Executives
Andy Eckert - President and CEO
Bob Colletti - SVP and CFO
Jay Deady - EVP, Client Solutions
Analysts
Richard Close - Jefferies
Corey Tobin - William Blair & Company
Sandy Draper - Raymond James
Anthony Vendetti - Maxim Group
Sean Wieland - Piper Jaffray
Frank Sparacino - First Analysis
Leo Carpio - Caris & Company
Eclipsys Corporation (ECLP) Q2 2008 Earnings Call July 30, 2008 4:30 PM ET
Operator
Welcome to the Eclipsys Corporation Q2 2008 earnings results call. (Operator Instructions)
Now, I'll turn the conference over to Mr. Andy Eckert, President and CEO. Please go ahead.
Andy Eckert
Thank you very much and good afternoon everyone. Joining me today are Bob Colletti, our Chief Financial Officer and Jay Deady, our Executive Vice President of Client Solutions. Please note that we issued a press release on our second quarter 2008 results this afternoon. A copy of that release is also available in the Investors section of our website.
Before we get started, I'd 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, solutions 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 a higher than expected cost to meet client commitments and achieve our development objectives. Cash consumption may exceed expected levels and the timing of the collections and expenses is not in-line with our forecast or strategic opportunities required cash investment. Software development may take longer and cost more than expected and a corporation of anticipated features and functionality maybe 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 risks. These and other risks are described under the heading risk factors in the company's Form 10-K, 10-Q and other filings made from time-to-time with the Securities and Exchange Commission.
With that said, I like to thank you all for joining us on the call today. First, I will provide some brief comments and then turn it over to Bob, who will review our financial results. Jay will then comment on our progress in sales and marketing and following a few more remarks from me, we'll open up the call for your questions.
Eclipsys had a solid second quarter. Our revenues were $132.1 million, an increase of approximately 11% over the same quarter last year.
Non-GAAP net income for the second quarter of 2008 was $13.2 million or $0.24 per diluted share compared to non-GAAP net income of $9.7 million or $0.18 per diluted share for the second quarter of 2007. This represents a 33% growth in non-GAAP EPS and a 36% growth in non-GAAP net income, year-over-year.
In addition, we recently announced Barbara Ann Karmanos Cancer Institute as a new Eclipsys client, which is one of the largest contracts in our company's history. This contract represents two key trends we've been seeing in the market. One is, we feel our ability to win business involving specialty care providers. And secondly, client and prospect demand to work with the same vendor for both clinical and financial solutions. This is an exciting partnership and I believe represents a pretty good testimony onto our progress as a company. Additionally, the EPSi acquisition continued to deliver strong results. As we announced today, we signed several new deals this past quarter of both new and existing accounts and have more than tripled the pipeline over the last few months.
When you can show how a client such as Memorial Hermann increased its bottom-line by 2.5%. Using the tools of EPSi, makes the ROI calculation pretty simple. We are seeing the benefit of adding these best-in-class integrated performance improvement solutions to an additional 100 plus salespeoples' bags, and the results continue to be impressive.
On that note, I'll pass the call over to Bob.
Bob Colletti
Thanks, Andy, and good afternoon everyone. We had a very solid second quarter. We are pleased with our improvements in revenue and earnings. Our revenue growth is driven by across-the-board improvements in recurring revenues, software license fees, as well as professional services. Our non-GAAP diluted EPS in the second quarter was up 33% over last year and non-GAAP net income was up 36%.
In the quarter, we also made great strides improving our margins. On a year-over-year basis, non-GAAP gross margins grew more than five percentage points to approximately 46%. The non-GAAP EBIT margins grew nearly three percentage points from approximately 7% to 10%.
Now more on results for the quarter. On a GAAP basis, second quarter net income was $8.5 million or $0.16 per diluted share compared to… excuse me on a GAAP basis, compared to 5.7 million or $0.11 per diluted share in the second quarter of 2007. This represents a 49% increase in net income and an EPS increase of 45%. Q2 non-GAAP results exclude stock-based compensation of $4.1 million, or $0.08 per diluted share, as well as the following items which in aggregate would have contributed approximately $500,000 to earnings.
One is a reduction in general and administrative expenses of approximately $700,000 or $0.01 per diluted share associated with insurance recoveries from our previously disclosed derivative litigation, the settlement which is pending final court approval. A gain of $1.2 million net of tax or approximately $0.02 per diluted share resulting from the achievement of certain closing milestones associated with our December of 2007 sale of our Clinical Practice Model Resource Center business. Cost of $1.3 million or $0.02 per share associated with completing the relocation of our corporate headquarters from Boca Raton, Florida to Atlanta, Georgia. And finally, expense of $1.1 million or $0.02 per diluted share for amortization of intangible assets associated with the February 2008 acquisition of Enterprise Performance Systems Inc. or EPSi.
