by an improvement in software license fees and continued progress in our business. A non-GAAP EPS in the first quarter is up 25% year-over-year and non-GAAP net income was up 22% with the move to enhance substantially complete new financing in place we will shorten our focus to drive incremental improvements in our operations.

Now onto our results for the quarter. On a GAAP basis, first quarter 2008 net income was 290,000 and $0.01 per diluted share compared to net income of 2.4 million or $0.04 in the first quarter of 2007.

Q1 2008 non-GAAP results excluded the following items. Stock-based compensation of 3.3 million or $0.06 per diluted share, cost associated relocation of our corporate headquarter in Boca Raton Florida to Atlanta Georgia on aggregate sum 1.7 million or $0.3 per diluted share. Cost of 2 billion or $0.4 per diluted share associated with defense and anticipated with settlement of our derivative litigation which was filed in July 2007 following completion of our voluntary stock option view and which was tentatively settled in March of 2008 subject to court approval.

Cost of 1.3 million or $0.2 per diluted share for an in process research and development charge and amortization of intangible assets associated with the acquisition of EPS which we completed in February 2008. Additionally, following items were excluded from non-GAAP EPS. A charge of 1.5 million or $0.3 per diluted share whether to a change in estimate for uncertain tax provisions under the provision of FIN 48. A gain of 2 million or $0.4 per diluted share based on the achievements on our provisions associated with the sales CPMRC.

Our non-GAAP net income of first quarter was excluding item that Eck describe was 8.1 million or $0.15 per diluted share compared to non-GAAP net income of 6.2 million or $0.12 in the first quarter of 2007 which was calculated excluding certain items occurring in that quarter as previously disclosed. Year-over-year this represents a 25% growth in non-GAAP EPS per diluted share and 32% growth in non-GAAP net income. Please refer our press release on Investors Relation website for detail reconciliation of non-GAAP to GAAP results, in the dealing of revenues for the quarter.

Our earnings for the quarter ended March 31, 2008 were a 124.4 million compared with revenues of a 139 for the quarter end March 31, 2007, an increase of 10%. Our growth in Q1 2008 was primarily driven by increases in the current revenues, software license fees and third party software licenses.

Revenues in Q1 consisting the following: recurring revenues were 8.7 million which is an increase of 7.59 or 10%. Software related fees totaled 8.3 million compared to 2.6 million in the prior year an improvement of 5.7 million or 215%. Professional service revenues were 28.2 million compared to 29.7 in the prior year, a decrease of 5%. Revenues primarily decrease over the prior year rates of the sale on CPMRC which was completed in the fourth quarter of 2007. Third party software license fees were 1.9 million which is an increase of 66% over the prior year.

Hardware revenues of 5.2 million which is up 36% compared to Q1 of last year. The increase in software license fees was a result of the successful execution, bio sales force related to ongoing initiative incremental of the past 18 months to drive more high margin software revenues, as well as a progress within our client base including add on sales. These revenues include on time license fees associated with new contract to sign new period, including annual license fees existing clients, as well as revenues from contract backlog that are not previous been recognized tending contract performance that the current was completed during the period and certain activities during the period associated with existing client relationships.

Finally, we will review gross margins as a reminder, all discussions in this conference call regarding gross margins and expenses are based upon non-GAAP result and excluded stock based compensation and other items previously discussed in our press release or our investor relations website for detailed reconciliation on non-GAAP to GAAP results. Gross margin in the quarter was 44% compared to 41% in Q1 of last year, an increase of 3 percentage points. The growth in gross margins was driven by improvement on revenue mix primarily related to higher software revenues.

In reviewing capitalized software development cost, the amortization of such costs which is included in cost of systems and service revenues totaled $4.8 million in Q1 up slightly compared to Q1 in 2007. On a sequential basis, these costs increased by $1.6 million. Capitalized software development costs were $2.9 million in Q1 or 15% of gross research and development expenditures compared to $4.4 million or 24% in Q1 of last year. On a sequential basis, capitalized software development costs decreased $2.8 million. The decrease in capitalized software development attributable to release of five dial in Q4 of last year.

Turning to our expenses for the quarter, sales and marketing expenses were $19.49, which is an increase of $1.9 million over the prior year. Gross research and development expenses are approximately $19.6 million compared to $18.1 million in Q1 2007. Net research and development expenses were $16.7 million, which is an increase of approximately $3 million over the prior year. The increase in gross R&D expenses was related to expanding capacity of R&D function through our offshore initiative. Q1 G&A expenses were $7.8 million, which is an increase of $1.4 million compared to the first quarter of 2007.

In viewing our cash and investment, we ended he quarter with $65.2 million of cash and marketable securities, compared to a $138.1 million in Q1 of 2007. The balance sheet as of March 31, 2008 reflects a reclassification of $112 million of auction rate securities as long-term investments.

