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Streamline Health Solutions, Inc. (NASDAQ:STRM)

F2Q08 Earnings Call

August 26, 2008 4:30 pm ET

Executives

Paul W. Bridge Jr., - Chief Financial Officer

J. Brian Patsy – President, Chief Executive Officer

Gary M. Winzenread - Vice President of Product Development and Strategy

B. Scott Boyden Jr. - Senior Vice President of Sales and Marketing

Joseph O. Brown II - Vice President - Client Services, Chief Information Officer

Analysts

Thomas Carpenter - Hilliard Lyons

Mark Cahill

Dan Veru - Palisade Capital Management

Operator

Welcome everyone to the Streamline Health Solutions second quarter 2008 earnings conference call. (Operator Instructions)

Paul Bridge

I am Paul Bridge the Chief Financial Officer of Streamline Health Solutions Inc., and thank you for joining us today. With me today to discuss the second quarter operating results are Brian Patsy, President and Chief Executive Officer; Joe Brown Vice President of Client Services and Chief Information Officer; Gary Winzenread our Vice President of Products and Strategy; and Scott Boyden Jr. - Senior Vice President of Sales and Marketing. Brian, Joe, Gary, Scott, and I will be available to answer questions during the question and answer sessions. We have arranged for the web cast of this conference call to be recorded and will be available at the website listed in the quarterly press release for the next 30 days.

Before I begin our discussions I would like to read the Safe Harbor Statements. Statements made by Streamline Health that are not historical facts are forward-looking statements that are subject to risks and uncertainties. Future financial performance could differ materially from expectations of management and the results reported now or in the past. Factors that could cause the financial performance to so differ include but are not limited to: the extended length of sales cycles; the timing of the signing and implementation of new agreements; the impact of revenue recognition rules; development of new channels of distribution; competitive products and pricing; product development; reliance on strategic alliances; availability of products procured from third-party vendors; the health care regulatory environment; and fluctuations in our operating results and other risks detailed from time to time in our filings with the US Securities and Exchange Commission.

Today we released our second quarter financial results. I would like to highlight the more significant aspects of those results. Total revenues for the second quarter increased 51% to $4.8 million compared with $3.2 million in the prior comparable period. Total revenues for the first six months increased 21% to $8.4 million compared with $7 million in the prior comparable period.

Systems sales increased for the quarter and year-to-date compared to the comparable prior periods. This increase was due to the fact that we were able to deliver the required software to an existing customer that was previously included in our backlog because the software they ordered required us to add additional specific integration functionality.

Service, maintenance, and support revenues increased for the quarter and on a year-to-date basis when compared to the comparable prior period and continue to have strong operating margins, as did our application hosting services. We reduced our operating losses for both the quarter and year-to-date, not withstanding the significant investment we are making in our new architecture platform, workflow program and significant increases in our direct sales and marketing efforts.

At July 31 our backlog was approximately 17 million compared with 15 million at the end of the first quarter, as a result of three new application-hosting services contracts signed in the second quarter. We expect these new contracts to begin contributing to revenues late this year and early next year after they have been fully implemented.

We continue to be debt free and have not had to borrow at any time this year on the working capital facility. We continue to monitor our expenses, cash balances, and receivables carefully to ensure they are on plan.

Now I would like to turn the call over to Brian Patsy who will discuss in greater detail some of the significant factors tat affected the quarter and the prospects for the remainder of the year.

Brian Patsy

This afternoon I will comment briefly on our financial results and then discuss our sales accomplishments over the last quarter. Our business and other activities relating to our three primary strategic partners and update on our product development activities, including recent product releases and finally I will comment on our progress versus our expectations year-to-date.

After my remarks we will conduct our usual question-and-answer session.

Regarding our Q2 financial performance, as reported our Q2 revenues of $4.8 million were 51% ahead of comparable prior quarter and an all time record Q2 performance for Streamline Health. Our first half revenue of $8.4 million was 21% ahead of last year’s performance. Both our Q2 and first half results were in-line with management’s expectations and at the end of the quarter our backlog stood at $17.7 million, which was an increase of $2.4 million or 16% greater than Q1s backlog; $8.8 million of the $17.7 million backlog are related to revenues that will be generated from maintenance and hosting services which are recurring revenue.