Our non-GAAP net income for the second quarter, which excludes the items I just described, was $13.2 million or $0.24 per diluted share, compared to $9.7 million or $0.18 per diluted share in the second quarter of 2007, which was also calculated to exclude certain items occurred in that quarter as previously disclosed. Please refer to our press release or investor relations website for a detailed reconciliation of non-GAAP to GAAP results.
Revenues for the quarter ended June 30, 2008 were $132.1 million compared with revenues of $119 million for the quarter ended June 30, 2007, an increase of approximately 11%. Revenues in the quarter consisted of the following. Recurring revenues were $83.5 million, an increase of $9.1 million or 12% over last year.
Software related fees totaled $7.5 million compared to $5.4 million in the prior year, an improvement of $2.1 million or 39%. These revenues include one-time license fees associated with contracts signed in the period, including add-on license fees to existing clients, as well as revenue from contract backlog that had not previously been recognized, pending contract performance that occurred or was completed during the period and certain other activities during the period associated with existing client relationships.
Professional service revenues were $33.7 million compared to $29.1 million in Q2, 2007, an increase of 16%. Third-party software license fees were $1.5 million, a decrease of 37% over the prior year, and hardware revenues of $5.8 million, which is up 23% compared to last year.
As a reminder, all discussions on this conference call regarding gross margin and expenses are based upon non-GAAP results and exclude stock-based compensation and other items previously discussed. Please refer to our press release or Investor Relations website for a detailed reconciliation of non-GAAP to GAAP results. Gross margin in the quarter were 46% compared to 41% in Q2 of 2007, which is an increase of five percentage points. The growth in margins was driven by an improvement in our revenue mix, primarily related to higher software revenues and incremental recurring revenue.
In reviewing capitalized software development costs, amortization of capitalized software development cost, which is the component of costs of systems and services revenues, totaled 4.3 million in Q2, down slightly compared to the prior year. Capitalized software development costs were $4.2 million in Q2 or 21% of gross research and development expenditures, compared to $5.3 million or 28% in Q2, 2007. In reviewing our expenses for the quarter, sales and marketing expenses were $20.9 million, an increase of approximately $3.7 million over the prior year. The increase in these expenses was related to higher payroll, including higher commission costs. The commission increase was related to strong sales bookings in the quarter.
Gross research and development expenses were approximately $19.7 million compared to $18.5 million in Q2, 2007. Net research and development expenses were $15.5 million, an increase of approximately $2.2 million over the prior year. The increase in gross R&D expenses is a result of our offshore expansion. The increase in net R&D expenses was a result of higher expenditures related to offshore initiative and lower software capitalization in the current year.
General and administrative expenses were $7.1 million, which is an increase of $1 million compared to the second quarter of 2007. In reviewing our cash, we ended the quarter with $61.7 million in cash and marketable securities compared to $65.2 million for the quarter ended March 31, 2008. Consistent with our balance sheet as of March 31, 2008, our auction rate securities remain classified as long-term investments.
As of June 30, 2008, our auction rate securities have a carrying value of $111.4 million. This balance reflects a temporary impairment of $5.2 million or approximately 4%. This temporary decline in value is recorded as a reduction in other comprehensive income as the component of stockholders equity. Accordingly, this adjustment is not reflected in our earnings for the quarter or for the year. The temporary impairment estimate increased by approximately $400,000 in Q2, 2008 to reflect current market conditions.
We currently plan to hold these securities; until such time auctions occur, a secondary market develops allowing us to recover substantial all over carrying value or the issuance refinanced or deemed securities. We will continue to assess the carrying value and the balance sheet classification of these assets on a quarterly basis. During the quarter, approximately $19 million of these securities were redeemed by the issuer at par. Deferred revenue was approximately $105 million compared to $111.1 million as of March 31, 2008, a sequential decrease of approximately $6.1 million.
As I've previously discussed in detail, deferred revenue is expected to range from $100 million to $110 million during the next several quarters. During the second quarter, we replaced our $45 million note payable with a $50 million one-year revolving credit facility. We expect to replace the one-year facility with a larger long-term facility to support our future growth strategies during 2008.
Now I'm going to discuss our cash flows for the quarter. Q2, 2008 operating cash flows were negative, $300,000, down $6.1 million over the same quarter last year. We had negative free cash flows in the quarter of $10.7 million.
Day sales outstanding were 80 days, up six days sequentially and seven days year-over-year. We believe this temporary increase is partly due to the transitioning of our billing function to India. With this transition now complete, and significant contracted billings in the back half of the year, we expect to have a strong cash generation to close out 2008.
Our cash collections are already off to a good start in Q3 and we are confident that the second half will result in strong free cash flows. By way of reference, in the back half of 2007, we had positive free cash flows of $34.4 million. Based on the season of contracted backlog, billings in the second half are significantly higher than the first half of the year.
Capital expenditures were $6.4 million in the second quarter compared to $5.7 in the prior year. The increase is result of our continued expansion in India, the relocation of our corporate headquarters to Atlanta and ongoing investments to support our remote hosting business.