With respect to our auction rate securities that we discussed in our last quarters conference call. Our auction rate securities are still underrate securities with all AAA rated. In the first quarter, as part of the auction rate classes we liquidated approximately $30 million of these securities and par before the auction started failing. In the second quarter, we have a redemption of $4.6 million par and expect another $14.3 million redeem that par in May.

After consideration of these transactions we liquated approximately $50 million of these securities RevPar since year end. As you see in other companies, we have set the value of our auction rate securities as of March 31, 2008, and recorded temporary impairment of $4.9 million or approximately 4% adjust in the carrying value. These temporary declined values report as reduction in another comprehensive income as the component of stockholders equity. Accordingly, these adjustment is not reflecting in our earnings for the quarter. We currently plan hobbies securities until such time as excisable auctions would occur, a secondary market develops allowing us to recover substantial over accounting value, or the issues refinanced within these securities.

As of March 31, we reclassified $112 million of these securities in long-term investments. We will continue to assess the carrying value and the balance sheet classification of these assets on a quality basis. In the mean time, we remain comfortable with all liquidity. Deferred revenue was approximately $111 million compared to $115 million as of December 31, 2007, decrease of approximately $4 million. This is consistent with prior years based on the seasonality of our billing cycles. Day’s sales outstanding were 74 days which is up two days sequentially in year-over-year. As of March 31, 2008 we have an out pay on our balance sheet relates with secured financing transaction and investment bank f $45 million. In near future, we expect to close a $50 million facilities we used to repay the note payable in capital purposes.

Another highlight on cash flows. For Q1 2008, operating cash flow is $6.9 million down $3.4 million of the same quarter of last year. We had negative free cash flows in the quarter of approximately 29, Consistent with the prior year we had negative free cash flow in the first half of the year, we expected our free cash flow generation of 2008 will happen in the back half of the year.

Cash flows are negatively impacting the quarter by cost associated with the corporate relocation, timing at year end compensation payments including bonus and commissions, our derivative litigation and our expansion in MDA.

Capital expenditures were 6.9 million in 2008 compared with 2.8 million in the prior year. The primary driver of the increase in CapEx was of any expansion as we briefly opened a new facility.

And now I would like to discuss our expectations for the remainder of the year. We continue to expect 2008 revenues to range from 516 to 518 million and non-GAAP EPS to range from $1.02 to $1.06. Additionally, I am providing incremental information regarding our progress through the year. We expect Q2 2008 revenues will range from a 126 to 129 million. We expect Q2 non-GAAP EPS to range from $0.22 to $0.24. Consistent with prior years we expect that revenue EPS will gradually improve as we progress through the year. We expect the following items and our GAAP results for the final three quarters of 2008 and we plan to exclude these items in computing our non-GAAP results.

Stock based compensation is expected to range from $0.06 to $0.07 per diluted share each quarter. EPSi acquisition related amortization is expected to be $0.03 per diluted share each quarter. The finalization of our corporate relocation resulted in a penny per diluted share of incremental expense. And recognition of deferred tax asset were approximately $1 to $1.50 per diluted share in the back half of the year.

Overall, I am very pleased with the progress we’ve made in Q1. At this point, I will turn the call over to Jay.

Jay Deady - Executive Vice President of Client Solutions

Thanks Bob. On today's call, I'm going to provide an update on our market success and update on our solutions and additional information on our go-forward market opportunity. I will also touch on the credit issues that have become fairly high topic in the industry recently.

From our market update perspective, we are very pleased with the balance of both new business and current client bookings from Q1 as well as our balance performance across clinical revenue side on decision support solution areas. From a leading event indicator, we are experiencing continued increased volumes of RFP and demonstration requests as well as significant increases in the scheduling of perspective in current clients to visit us in our outcome strategy center in our new corporate headquarters in Atlanta.

Additionally over the past two quarters we have seen significant pipeline growth, those are meaningfully on a year-over-year basis with consistent balance from a solution and coverage stand perspective.

From a solutions perspective we released Sunrise Clinical Manager 5.0 back in December and to date we have made good progress with the dozen or so clients during the process of upgrading with many more in the funnel. The key add-on on sales drivers with 5.0 continued to be orders reconciliation, clinical NOX, emergency care, ambulatory care, and Sunrise Access Manager which was released new with 5.0 in include integrated capabilities for registration and scheduling. We will continue to update you on our 5.0 progress over the course of this year.

On the revenue cycle management front, some recent successes that our clients with activations has improved our visibility and competitive positions in this market, we completed a number of successful activations in early 2008 including the Cancer Treatment Centers of America in Schaumburg, Illinois and Springhill Medical Center located in Mobile, Louisiana. Both of these organizations also own Eclipsys clinical solutions and represent a growing trend upon health care organizations to understand the value in having integrated workflows across the enterprise to help improve clinical and financial outcomes. Additionally we are still experiencing solid pipeline development of standalone revenue opportunities to de-install the old solutions in the marketplace that’s spoken about on previous calls.