As Paul mentioned, the increase in recurring revenue backlog was primarily due to the signing of three new hosted customers during the quarter. Our backlog increased 16% even though approximately $1.5 million came out of the backlog during the quarter and was recognized. This was the third revenue from a large contract signed last year that included the delivery of future site-specific integration of our solution to the loss and administrative information system.

Our professional services revenues continue to be strong as was the case last quarter as we continued implementation activities for the several new systems sales closed this year and various upgrades within our existing customer base.

Based on the four new clients signed this year and the pipeline of anticipated contracts, we continue to believe that fiscal year 2008 will yield improved operational and financial results.

At this point I’d like to review our sales and business development activities.

Regarding our sales activities, as mentioned earlier we announced four new contracts in our second quarter. One contract involving two large health care facilities in Canada namely McGill University and the University of Montreal Hospital Center is our first expansion to International markets through our relationship with Emergis. The other three contracts including Catholic Healthcare West, Columbus Vital Statistics, and Marion General Hospital are hosting contracts that contributed to the 16% increase in our hosting backlog mentioned earlier.

Catholic Healthcare West and Columbus Vital Statistics were direct deals while Marion General Hospital was signed through our remarketing partner GE Healthcare. Of special note is the fact that none of these four new contracts contributed to revenues in our second quarter but will significantly contribute to revenues in future quarters. For example the International contract to Emergis, announced in May, involves a future deliverable of multi-language capabilities and therefore the revenue has been deferred until delivery which is anticipated next year.

The recurring revenue from the three hosted contracts announced in Q2 will follow our traditional hosted model for revenue recognition that is revenue will be recognized on a monthly basis over the life of those contracts once those systems achieve contract specific implementation milestones, which is typically six months or less from the time of contract signing. As a result, we do anticipate recognizing recurring monthly revenue from some of those implementations later this year. It is anticipated that all three will contribute to revenues early next year.

Two of the three hosted contracts warrant further comment. Catholic Healthcare West is the 8th largest healthcare system in the nation and includes 41 hospitals across California, Arizona, and Nevada with more than 9,500 physicians and approximately 50,000 employees serving a population of over 22 million. We have already begun implementation of our Enterprise Document Workflow solutions in three of their hospitals with plans for more yet this year. Our workflow solutions will integrate with their Cerner and McKesson Hospital information systems to provide a single point of access to health information.

Our contract with Columbus, Ohio public health vital statistics office is another noteworthy win for Streamline Health. This was our first expansion beyond our traditional provider organization market segment as we extended our reach to the public health sector. We are eager to complete our implementation and leverage our success in order to target what we believe is a large potential market segment that includes similar organizations in state and municipal governments through out the United States.

One final comment regarding our sales activities, recently we brought on board Scott Boyden as our new Senior Vice President of Sales and Marketing. Scott will be updating our strategic plans to better leverage our sales organization and strategic partners while also directing our marketing activities. We are counting on Scott’s extensive experience and proven track record of success to help us achieve our ambitious goals for top-line growth.

Regarding our business development activities, we are focused on supporting and optimizing sales growth opportunities through our three primary distribution partners GE Healthcare for Enterprise Document Workflow opportunities domestically; Emergis for Canadian and International Enterprise opportunities and Standard Register for broad distribution of our newly released stand alone workflow solutions to address opportunities at the departmental level within healthcare organizations. Each of our three primary distribution partners has the potential to contribute significant revenue growth in the coming years as their respective sales channel opportunities are fully exploited.

At this point I would like to comment on our product development activities.

Earlier this year we completed a new workflow architecture that has significantly reduced our time to market for our new workflow solutions; for example we recently completed two new workflow solutions under the new workflow architecture, Financial Screening workflow, and Cash Management workflow.

Financial Screening workflow forwards insurance cards and financial documents at the time of admission to insurance specialists for special payment program analysis. The Financial Screening workflow allows financial specialists to review patient financial information and determine need based financial assistance. The workflow automates the tracking, routing, and letter generation associated with this traditional labor-intensive process.

Cash Management workflow focuses on enhancing the cash posting, research, and follow-up processes within the business office. It offers two primary components: one, management of electronically generated explanation of benefit documents, also known as EOBs and two, scanning paper generated EOBs extracting payment data via optical character recognition and automatically posting that payment data into the hospital billing system.