And now, I would like to discuss our expectations for the remainder of the year. We now expect 2008 revenues to range from $520 million to $528 million, which reflects the tightening of our estimates based on our actual results to date. Our previous range was $516 million to $528 million. We continue to expect respect non-GAAP EPS to range from $1.02 to $1.06.
Additionally, I'm providing incremental information regarding our five risks through the year. We expect that Q3, 2008 revenues will range from $131 million to $134 million. This guidance considers that Q2, 2008 revenues benefited from higher than expected hardware and software license fees, which are subject to quarterly fluctuations. We expect Q3, 2008 non-GAAP EPS to range from $0.29 to $0.31. We expect the following items in our GAAP results for the final two quarters of 2008 and we plan to exclude these items in computing our non-GAAP results.
Stock-based compensation is expected to range from $0.07 to $0.08 per diluted share each quarter, a range that is a penny higher than we provided last quarter. EPSi acquisition-related amortization of $0.02 per diluted share each quarter, which is a penny less per quarter than we originally anticipated.
And finally, a recognition of our deferred tax asset of approximately $1.00 to $1.50 per diluted share. Other items of expense recognized in the second half of the year may also be excluded in determining non-GAAP results, if and as appropriate. Q2, 2008 was a solid quarter and keeps us on track towards our annual objectives. Overall, I am pleased with the progress we made.
At this point, I'll turn the call over to Jay. Thank you.
Jay Deady
Thanks, Bob. On today's call, I will provide an update on our market success, our solutions and highlight some current market opportunities and conditions.
From a market update perspective once again in Q2, as you've heard from both Bob and Andy, we had a nice balance of both new business and existing client bookings, as well as balance across our entire solution portfolio, namely clinical, revenue cycle and decision support solutions.
As Andy mentioned earlier, Karmanos Cancer Institute recently signed on implement, our Revenue Cycle Solution portfolio, in addition to our clinical solutions supported by the majority of our entire portfolio of professional and technical services that we offer to the market. All of our leading event indicators continue to be very strong. We continue to see increased volumes of RFP and significantly increased demonstration requests.
There's a continued uptick in client visits coming to our Outcome Strategy Center in Atlanta, our new headquarters and very strong pipeline growth with consistent balance from both the solution and coverage team perspective.
In May, we had our most successful Executive Forum to date with 30% more attendees than the prior year, and a real level of excitement of significant buying interest in our solutions. There's been a positive transformation of our client base over the last two and a half years and it's certainly gratifying to see that change in person when we meet with our client executives that come down and spend time with us at the executive forum. This event is critical to helping Eclipsys expand our product footprint in our client base and our sales team is diligently working to close. the many opportunities we either generated or moved along at this event.
A quick comment on the credit market issues, impact on hospitals, but I still hear a bit about on a regular basis. From our perspective, this continues to be a non-issue as we did not see any impact on Q2 deals or on our ability to grow the pipeline. Certainly, they may crop up after the future but to date, we have not seen any negative impact in terms of our ability to build the pipeline or sign business.
Now, moving on to the Solutions and what we're seeing in the current market drivers. Sunrise Clinical Manager 5.0. In terms of our progress with Sunrise Clinical Manager 5.0, we now have several clients live, and initial feedback has been very positive. We also have built a nice pipeline, continue to provide updates on 5.0 over the next few quarters. We also have built a nice pipeline for the orders reconciliation capabilities that we introduced new to SCM Inversion 5.0.
Our Orders Reconciliation Module is yet another solution we're delivering that helps our clients better manage an external regulatory pressure. In this case, it's the joint commission's focus on medication reconciliation as a national patient safety goal to reduce preventable medication errors. The orders reconciliation capability helps prevent med errors by enabling caregivers to reconcile all orders related to the patients care at all handoffs between caregivers and units as well as that admission and discharge.
Now I'm going to provide an overview on our Revenue Cycle Solutions in the market. Eclipsys offers an end-to-end revenue cycle management platform that encompasses all key workflows from registration to scheduling to patient billing, as well as newly introduced revenue cycle dashboard analytics. Our client base includes some of the best known healthcare organizations including Yale New Haven Hospital, Scripts Health, WellSpan and Colida Health, who are using our solutions to drive improvements in their financial operations.
For instance, WellSpan Health, a fully integrated health system located in South Central, Pennsylvania has been able to improve cash flow to 98% of net revenue to increase cash for operations and profits for the bottom-line. WellSpan has also increased point of service collections 54% and raised clean claims throughput to 99%.
With hospitals generally working with very thin operating margins, Eclipsys Solutions' proven ability to help stop revenue leakage is a highly compelling value proposition.
Over the last several quarters, we've announced a number of new revenue cycle clients, including Clark Memorial Hospital, Karmanos Cancer Institute, DeKalb Medical Center, Bronx-Lebanon Hospital Center, North Mississippi Health Services, City Hope and Cancer Treatment Centers of America.