From a decision deployed EPSi prospected -- as Andy mentioned earlier we are very excited about the acquisition of EPSi from both the solution and team talent perspective. The modular nature of this solution allows us the opportunity to answer new prospect accounts with a single module such as budgeting a product line management, as well as entering with a full decision support performance improvement solution. Between the opportunities for full solution sales and/or modular sales, the market for this solution is an excess of 1500 hospitals in the United States.

We’re in the process of expanding the field sales, sales deployed and product marketing at areas of our organization to take advantage of this opportunity towards Eclipsys. We are also excited of opportunity introduced strategic planning module as part of the integrated sunrise EPSi suite that we feel will be very attractive to the operational executives of both current and perspective Sunrise EPSi clients.

There continuous to be increased market interest for Sunrise Clinical Essentials, our cost effective deployment methodology and prescriptive delivery approach that delivers faster time to value while providing the foundation for more advanced application. We had very successful acquisitions of Pennsylvania wholly spirit health system which was completed in just 11 months to start to finish timeframe we anticipate for most clients. We also announced to start any great clients regional medical centers in North Nebraska, we identified Sunrise Clinical Essentials as the best platform in the industry to help them easily measure and drive quality performance and outcome improvement in the shortest timeframe. This solutions help Eclipsys complete more effectively in both the community hospital and international market. So we are very enthusiastic about initial market success in pipeline development. We are underweighting the planning of developing similar accelerated deployment methodologies for the balance of our solution suite and we will keep you updated on our progress this year.

From the market driver perspective as I mentioned before we have a solidly expanding pipeline across all the Sunrise Enterprise Solution from a clinical excess revenue cycle and performance improvement solution suite prospective. In addition of this pipeline development we are very encouraged by the market respond enhanced which continues to be a very strategic event for Eclipsys that we plan to strongly support. We have doubled the number of clients meetings and demonstrations in 2008 compared to 2007 and later on this month we closed our annual executive form a make for the C suite Executive of our client and selected perspective clients. And while registration is not yet closed we are currently on a 33% attendee increase compared to last years event.

Our sales effort should also get a boost from our recently announced agreement with Premier, one of the leading healthcare purchasing networks in the country. This agreements helps improve Eclipsys’s visibility and competitive physician with more than 1700 new healthcare organizations of Premier. Premier has a field force of more than 100 staffing consultants who promote solution to its numbers which include many of the nations prominent healthcare institution, integrated delivery network and group affiliates.

In addition of new major market driver for Clinical IC system and a topic that will be covered extensively at our upcoming executive form is the reduction of reimbursement by both the US centers, the Medicare and Medicaid Services and recently announced a few private insurance companies of hospitals acquired conditions beginning in October 2008.

Eclipsys has been proactively working with our clients to help them reduce the likelihood of these conditions occurring within their facilities. We are taking a focus toolkit approach targeting very specific outcomes, developing specific methodologies and associated metrics, implementing bench marketing processes, and then continuing to monitor the best practices. This approach was very well for our client Cape Canaveral Hospital, a hospital in Florida that is successfully targeted two of the most common and costly hospital acquired condition, pressured and falls and driven both to effectively to zero in their institution. The hospital expected to save 500,000 per year as a result.

As market conditions in reimbursement policies change, Eclipsys is committed to helping our client successfully manage through these changes and help them achieve the best quality outcomes. This is why Eclipsys is known as The Outcomes Company and what we feel substantially differentiates Eclipsys from other vendors in the marketplace.

Now I will make a few brief comments on the credit market issues hospitals that have been receiving a lot of attention recently. While you’d have obviously read the stories out there detailing certain hospitals having issues, we are not seeing any impact on deals in our pipeline. Most clients I speak with such as University Hospitals in Cleveland, Ohio have already refinanced their debt and are completely out of auction rate securities. Also, we believe our subscription model is a competitive advantage that the majority of the enterprise clients in our pipeline plan to take advantage of to appropriately spread the cost of these systems over a number of years tied more appropriately to the benefit that they will receive from their investment.

Additionally, in today’s healthcare environment, programs such as pay per performance are becoming increasingly critical for healthcare organizations. These programs require detailed electronic reports to receive payments making it essential to have a clinical information solution such as Eclipsys’ Sunrise Clinical Manager to generate these reports. Case in point is Eclipsys’ client, University Health Systems in San Antonio, Texas. We are taking advantage of the robust documentation capabilities in Sunrise Ambulatory Care to participate in the voluntary physician quality reporting initiative sponsored by CMS. This will write down a 1.5% payment bonus as well as prepare them should the program become mandatory.

A recent analyst report also referenced the healthcare information technology remains the number one and number two capital priority for hospitals. So, healthcare organizations are looking to delay major projects, which we frankly in our pipeline have not seen evidence of, a clinical information solution implementation would most likely be among the last to stall.