Both new workflow solutions offer a strong value proposition that can provide a quick win for the healthcare organization. We have numerous other product development initiatives underway, including the design and development of our Next Generation Enterprise Document Workflow in Management Solution that incorporates enhanced functionality as well as multi-language capabilities. We anticipate the delivery of additional workflows in the second half of the year and the delivery our Next Generation document workflow and management solution next year.

As mentioned in previous earnings calls, we are dedicated to maintaining a strong research and development effort as we expect to expand our product offerings to address the needs of other market segments both domestically and internationally. Furthermore, this fiscal year we increased our research and development budget over traditional levels in order to design and develop our Next Generation solution. Once completed next year we believe this new architecture will set the stage for improved operating and financial performance going forward. We also anticipate that our research and development investments next year will scale back to more traditional levels as we complete our Next Generation solution.

Let me conclude my remarks by reiterating that we anticipate continued strong sales performance through out the remainder of the year based on current sales pipeline activity and contract negotiations in process. When looking back on our strong first half sales, we are seeing a shift to the hosted model which by its nature results in revenue recognition over the life of the contract rather than recognizing the software revenue up front, as we typically do with the licensed model; however it is very important to note that this shift to hosted solutions provides us with a significant advantage in the marketplace as many of our competitors do not have a similar offering. While a relative increase in hosted sales may cause a shift in recognizing revenues to future periods, nonetheless it would significantly contribute to our overall market penetration and revenue performance in the coming years. In addition the recurring revenues generated by hosted deals would improve our future revenue visibility.

On the development side, our time to market for new workflow solutions has been significantly reduced, which in turn will help create additional sales opportunities as each new workflow becomes available.

As a testament to our streamlined product development process is the fact that we were able to recognize approximately $1.5 million in additional revenue from our backlog as a result of the completion of the integration of our solution to the Loss and Administrative Information system. You may recall that we signed a contract last year that required us to defer revenue recognition until that integration was completed. Not only were we able to deliver the integration ahead of schedule, but we now have another sales asset, namely integration of our solution to the Loss and Administrative Information System. This integration reinforces our vision of providing an Enterprise approach to eliminate friction points in document centered business processes within healthcare organizations and will provide yet another differentiator in competitive sales situations.

This concludes my formal remarks. I would like to turn the call over to Paul for the question-and-answer session. I have asked Gary M. Winzenread, Senior Vice President of Development and Strategy, Joe Brown, CIO and VP of client services and Scott Boyden, our new Senior Vice President of Sales and Marketing to be available for this quarter’s discussion to give you an opportunity to hear from our executive team and to ask them any specific questions.

Scott Boyden is traveling to a customer site and demanding on the timing of his flight, hopefully will be participating remotely.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thomas Carpenter of Hilliard Lyons.

Thomas Carpenter - Hilliard Lyons

It was nice to see the revenue increase in the quarter, even though none of the revenue from those deals is recognized yet.

Brian Patsy

That’s a good thing, having improved revenues and better visibility on the recurring revenues going forward.

Thomas Carpenter - Hilliard Lyons

One of the things that you mentioned in the past two quarters was the number of deals that you have out there, our customers were your vendor of choice. Can you update us on that metric?

Brian Patsy

Last quarter we had 13 deals in the pipeline where we were vendor of choice, co-vendor of choice, or in contract negotiations and out of those 13, six have come out of the backlog of deals in contract negotiations; four of them were announced, one of them was the deal that carried over from last year that we anticipated to recognize revenue and one, frankly, we lost that was in the category of dual vendor negotiations. During that same period we added two more where we are in that category of vendor of choice contract negotiations or co-vendor of choice, so the net total now is nine, but we hope to close between now and then end of the year. Some of these might be towards the end of the year and could possibly carry over into Q1.

Thomas Carpenter - Hilliard Lyons

Okay, so fourth quarter you guys were seven, at the end of the first quarter you were 13 and now you’re nine, so net, net we are still up to your date, even though you closed four.

Brian Patsy

Correct.