With the recent introduction of our new Revenue Cycle Dashboard, we continue to expand the capabilities of our revenue cycle offering. The Dashboard empowers users to make informed decisions in a timely manner and eliminate the resource intensive demand involved in the collections and analyzing data provided in flash reports. This will help our clients improve financial performance through quick, informed decision-making to fix breakdowns in operational work flow.
An industry study states that approximately 25% of healthcare organizations will replace the revenue cycle systems over the next two to three years. With our highly knowledgeable specialty sales force and increased marketing efforts, Eclipsys is very well positioned to capitalize on this market opportunity. Our specialty sales force has also done a great job in increasing sales of our Laboratory Information Solution. The laboratory is the hub of clinical decisions and for many hospitals it's key area for organizational growth and financial performance. We've recently announced a number of new client wins for this solution which gives us a nice foot in the door to sell additional Eclipsys Solutions.
A key takeaway from our Executive Forum for me, was that we're doing a much better job addressing the real issues our clients are dealing with in today's increasingly complex regulatory and reimbursement environment. For instance, there is an increasing amount of pressure in healthcare organizations to provide more transparency, whether it's patients seeking information about price and quality or physicians and executives looking for more data to be able to make real-time decisions on running the health system.
CMS Core Measures are planned to expand from 27 in 2008 to 127 in 2011. These reporting requirements will not be able to be met in a manual or non-integrated solution environment as is the case in many hospitals today. For instance today how it works is a roomful of analysts with MBAs sort through piles of charts trying to determine trends and care delivery across each condition. This is highly manual, very inefficient and extremely costly. Our clients can solve this problem with our Sunrise Clinical Analytics Solution, which automates this process of chart abstraction to easily manage current and future reporting requirements. Sunrise Clinical Analytics can also identify when care providers should intervene during the course of a patient's care. For instance, if a quality measure is being overlooked. In Q2, we won several more new contracts for this solution. We continue to build the pipeline and this capability is starting to positively impact net new enterprise transactions for us as well.
As Andy previously mentioned, our Sunrise EPSi Budgeting and Decision Support Solutions have quickly become a strong growth vehicle for us. We only have 20% penetration of our Legacy Decision Support Solutions in our Sunrise Clinical Manager client base and we are seeing very nice interest level from the remaining 80% for Sunrise EPSi. Additionally, more than 60% of all hospitals in the country use Microsoft Excel for budgeting and we've executed several lead generation programs targeting these organizations and are starting to see some real traction. And finally, the competitive legacy, Budgeting and Decision Support Solution market is starting to show real interest in Sunrise EPSi to trade out their current legacy solution.
Conclusion to close, we had a strong Q2. We continue to see really strong demand in the marketplace across our entire solution portfolio. In the second half of the year, we need to execute on significant new and existing client opportunities in our pipeline.
And I'd like to turn the call back over to Andy.
Andy Eckert
Thanks, Jay. I'm certainly pleased with our sales and marketing efforts in winning new business and building our sales pipeline in what is a very competitive market. We're on track midway through the year and like last year we expect increased buying activity in the second half.
Coming off a sales meeting last week, it was interesting to dive into our pipeline of business. Unlike a couple of years ago, where nearly every opportunity revolved around the core of Sunrise Clinical Manager. Today we have a significantly more balanced book of potential business. I attribute this to our sustained investment in our company and product development over the last couple years. In that period, we've increased our product development headcount by over 75%, which has provided the capacity to accelerate development of nearly all parts of our product suite.
As Jay mentioned, we had momentum in lab, we certainly had momentum in revenue cycle, as well as, it did not exist in 2005. Our Radiology product has turned into a very nice asset. We're gaining momentum in Ambulatory and EV. We're innovating with products such as Sunrise Analytics and we currently have several new products for future release. We're committing meaningful capital to strategic acquisitions such as EPSi and plan to continue to do so in a carefully considered manner.
In addition to this investment in our product line, we've increased our services and support capacity by nearly 30% in the last two years. We're constantly adding seasoned management from within and without the industry and we are putting close to $5 million this year into building the foundation of our international business.
To date, I think we've balanced the short-term results with a good focus on building a successful business for the longer term. In the second quarter we also added two new Board members to Eclipsys; John Casey, who is the Chairman of MedCap Corporation and Craig McNabb, who serves as the Chief Executive Officer and member of the Board of Directors of National Retail Properties. Craig is a former Board member of Per-Se Technologies. I've certainly enjoyed working with Craig and John over these last few months and they both bring diverse backgrounds to our company. John Casey brings deep executive experience within the healthcare industry having run a number of provider organizations. Craig has a strong operational track record of building highly profitable businesses and is experienced, and the Board of Per-Se will help us focus we believe on the revenue cycle market even more.