In conclusion, we had a solid Q1. We continue to see a strong opportunity for our solutions. We are addressing the market requirements most critical to our client prospects. I am also especially pleased with the team’s talents across our multiple enterprise solutions in both new business and current client markets.

And with that, I would like to turn the call back over to Andy.

Andy Eckert – President and Chief Executive Officer

Thanks Jay. We are pleased with the increased effectiveness of our sales and marketing efforts and certainly this is helping us build our sales pipeline in one of the very competitive market like FHR services activity, as well as provide comments on our India and international initiatives.

In terms of activations, we are making progress in the services several very successful high profile activations that we completed over the last few months. We issued a news release a few weeks ago announcing an activation at the Cancer Treatment Centers of America that represent what we strive for with frankly in every implementation. It was completed on time and on budget. A 100% adoption of CPOE on the day of the activation and a process in place to start documenting outcome improvement. And as Jay mentioned earlier, CTCA also activated a full range of our Sunrise Enterprise including our clinical revenue cycle and access management solutions.

Given how much remedial this industry focuses on high profile blowups it great to see an organization like Cancer Treatment Centers of America nail and activation from start to finish. In my two plus years of this company, I have seen substantial improvement in our ability to deliver value for our clients, but we still have work to do if we are going to make all of our clients as successful as CTCA, I think we are making steps in the right direction.

We also completed successful activations at three of our high profile academic medical center clients. Very recently University of Michigan Health System completed its implementation of Sunrise Clinical Manager and its University Hospital and its Cardiovascular Center. With nearly 5,300 staff trained on Sunrise Clinical Manager and 100% of orders being placed in the Eclipsys CPOE system, University of Michigan has already achieved several outcome improvements including a 29% reduction in medication errors and a 40% reduction in the time between the ordering and administration of urgent medication.

The University of Kentucky Chandler Medical Center completed its successful activation of Sunrise at two of its clinic as it extends the Eclipsys CMR out from its in-patient settings. Yale-New Haven Hospital also recently completed a successful activation of Sunrise Acute Care along with Sunrise Pharmacy. Our relationship of leading academic centers such as Yale, Kentucky, and Michigan provides immeasurable benefit to our entire client base as we incorporate lessons from these leading institutions into solutions and practices.

International, international we continue to make progress as our pipeline is really doubled since the end of 2007. This month we have two major including NJ Zapaq Hong Kong and the Middle East Healthcare Expansion Conference in Dubai, as we are actively working to build our brand and generate interest in our solutions. We continue to make investments in the region, and are actively looking at top talent and evaluating facilities to establish local operations. Additionally we continue to make progress with the Sing Health dual life and we will update you when we complete the superior important activation.

With respect to second, system India couple of weeks ago when we kept a visit on our new 50,000 square foot facility in Pune. We now around 450 employees and had expanded into a brand new building. I am very proud the talent our General Manager Nitin Deshpande has attracted to our company, as nearly 40% of our new associates have masters degree. He has entire management team and it is a very impressive and accomplished group. From the beginning our vision has been to build an organization that would augment our North American team. After my week long visit I am convinced that I am on the right track. The communication and collaboration between our North American organization and India is working as well as I expected. Every person I spoke with told me about your daily or weekly conference calls of their counterparts on this side of the world, and most importantly our teams in India are now making significant contribution in a variety of areas to our company and we should start seeing real benefit in 2008.

In conclusion all in all the first quarter marked creative progress for our company. The robust throughout the company about the potential we have with a newly acquired EPSi solution. Our clients are eager to implement Sunrise Clinical Manager 5.0 and we are making good progress on this front. We continue to get better required activation which is essential to our client’s satisfaction rate. So we also continue to achieve around our major initiatives and feel confident we’re well positioned to successes fully execute for the balance of this year.

So thanks for your time this morning. An at this point, I would like to ask the moderator to take some of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). And our first question is from the line of Corey Tobin with William Blair & Company. Please go ahead.

Corey Tobin

Hi, good morning guys, congrats on great quarter.

Andy Eckert

Thank you Corey.

Bob Colletti

Thank you Corey.

Corey Tobin

Let me start with the clarification, Bob, on the guidance did you say 516 to 528?

Bob Colletti

Correct

Corey Tobin

Revenues for the year, okay, great.

Bob Colletti

Yes.

Corey Tobin

And the expectations for our EPSi is about 10 million for the year, is it still…?

Bob Colletti

That’s right, yes. We offset our guidance, correct.

Corey Tobin

Okay, good so change there.

Bob Colletti

Correct

Corey Tobin

And then shifting gears, you start – you might hear upon this in a couple of different of the prepared marks, but, I was just curious, can you just give little bit more on the pipeline trends for three key segments, clinical systems, add ons, and revenue cycle management? And if possible I know you typically don’t give hard number but if there is any numerical or any number you could put behind it that will be helpful, thanks.