Thomas Carpenter - Hilliard Lyons

That’s positive. The revenue was good this quarter; I was a bit concerned about the operating expense up 23% year-over-year, 25% quarter-over-quarter understanding your architecture and some of the other product developments and you guys expect that to moderate in ’09, the absolute dollar amount, is that correct?

Brian Patsy

That’s correct. We are beginning the moderation process yet this year.

Thomas Carpenter - Hilliard Lyons

Okay, then maybe you and Paul can walk me through the cash and the accounts receivable, if there have been any changes since the end of the quarter, but you guys started off the year pretty solid on the cash side, now you’re down to a little bit under $400,000. You do have a decent slug view in accounts receivable and contract receivable. Maybe you can update us on that and talk about the revolver and just you guy’s thought process and where you want to be between now and the end of the year on cash.

Paul Bridge

WE haven’t had to borrow into the revolver. The second half of the year fiscal year normally includes large prepayments of annual maintenance and we have started to receive some of those subsequent to July 31 and we will receive some in early January, but basically the third/fourth quarter we get these large prepayments, so I don’t have any concern on our cash position right now. We may have to take and use the revolver on a short-term basis during that period, but I don’t see it in the next couple of months.

Thomas Carpenter - Hilliard Lyons

Okay, you said you usually get large maintenance prepayments?

Paul Bridge

Yes.

Thomas Carpenter - Hilliard Lyons

Okay refresh my memory, the revolver, is it 500K now, or is it more than that?

Paul Bridge

No it’s about $2 million. We just filed an 8K with the new revolver in it.

Thomas Carpenter - Hilliard Lyons

Okay yes, the 500K might have been temporary; the $2 million was the permanent.

Paul Bridge

The old [inaudible].

Thomas Carpenter - Hilliard Lyons

That is good news and Brian and I don’t know if Scott’s had a chance to go out there and talk to a lot of the existing customers and also some of the people in the pipeline, can you give us an idea of the spending environment out there? I know there’s, big hospitals have done fairly well the past couple of years as far as upgrading their systems. Small admitted, it seems like there is some concern, we are in an election year, obviously the economy is soft right now, but maybe you can update us on what you’re seeing on the overall spending environment with hospitals?

Brian Patsy

I will comment first and then I’ll take a chance on the opportunity that Scott was able to join us and his flight landed on time, I don’t know specifically if he was able to dial in, but as soon as I’m done I’ll ask to see if he’s out there in the telephony land.

First of all, if you look at our level of sales activity and the number of contracts we’re involved in, we’re clearly seeing an up tick in activity. That’s a combination of things and many of those are driven by internal factors in terms of hiring additional people and bringing a stronger focus to our sales effort by the hiring of Scott Boyden and the impact that he’s having. But, we also are seeing a shift, at least through the first half of the year and moving towards the hosted model where you don’t have to come up with the large capital outlays and I think that bodes well for us since that’s a differentiator in the marketplace for us.

We haven’t necessarily seen an erosion in terms of activity because of the economy. I have been at this a long time and many times healthcare runs counter cyclical to the overall economy, so we haven’t seen it as yet. It doesn’t mean to say that it couldn’t materialize in the coming quarters, but right now business is brisk.

Thomas Carpenter - Hilliard Lyons

Scott are you on the call?

Brian Patsy

Scott, are you out there? I know you were having trouble with your flight, so we’ll see if we can hear from him here. It looks like we may have lost him.

Operator

Your next question comes from Mark Cahill.

Mark Cahill

Going back to what you were just discussing, the shift to the up crease in hosting, is it a budget issue, why are they shifting do you think?

Brian Patsy

I think it’s a combination of factors. One is simply education and making that choice available to the marketplace. It’s unique and it’s refreshing, candidly. Secondly it is a lot easier to get approval for an operating budget than a capital budget because the sales cycles and the budget process for capital budgeting can run as long as 18 months. Thirdly, it creates a lot of flexibility with organizations where they can start small and then ramp up over a period of time as opposed to the big bang theory. There is a lot of inherent advantages in hosted as well in terms of redundancy and disaster recovery, so I think all of those factors combined have created a rich environment for us and we’re promoting it.

Joe Brown, who runs our hosting center, do you have any other —.

Scott Boyden

Hello.

Brian Patsy

Is that you, Scott?