Practically, Eclipsys is very well positioned to win new business and increase our market share over the next few years. When you look at industry studies that show that our company has approximately 60% of our client base using CPOE and the nearest competitor has approximately 20%. I think that speaks volumes to our ability to deliver real value to our clients. Granted we are still not satisfied that 40% and not using CPOE. The plans are certainly in place to accelerate adoption with these important clients. And the only way clinical systems are going to drive out some improvements is if the doctors are in fact using the systems to place orders.
For instance, our client, University of Michigan shortly after Go-Live reported a 29% reduction in medication mistakes and a 40% reduction in the time between ordering and administration of urgent medication. And the University Health Systems in San Antonio has approved all key indicators in its care of patients with diabetes.
Eclipsys is committed to helping all of our clients achieve this type of success. This is why our slogan, “The Outcomes Company” is pretty simple. As the market continues to mature, the more we can communicate our clients' successes and position Eclipsys as the company whose clients achieve results and thrive in this ever increasingly complicated reimbursement and regulatory environment, the more new business we'll win.
So I'm pleased with our results this last quarter. Certainly pleased with our pipeline growth and I have pretty good confidence in our ability to grow this business. Well we still have much to improve, we continue to chip away our major initiatives and I feel very confident about our ability to successfully execute over the balance of this year. So thanks for your time this afternoon, and at this point we'll hand the call back to the moderator so we can take some of your questions.
Questions-and-Answers Session
Operator
(Operator Instructions)
First question is from line of Richard Close with Jefferies. Please go ahead.
Richard Close - Jefferies
Yes. Congratulations. Bob, I was wondering if you could just provide that amortization, acquisition amortization guidance again?
Bob Colletti
Yes, Richard. It will be $0.02 per quarter. It's about $1.1 million per quarter.
Richard Close - Jefferies
Okay. And then on capitalized software, what was that again, I'm sorry?
Bob Colletti
The amortization was $4.2 million in the quarter and it will be around that each quarter, the rest of the year.
Richard Close - Jefferies
Okay. And then, you mentioned you're paying higher commissions I believe in the quarter based on strong bookings; obviously, a positive forward-looking statement. Can you guys give any additional color around that statement?
Andy Eckert
Yes. What I'd tell you is we had very solid second quarter. We're positioned as we go in the back half of the year to have a very strong year in sales. So, was just a good solid sales quarter, and that's why our commissions were up.
Richard Close - Jefferies
Okay. And then if we look at the Executive Forum, you guys talked about the attendance being up I think 30% year-over-year. How should we look at that Executive Forum in terms of maybe the composition between potential customers and existing customers who attended? And then maybe your thoughts around, of those people who attend, what is the percentage of those attendees that maybe buy within the next quarter or two?
Jay Deady
Sure. This is Jeff. Take that one. So, in terms of net new prospects versus clients, this is principally a client event. We do and then we had a nice increase of prospective executives come this year, but we're pretty selective on that because this is principally an event to really connect well with the C-suite of our client relationships. We have limited invitations that we extend to new business prospects.
What I can tell you is the pipeline coming out of that event this year versus last, was up threefold between the two events. And now some of that is enterprise buying and certainly some of it is competitive, for sure, but some of that add-on and more modest will probably close in the quarter or two coming out of it and other cases where we might be looking at perhaps an entire revenue cycle opportunity within an SCM client. That's going to be competitive and run a little bit longer sales cycle. So it's a balance of enterprise and shorter add-on solutions.
So our expectation, we track it over the year versus trying to see what we can get done in the next quarter. But, I think having 30% growth in attendance with a number of return clients, they're very significant,. Clients in our client base attending combined with a threefold pipeline increase is a testament to how we're taking care of clients and their interest in our solutions.
Richard Close - Jefferies
Okay. Just to be clear; so the threefold pipeline increase, is it threefold pipeline increase of just those customers that are attending that Executive Forum?
Jeff Deady
Yes. So you should not try to extrapolate that against an entire pipeline comment that is specific to those attending the forum.
Richard Close - Jefferies
Okay, great. Thank you. Congratulations.
Bob Colletti
Thanks, Richard.
Jay Deady
Thank you.
Operator
We have a question from Corey Tobin with William Blair & Company.
Corey Tobin - William Blair & Company
Hi, good afternoon, guys. Congrats on a nice quarter.
Bob Colletti
Thank you.
Corey Tobin - William Blair & Company
Andy, quick question for you regarding revenue models. I know at the time that you bought the EPSi, the revenue model was closer to a traditional licensing model than the more recurring model that you used for the core clinical purchase. Have you guys migrated that business model more closer to the base company today or it's still fairly front-end loaded?
Andy Eckert
It is primarily front-end loaded. Due to the fact frankly most of the deals are significantly smaller than our typical enterprise deals and so the license fees are kind of in the range for our internal guidelines and policies that would suggest people want to buy them and we sell them typically as a software license fee structure.
Corey Tobin - William Blair & Company
Overtime that was the plan to migrate that more closer to the rest of the business?