Bob Colletti

Thank you for question. Yeah, I mean, we haven’t given out specific numbers related to the pipeline, if I can just tell you that last year we had a substantial increase on our revenue cycle bookings and grew the pipeline and that progress was continued for this year. What we have been encouraged by is a resurgent from a clinical perspective as I mentioned has really accelerated based on this forthcoming payment in the events by CMS and recently four or five insurance companies that has motivated some folks to start moving on a clinical side again. So, but nevertheless revenue cycle continue to build will on the pipeline.

Corey Tobin

And with respect to EPSi, I mean, we have a very large and successful and decision support. EPSi has expanded that base obviously, and also is providing some real advantage with respect to new business decisions, new enterprise decisions where we’re able to substitute the EPSi decision in active sales records where we were selling prior to that fee occlusive VSM product that are recent prospect where it was noted as a significant advantage for us as we continue to pursue the vendor choice decision. So before you hear about the pipeline right now it remain strong and continues to build incrementally and as I mentioned earlier we are focused on building international pipeline as well.

Corey Tobin

And the tie-up at the Jays comments on the credit environment there has been no slowdown in the build of the pipelines, is that fair to say?

Andy Eckert

We haven’t, we have not seen it, I mean, obviously the credit markets are challenging for our hospitals, but you know there has been some recent board putout by some European that suggest that despite the problems healthcare ICU remains is a number one and number two in terms of capital priorities at these institutions the world doesn’t stop. We’ve got to get out within and we think our subscription model helps in hat regard, and obviously the ability and growing improvement performance is being on time and on budget, I think it gives some of our clients silos that they can quantify the investments stick to it overtime.

Corey Tobin

Great thank you.

Operator

And now our next question from the line of Frank Sparacino with First Analyst. Please go ahead.

Frank Sparacino

Bob, I just want to go back to that cash flow to make sure I understood you correctly, your expectation is for the entire first half of ‘08 we have negative free cash flow?

Andy Eckert

Correct. If you look back on last year, first half of the year we have about negative 3 million of free cash flow and then we had put more than 30 million at the back half of the year. With the seasonality of billings and the seasonality of our expenses we want to expect to see the same thing that the bill would give at the back half of the year.

Frank Sparacino

And Bob can you may be just talk bout from the Cap-Ex prospective what the expectations should be for '08?

Bob Colletti

Should be capable to last year. So maybe a bit higher given or in the expansion. So I thought a little bit a growth on top of last year about 15-20% on top of that given R&D expansion.

Frank Sparacino

Okay. Thank you.

Bob Colletti

You are welcome.

Operator

Our next question from the line of Sandy Draper with Raymond James. Go ahead please

Sandy Draper

Thanks. Bob one quick question on EPSi revenue, can you give me some sense of where that revenue is going into which of the bucket I mean, how much went to recurring versus professional services – sorry, what velocity you can think about that mix?

Bob Colletti

I would –but most of it is going to be -- some of the license fees going to be professional services. So it’s probably – and then its little bit of recurring on the maintenances, probably 25% with recurring, 25-30% in the services and then the rest of the licensees, that’s normally how given the size of the transaction tends to a licensing transaction.

Sandy Draper

Okay. It’s pretty fair to say the nice step up and recurring revenue in the first quarter would have not riven primarily by the EPSi?

Bob Colletti

Yes exactly, that’s exactly right.

Sandy Draper

Okay. Second question on, you got professional services at the conference, should we expect to set a similar trend in 2Q where you don’t see a whole lot of growth and professional services in 2Q?

Andy Eckert

We will have the sum again. So I would – but we would like to expect some growth and services in quarter.

Sandy Draper

Okay. And then just finally tagging on, obviously, the backlog was going, sales are going up well, you know, if I turn just back on the envelope right now, it looks to me like professional services will be maybe high single digit growth, I am just trying to understand where the lag is or if recurring revenues is doing as well, the booking everything else are going well. At what point would professional services catch up and start to do double digit type growth or maybe I am doing some bad math?

Andy Eckert

Remember one these should get factor and inside got CPMRC right. So you got to take that out of the services, so in adjust for CPMRC that we saw in the last quarter was actually – if you look at the slight decrease it was really the CPMRC being out in the quarter.

Sandy Draper

Okay and that was harder percent of CPMRC than professional services?

Andy Eckert

No, but this is probably about half of the revenues or bit more of that were in professional services. So the time that we talk about 10 to 12 actually over half that were in services that come out.

Sandy Draper

Okay great and that’s my questions, thanks and congrats on nice quarter.

Bob Colletti

Thanks Sandy.

Operator

And we are going to next to the line of Leo Carpio with Caris & Company. Please go ahead

Leo Carpio

Hi good morning gentleman. First congratulations on the universal Michigan activation of (inaudible) great work. Have a couple of quick questions. Regarding the mid-size hospital market, in terms of your sales traction with our clinical essentials, how has that been so far in terms of reception and how does that relate to the pipeline in terms of how much you think that may contribute to your pipeline in '08?

Jay Deady

Frank, this I Jay, I'll take that one. You know, it is getting a great reception because it is giving folks, as Andy mentioned the confidence that as they make this sizable investment that they are going to start to receive significant benefit in the way of outcomes from that investment really quickly. So, people like the methodology. They like the deployment strategy and they like the acceleration model of it. And so that has been well received and this is a lit bit of back of the envelope but I would say it’s probably 15 to 20% of the clinical portion of our pipeline growth has probably been contributed to by this deployment methodology in conjunction with the strength of our systems it is finding – in the mid-to-smaller community hospital market, it is finding a lot of traction right now.

Leo Carpio

Okay and then turning to competitive pressures, have you seen any change in competitive pressures from your Cerner, Epic, or any other players in the space?

Jay Deady

No major change. It's the same group of tough competitors that for the last couple of years we've fought up against. And it is no major change, no major developments in regard to those players.

Leo Carpio

Okay. And then lastly on the credit crunch, you said you see no impact so far on the pipeline. Have there been any like one-off situations of any hospital you've heard of that are struggling with this or is just pretty much everything seems fine from your perspective?

Jay Deady

Yeah I mean we've not had deals for pipeline development affected by it. We certainly know some clients have been working through some things and we've been aware of it but they have been able to go ahead and execute the deals with us including enterprise subscription deals because of the model and it's still they were able to economically swing it. So, I'm not certainly not indicating that there is none of our prospective client that are having to deal with it, certainly they are; but we haven't seen it negatively affect their ability to do deals with us.

Leo Carpio

Alright well thanks.

Jay Deady

Thank you.

Bob Colletti

Thank you very much.

Operator

Our next question from the line of Sean Wieland with Piper. Please go ahead.

Sean Wieland

Hi thank you. Can you talk a little bit about the CMS rack audits that are coming up, what do you think the opportunities around that is and maybe some of the pitfalls.

Andy Eckert

Well I think that from a CMS perspective as they are going out in terms of the audits and what they are doing particularly in the reimbursement of events, there are going to be two impacts on the system, right. One will be if you are not electronically automated with the modern information system, it is going to be very difficult on paper to track and stay up with this stuff. So, that is going to be very difficult. The second is that the point of presentation, the level of documentation required has got to be extensive so that you can do appropriate documentation of what the patient presented, which conditions, and what they did so that, outcome toolkits they are helping with the appropriate documentation when the patient presents is extremely important. And now on the back-end obviously one patient is in the bed, our system's ability to alert the clients as to those patients that might be greatest risks for some of these would have turn number events is also significant so that they can get ahead of that. Rough estimates today that we see from industry perspective would be on an annual basis that the potential reimbursement across the US hospital market could be anywhere from 20 to $38 billion and that's only for the first aid and then what they have earmarked is additional audits associated with non-reimbursement of additional ones and then when you look at organizations such as the blues and other players jumping on this and saying we're not going to reimburse either, and that's a significant impact on our client and will make a significant impact on our industry.

Sean Wieland

Okay thanks and second question is, do you have a sense on where the software license revenue should be for the year in terms of percentage of total revenues, last year you gave us that guidance for '07 and I am not sure if you have that for '08?

Andy Eckert

I understand Sean, when I talked what’s consistent is that it is approximately the same levels of the percentage of revenue as last year. So, around 4% I think it is slightly a little bit higher than that, but somewhere in that range.

Sean Wieland

Okay it was a, year-over-year was a pretty dramatic improvement on that?

Andy Eckert

It will continue to fluctuate on a quarterly basis given that that’s the nature of licensing. But it was obviously a very strong start to the year while positioning to go through the rest of the year. But as you know that tends to be lumpy so it will fluctuate quarter to quarter. But somewhere, somewhere it will be north of 4%, it’s a reasonable estimate for the year.

Sean Wieland

Okay great thank you very much.

Andy Eckert

Thank you, Sean.

Operator

Our next question from the line of Charles Rhyee with Oppenheimer. Please go ahead.

Charles Rhyee

Yeah, I had a couple of questions here. First one on the Premier contract that you had announced last week. Can you just give us a sense on how many of the existing Premier Hospitals might be Eclipsys customers and if I think about this contract, specifically it seems more like a head hunting license and maybe leveraging some of their existing sales force? Is it typical, you know, I know with GPO'S and other types of vendors that deal with – is there an added level of discounting if they purchase through their Premier contract?