Bob Colletti
Corey, it's Bob. What I'd describe is when we're selling as part of an enterprise deal, the enterprise deals tend to be packaged at a more current revenue basis because of the size of the transactions. And if so, if we sold that those enterprise deals, it'd be packed into our current revenues because any other module would be in there.
When you have it as an add-on module, it just doesn't lend itself to 84 months of payments. It's just not, it's a modest license fee compared to the enterprise. It will be a deal by deal, by the time the enterprise will be packed together just like that.
Corey Tobin - William Blair & Company
Understood. Okay, shifting gears for a second. On the margins, obviously I'm very happy to see the direction there. What were professional services margins in the quarter?
Bob Colletti
They would be like mid 20s, between 25 and 28, something like that. Still got work to do there. We got a lot of heavy lifting in services but it was an improvement. Compared to Q1, we'll move in the right direction. Also remember in Q2, we did have the services summit again, and so that was negative to the margins as well as in the prior year. So, as you run through the model, that did impact the quarter.
Corey Tobin - William Blair & Company
And then, refresh my memory if you could. The impact of that could be sort of what, 100 basis points?
Bob Colletti
Yes. It's somewhere close to million dollars in the quarter, it impacts us.
Corey Tobin - William Blair & Company
Million dollars. Okay, great. So just to wrap-up; on the margins, obviously a nice incremental step-up. Should we be looking at this as sort of the new base and we'll go from here or is there a chance we could see some volatility dipping back down closer to Q1 as we look at the rest of the year?
Bob Colletti
What I'd tell you is, when we get guidance for the year, what I had said was we like to be up 100 to 200 basis points for the year, year-over-year. When you look at the whole year in whole, and that's what we still expect. I mean it's the same.
And that was quite frankly when we talk about guidance for the quarter, the level of software license fees is subject to fluctuate, and that's going to impact margins in any given quarter. So, our elite model would be the guidance we gave for the year. On margins, I think that's a reasonable quote for the year.
Corey Tobin - William Blair & Company
Okay. Thanks much. Congrats again.
Bob Colletti
Thank you, Corey.
Operator
We have a question from Sandy Draper of Raymond James.
Sandy Draper - Raymond James
Thanks and congrats. Corey actually just stole my question on the gross margin. Just one detailed question for you, Bob. In terms of the amortization from EPSi, it looks like if I'm doing the math correctly. In the quarter, there was about $100,000 that's actually up in cost of goods or is that all going to be down in the D&A line?
Bob Colletti
It's all on D&A.
Sandy Draper - Raymond James
Will that be the same thing going forward, so there will be no amortization from EPSi up in cost of goods?
Bob Colletti
It will be $1.1 million in D&A, yes.
Sandy Draper - Raymond James
Okay. Okay, great. And then I guess just on a broader market question maybe for Jay and/or Andy. You're starting to see McKesson get more aggressive with the revenue cycle product. It hasn't seen a lot of announcements out of Cerner Epic and it seems like they're done about the same.
But do you think with McKesson getting a revenue cycle product, you guys are out just talking about the importance of the combined product, does that make them potentially more competitive against you guys and just general thoughts about that? Thanks.
Andy Eckert
Thanks. I think the McKesson announcement at shortly before HFMA, I think was at their investor conference and then solve it up with HFMA. It has continued to raise focus to the revenue cycle replacement in the marketplace.
We've been contacted by a number of McKesson legacy clients since that announcement, interested in our Revenue Cycle Solution. So, certainly, McKesson is a large company, had lots of solutions and they will continue to be a formidable competitor.
But the fact that they are putting more of a spotlight on revenue cycle and the fact that a lot of their legacy systems and the systems from other competitors are fairly long in the tube and we don't think that they're sole source. If they look at an enterprise solution, it's going to pull us into a lot of net new deals. Then we're looking forward to continuing to compete for those revenue cycle transactions.
Sandy Draper - Raymond James
Great. Thank you very much and maybe just one final question, Bob. You had the question asked earlier about the sales and marketing. With sales and marketing dollars being higher than the fourth quarter of last year, would I be wrong to think that your sales in the second quarter were better than sales in the fourth quarter?
Bob Colletti
That's a great question. What I'd tell you is, the seasonality of the business is always going to be at the back half of the year, it's going to be the highest. We've also made some investment in sales and kind of upgraded the talent as well, so you see some of that in expense. So it's a combination of payroll and commission; the bigger piece being commission.
Sandy Draper - Raymond James
Okay, thanks.
Bob Colletti
Thank you.
Operator
We have a question from Anthony Vendetti with Maxim Group.
Anthony Vendetti - Maxim Group
Thanks. Good afternoon.
Bob Colletti
Good afternoon. How are you doing?
Anthony Vendetti - Maxim Group
Good. Good. How are you?
Bob Colletti
Good.
Anthony Vendetti - Maxim Group
Yes, great gross margin number this quarter. I just wanted to talk a little bit more about the large win for the Barbara Ann Karmanos Cancer Institute. Can you give the number of deals that you've won this year that are greater than $15 million?