Jay Deady

Thanks for the question. So there is actually a very modest number of Epclipsy's clients currently from a Premier standpoint. So that’s one reason why we competed so vigorously to win this contract away from the vendor that held it for the past few terms. And so, we think it opens up good opportunity for growth for us. To your question, you're right it is a head hunting license if you will. But the key with Premier versus some other GPO's if they deal with a hundred people out in the field. So we have the opportunity to educate those folks on our solutions and essentially have them in the Premier Hospitals being an extension of information related to our solutions. So that’s quite a benefit that we are going to execute in education plan on and hopefully execute into building the pipeline and closing more business as a result of it.

Charles Rhyee

Okay great. And then if I could follow up here. Question for Bob. You mentioned a little early to another question that the decline in professional services largely relate to CPMRC adjusting for that. If you assume about 50% of those 10 to 12 million is from services, and even if you had back in it looks like services were only up mid low single digits. That’ still down sort of on the pace that you have been going on the previous year. Can you sort of just touch on what might be driving that and sort of what gets that going again?

Andy Eckert

I just think we progressed during the – its generally first quarter tends to be, you have a lot of activities with hems and other things that people are supporting and a lot of activities around that stuff. We also had significant, some hiring and training going on in Q1 beside, we had some boot camps going on. We are expanding capacity. So it’s just normal kind of cycle stuff in the business, but we should expect that would gradually increase as we go through the rest of the year.

Charles Rhyee

Okay great thanks a lot.

Andy Eckert

Thank you.

Operator

And our next question from the line of Richard Close with Jefferies & Co. Please go ahead.

Richard Close

Yes thank you. With respect to the software license sales, Bob, can you talk a little about the timing in the quarter when those sales came generally speaking? Was it more front end loaded or back end loaded in the quarter?

Bob Colletti

Yeah reasonably all over the quarter Richard. We made progressed to the entire quarter on them.

Richard Close

Okay so for instance at the time of the credit crisis when it was at its peak I guess in late February or March. You were still selling the software?

Bob Colletti

That’s correct we were doing transaction throughout the quarter.

Richard Close

Okay great. Thank you for answering that question. And then with resect to the license sales again. You mentioned three buckets I guess add on sales, new clients and then from existing backlog. How was that divided around the 8.3 million?

Bob Colletti

We don't get into those details on that Richard. I mean it's all – through all the different buckets I mentioned that’s how it happens every quarter.

Richard Close

Okay. And then with respect to I guess a follow on the Premier. How active do you think they – is there a particular product that you think will be most effective in selling in to their Premiere base? Is it going be like the EPSi decisions support product possibly?

Jay Deady

Well we have done a look at the hospitals for the penetration of buying a recent in last few years, Enterprise Clinical Solution. We think there is some very solid growth there. We looked at the age of most of the institutions in terms of their revenue cycle solution is pretty somewhat in the industry where 40% of the industry hospitals is above 200 beds in the US plan to cycle up their revenue cycle solutions in the next 3 to 5 years. The Premier institutions now got well on an industry average basis there. And we think over half of the Premier Institution do represent targets for EPSi's as well. So our goal is to get balance penetration across those three major suites, we will certainly say, if one of them goes out to lead about the other two we certainly take it, but we are hoping for balanced pipeline development and eventually close sales across the three major solutions up.

Richard Close

Okay. And then Jay well, I guess, you are talking Jay, I mean, executive form you mentioned I guess a 30% increase in attendance potentially on that front, if I am not mistaken. Are these all potential new clients, are they existing relationships maybe if you could give us additional clarity around that?

Jay Deady

Sure the majority our current clients, so generally current enterprise clients, clinical revenues cycle or both. We do have a number and it’s a much bigger number this year versus last year, our perspective client executives that are coming where they don't have enterprise relationship with us. And we have also seen part of the increase being that some attending institutions are bringing more C suite numbers then what they have in the past, and the obvious goal there is to add more of those executives expose to other solutions from our cross selling standpoints. So its across the board, like overall the majority of these can be from our current enterprise clients.

Richard Close

Okay. And then just one final quick housekeeping with Bob here what – Bob, if you can just remind me what the revenue takeaways are from last year, you mentioned I guess, 10 to 12 million on the CPMRC, you also had network, how much is network and…?

Bob Colletti

Its roughly $20 million came out, so it’s about 9, 8 to 9 on the network business and then the remainder was CPMRC.

Jay Deady

And then we added 10 million on the EPSi transactions alright

Bob Colletti

10 million came on EPSi when we revised our guidance.

Richard Close

Okay. So net were down just 10 million year-over-year?

Bob Colletti

Correct.

Richard Close

Okay, thank you very much I appreciate that and congratulations.

Bob Colletti

Okay, thanks Richard I appreciate it.

Operator

We will go next to the line of Glenn Garmont, with Broadpoint Capital. Please go ahead.