Bob Colletti
Yes, we don't give details on bookings, those type of things. So we really don't give any specific on that. But I'll tell you that was a, that's bigger transaction.. Significant transaction was all in all end-to-end and it's really twice to being able to do a portfolio of transaction of IT solutions and software and clinical in that cycle. But like I said, we don't give specifics on that type of stuff.
Anthony Vendetti - Maxim Group
And can you talk a little bit about how India is going in terms of how much you expect to, the outsourcing of R&D? I think you mentioned in the first quarter, numbers there, if you just clarify that a little bit and just update us on any changes to that?
Andy Eckert
Sure. As of, in fact Monday, we crossed 500 people in India. Probably two-thirds of those or actually a bit more are in the product development area. We have several major developments going on in India.
Some developments are all in the U.S. or North America, some are shared and some significant development opportunities and projects are going on 100% in India. We've hired a fantastic team of leaders many of whom we've known from our prior lives, and really have developed a strong critical mass. And it's impacting all parts of the business.
We're doing billable work for clients. We're doing outsourcing support work for other clients. We're writing order sets. We're building reports. We're really have augmented, really every major activity along the value chain for our client base in addition to product development that's going on in India.
So it's an important part of our business and obviously the fundamental reason why we've been able to increase our R&D capacity by 75% in the last couple years. And I would expect by the end of this year, it could be 100% increase in R&D for this company versus 2006.
Anthony Vendetti - Maxim Group
And in terms of cost savings relative or vis-à-vis, what you're spending here in the U.S. or what you were spending. When you say you're increasing the capacity by 75%, how much of a cost savings is that because it's being done in India?
Andy Eckert
I would say this year that cost savings would be about $50 million.
Anthony Vendetti - Maxim Group
Wow! Okay, significant. And Andy, I just wonder if you can give us a little bit more of an update. I know you said this is more of an end of the year situation, but in terms of going after some of the international business that's out there, putting a team in place to do that, where is that at?
Andy Eckert
Sure. Good question. Our primary type as we call it, inside our company, our anchor clients in Asia; Sing Health has done exceptionally well. They've made a number of follow-on purchases of additional software from us since we signed the original contract last fall with them. So that's been a fantastic engagement.
I think a year from now, we'll be sitting here talking about how great a show site they are for us, and already are helping us in that regards, despite the fact the project is kind of in progress.
We have built a team in Asia and continue to attend various marketing events, various marketing outreach programs. We've seen some activities in Australia, Hong Kong and other parts of Singapore.
We had plans in place around our entry to India. And then our other major kind of center of gravity is in the Middle East, where we have built a small team and have leadership. I expect leadership to be in place pretty soon and I'm pretty excited about the opportunities there.
We've yet to sign a major client in that region of the world , but I would tell you the pipeline is so rapidly expanding and so kind of dynamic that something good will happen.
Now when that happens whether it's this quarter, next quarter or quarter after that, I'm not sure. But I will tell you that the pipeline and our discussions with potential partners in various countries has gone pretty well and hopefully we'll have more stuff to talk about as the year progresses.
Operator
The next question is from the line of Sean Wieland with Piper Jaffray.
Sean Wieland - Piper Jaffray
Hi, thanks. Couple questions on EPSi. The success you're having, are these mostly the upgrades from the old TSI customers and how is the strategy progressing at that?
Jay Deady
Hi, this is Jay, Sean. Thanks for the question. There were a couple of TSI customers that were in progress looking at EPSi. So couple of deals we got done were in fact those types of transactions.
A couple of other deals we got done were what we call wrap-around-deals, where from a legacy perspective the core system is going to remain but EPSi offers modules that the legacy system doesn't have, and so basically it bought some of the new modules to wrap around their prior investment and we had a couple of those transactions.
And then we had a couple legacy, you know, pull outs and replacements and net new clients where it was somebody else's legacy decision support products and they're opted to go to EPSi and install the other system. So, we had targeted efforts across that whole spectrum and this past quarter was representative of hitting every one of those segments with deals.
Sean Wieland - Piper Jaffray
All right. So for some of the old TSI accounts that essentially upgraded, are they shopping around for a new, and sending out an RFP? Are pretty much just moving to your new platform?
Jay Deady
Well certainly we would further adjust if they were in the, making a decision to move that they move to us. A couple of them we're shopping and fortunately EPSi being ranked number one in the industry helped us to retain them as a client.
And in many cases, though, that client base is very well satisfied and very happy with the investment. Many have renewed for quite a period of time on that application and so they're not out shopping and in fact, enjoy the new capabilities of EPSi with those modules.
So, I think we certainly are very committed and have not in any way sunset it, our legacy solution there continue to support it strongly and are hopeful that many of those clients will buy add-ons from EPSi versus near term feeling the need to go to a full replacement cycle.
Sean Wieland - Piper Jaffray
Okay, good. And then, Bob, one question for you in the software license guidance. I think the last update was you expected that for the full year to be about 4% of total revenues? And is there a need to update that? You've been doing a good job on that line.
Bob Colletti
It does seem to be running a bit higher than that, yes. So I would probably model it a bit higher than that. I mean, again there's going to be lumpiness in that, but clearly two quarters, we're tracking for a bit higher than that. So, given a range, I'd probably bump to the high end of that or maybe slightly higher.
Sean Wieland - Piper Jaffray
Do you care to throw out a number?
Bob Colletti
Yes, EPSi is a big driver. We actually finally gave the original guidance is that EPSi is actually right out of the block, has been successful being integrated into the sales force. Right at the get go. So that's where some of that movement has been a great acquisition for us. So, I would just tell you, model it higher. And if they have given of range of 20 to 25, I'd probably model a little bit higher than that.
Sean Wieland - Piper Jaffray
Okay.
Bob Colletti
Thank you, Sean. Appreciate it.
Operator
We have a question from Frank Sparacino, First Analysis.
Frank Sparacino - First Analysis
Hi, guys. First question, I don't know if you'd be willing to share. In terms of revenue cycle, can you give me a sense as to maybe what percentage of the bookings this quarter or what percentage of the pipeline those opportunities represent?
Jeff Deady
Well, I mean what we've talked about in the past without giving definitions of the pipeline is that in terms of percent growth, it's been significant growth relative to revenue cycle in terms of growing the pipeline. What we haven't done is broken down bookings into what percent clinical versus decision support versus revenue cycle.
So, well, I'll just give commentary that it's an increasingly important component to it. Still the lion share of bookings continue to be in the pipeline, continue to be enterprise clinical opportunities and that certainly has not dried up despite some questions from analysts to the contrary.
That business continues to be very strong and the pipeline is very strong. But the biggest and most rapid growth in our pipeline has been rev cycle in addition to the commentary Andy and Bob gave earlier about EPSi.
Frank Sparacino - First Analysis
Okay. And then, my last question is just on the Ambulatory side, I'm curious if how you would characterize the environment there? If it's any different than what you're seeing on the hospital side or maybe any trends. That's it.
Jeff Deady
Thank you. This is Jay again. I'll comment on Ambulatory. Yeah we, today, we don't compete in what would be a standalone, lower-end ambulatory market. So our view is really sort of hospital based if you will kind of surrounding our client-out type of strategy.
From that perspective, we have an increasing volume of discussions with our clients regarding starting the budget potentially to give Ambulatory solutions. We have a good number of very large Ambulatory opportunities on a dollar basis in our pipeline with our current clients, either owned or closely affiliated large group practices that we are competing vigorously in. And that's been a nice uptick in terms of our opportunity.
We're putting a tremendous amount of investment in our Integrated Ambulatory product and have continued to do so and have been getting very positive feedback from our client groups, who advised us on this solution that we're making rapid progress.
So we're hoping to win a number of these and be able to announce them in the future. But the Ambulatory pipeline on the very high end of the market that is being influenced by our client relationships continues to be very strong.
Operator
Our final question today comes from the line of Leo Carpio with Caris & Company.
Leo Carpio - Caris & Company
Good afternoon, gentlemen. Congratulations on the quarter. I had two quick questions. First, regarding the domestic competitive environment, have you seen any changes in terms of the competition? Cerner Epic Systems have become more aggressive or just same old situation, status quo?
Jeff Deady,
For the most part, it's the same competitors and for the most part, fairly status quo. Very competitive in these deals and for many of the enterprise clinical engagements, we're in the bottles against Epic and Cerner or Epic. So they continue to be the same cast of characters we're going up again.
Leo Carpio - Caris & Company
Okay. And then in terms of the pricing, has it been holding firm in terms of any need for concessions for larger deals or clients are willing to pay the price in order to get the quality?
Jeff Deady
I think generally across the marketplace, what we've seen is that pricing has certainly held. The amount of services in some of these deals has expanded, which is why our remote hosting and outsourcing and others are starting to come to an advantage for us.
In the New York area, I will say that a number of our competitors have tried to target that relative stronghold that we've had for a number of years and are being extremely aggressive on price as a way to break into that particular market. But that's more of a regional commentary versus anything on a national basis.
Leo Carpio - Caris & Company
Okay. And then last question, regarding Sunrise Clinical Essentials, how is that product being received in terms of the mid-size hospital markets?
Jeff Deady
Very well, and an increasing amount of community hospitals in our pipeline are absolutely, currently evaluating that as a preferred means of implementation. We have a number of them underway. And in terms of, I'd say community hospitals in the pipeline, 30 to 40% today are considering our software solutions to be deployed with that methodology. So that's an increasingly important services strategy for us.
Leo Carpio - Caris & Company
Okay. Thank you.
Jeff Deady
Thank you.
Andy Eckert
Thank you, Leo.
Bob Colletti
Okay. Well, thank you all very much for joining us today and we look forward to updating you in the quarters to come. Thanks again.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.
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