Glenn Garmont

Thanks. Good morning just two quick question, Bob, you mentioned 450 or mentioned 450 employees in India currently. But what sort of the targeted staffing level there, and, would those be net adds or sort of relocations of cash that are currently done here. And then secondarily on the revenue cycle side, I mean, what percent of your clinical customers today are also revenue cycle customers, and is that where the interest is coming from, is it coming from your installed clinical base or is revenue cycle something that’s also sold on kind of standalone basis? Thanks.

Bob Colletti

Okay. Well I will start with the first question. With respect to India, we expect we will expand that probably in order of 30% or so by end of the year. It is our plan, so probably year from we will have somewhere in the range of 600 people. In India we’re doing all kinds of things over there, its obviously a very merged development team, we’re doing quite a bit of implementation to support work, we’re doing some transaction work around finance, we’ve got some people doing some marketing task, HR task. So we continue to view this is the right augment, our capabilities here in North America and also to support our international expansion. And now clearly we – as we – and we expected well periodic clients. Outside in North America, there is over the cost pressure and there is certainly geographical issue, so we plan on using Eclipsys India colleagues as way to support that, as resources to support that growth. With respect to your revenue cycle question, probably 15 to 8% of our clinical clients today, Sunrise Clinical Manager clients also are Sunrise revenue cycle clients, and so, that’s obviously a pretty good opportunity for us. We have seen frankly the majority of our new business come from non-clients, non-clinical clients here in the last few quarters, and so, we've got today a pretty even pipeline between the existing clinical clients, as well as kind of net new clients to the company, as well as, in terms of the pipeline, folks that are looking at a complete offering of Sunrise Enterprise or Sunrise Clinical Essentials combined with our revenue cycle solution. So it's an interesting pipeline. It's, it's surely driven because of the strength of the revenue cycle product line and the strength of our installed base by the clinical installed base at all.

Glenn Garmont

Okay, thanks.

Bob Colletti

Great, thank you, Glenn. Its time for one more question.

Operator

Okay. And that would be from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Anthony Vendetti

Thanks. Since this is the last question, I'll try to make it a three-part one.

Andy Eckert

That's a triple, then.

Anthony Vendetti

On international sales, Andy, you mentioned in the fourth quarter conference call, that you were expecting to start to see a little more progress on that front towards the end of 2008. I was just wondering if you could give an update on that. And then I just had a couple quick questions for Bob.

Andy Eckert

Okay. With respect to international sales, two quarters ago now, we announced the Sing Health relationship. That relationship has continued to expand and so, we've added on a number of new applications, implementations is going quite well and that is beginning to open some doors in that part of the world for us, I am also very focused in on the Middle East, as I mentioned. You know, we're kind of taking this one client at a time. These are long sales cycles, easily as complex and complicated as sales cycles here in North America, and so, so for us, you know, if we booked one or two clients in 2008 and we hope to view those clients as kind of anchor clients in various geographies, it would be a huge success for us. Because this is a, as you know, a very reputation-driven business and we want to do a fantastic job for these early clients, but I could tell you the interest is certainly high, and – but you know all of our competitors are there as well, as you would expect. And so, we're competing vigorously and we're really trying to find the best you know those anchor clients as we can in the various geographies. So I expect and hope that we'll have more to report to you as the year progresses.

Anthony Vendetti

What do you think, Andy, in terms of end of may be 2009 as a percent of sales, what international would make up? Do you have a range, maybe?

Andy Eckert

I think it would be still pretty light in terms of the revenue mix of, you know, I would think it probably is five percentage would be a number I hope in terms of the bookings level would be double that. But, you know, these are generally larger transactions. They are generally in many cases brand-new hospitals or even hospitals that have not yet been built and so, I think revenues will trail bookings by a healthy margin.

Anthony Vendetti

Okay, great. And Bob, the gross margin was a little bit higher this quarter than expected. Is that solely due to the higher software license revenue, and if you could just talk about the trend for the rest of '08?

Bob Colletti

Yeah, certainly the mix did help, but also the fact that we got out of the lower profitability businesses, the CPMRC, as well as the networking health. So the general mix was better anyway and then the license mix helped. When I talk about on Q4, which is consistent with where we're going, a few percentage points higher this year than we were last year in gross margin for the year. So where I model that as we go through te year, compared to last yea, that’s how I would look at.

Anthony Vendetti

Okay, and then lastly, on the note facility, you said you were looking to closely a $50 million note facility to pay back the 45 million borrowed from an investment bank, where are you with that when you expect to closer and what kind of terms you’re looking at this point?

Bob Colletti

We're well down the pipe. But won't get into specific terms, but it will be a traditional facility and we expect to close it in the next week or two, but we're way down the pipe with it and in the final, you know, documentation phase. So it should be closed very shortly.

Anthony Vendetti

Okay, great. Thanks, guys. Good quarter.

Bob Colletti

Thank you, Anthony.

Andy Eckert

Okay. Well, thank you all for joining us this morning, and we look forward to updating you in the quarters to come. Thanks so much.

Operator

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

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