Scott Boyden

Yes, I apologize. I just joined and figured out how to get off mute.

Brian Patsy

Scott hold on a minute. I just passed the baton to Joe to comment on our hosting activities and then we’ll come back to you.

Joe Brown

Yes I agree with Brian. One of the things we see with the document management system is the amount of infrastructure it takes to support that type of system and with HIPPA, Sarbanes Oxley and other compliance issues, the hospitals are aware that essentially you need two systems, you need a production system, but you also need a DR site. So that is where our ASP comes in. It really fills that void and provides some cost avoids for a hospital, they don’t have to purchase that. They lease it from us and we provide both a production system as well as the DR system, so they check the box in both regards. They have a system that they can use and they also comply with compliance regulations out there, HIPPA and the others.

Mark Cahill

Is GE making a big push in this area too, pushing the hosted product?

Joe Brown

Paul Bridge just mentioned people don’t know what DR means, that’s disaster recovery, I‘m sure you do, but we have seen a little more interest with GE, the Marion General of the GE hosted opportunity, but in terms of actually volume, I think that it really is driven by the end user. The end user sees the value of a hosted opportunity versus a capital purchase, then I think at that point it’s a financial play.

Brian Patsy

Mark one moment, what I would like to do is circle back, assuming Scott Boyden is still on the line and circle back to the question that Tom Carpenter asked in terms of what do you see in the market place in terms of activity relative to the economy.

Scott are you still there, can you jump in and give your observations as a new executive on the staff?

Scott Boyden

Brian I would just echo what you had said. Tom I don’t think that, well first I’ve got 60 days of data points, but after being in the market and connecting with customers, reviewing our fees and RFIs, I would tell you that there is quite a bit of activity. I think the reason is that our bridge software I think offers, what I would consider, some first down opportunities and some value back to these customers in less than a year and sometimes in less than six months that they can see, and realize, and touch, opposed to, what I consider, kind of the big bang acquisition in investment in large, large, systems which basically take place over multiple, multiple years. So, because of that I don’t see activity going down. I think it’s actually reversing and I think for the first time we are actually beginning to see, in some of these RFIs and RFPs and conversations with prospects, that there now is a very direct strategy of utilizing bridge software workflows, document centric software to compliment their vision of moving towards electronic healthcare records within their entities. I don’t think in the past we had ever really seen that directly communicated.

Mark Cahill

When you are talking about the bridge, are you referring to integrating all the different vendors together?

Scott Boyden

I am just referring to what some people view in terms of where they put our solutions set. Some people refer to it as bridge software because it connects with current infrastructure and I think that’s a very positive thing for a lot of buyers.

Brian Patsy

Another bridge comment here and my apologies to Paul Bridge in the room, is that what we have out there in healthcare is a hybrid medical record and it has been a hybrid medical record forever and it will most likely continue to be a hybrid medical record for the foreseeable future and beyond. What I mean by that is that a lot of healthcare organizations spent, a typical hospital, $15 million to $50 million to digitize their health information clinical results, patient demographics, billing systems.

The dirty little secret of healthcare is that there is a heck of a lot of documents and healthcare is fundamentally document centric. When we talk about bridging, we talk about bridging the electronic world of the digitized health information with the paper world as well, so we bridge multi-vendor environment, we also bridge the document world with the digital world and that’s a double plus.

Mark Cahill

Do you guys anticipate seeing the percentage of your new business coming forward here is going to be 50% hosted, 50% licensed or is it going to be 60/40?

Scott Boyden

I would suspect it would be more than 50% for all the reasons that everybody on the call has already mentioned. It is less resource constraint in the current organization. A lot of our buyers, especially at the Enterprise level, they have got multiple projects already going on, so it’s easier, it’s simpler for them and as Joe mentioned it is less up front costs.

Mark Cahill

When will we start seeing results out of the Standard Register partnership?

Brian Patsy

From a business development point of view, as I have discussed in previous earnings calls, we have had the relationship for some time, but we weren’t able to really optimize the opportunity and the real break through occurred earlier this year, thanks to Gary Winzenread and his organization when they introduced the new workflow architecture. Simply put, what that allowed us to do was take the value proposition for our Enterprise Solution and chunk it down to a departmental solution that was affordable, primarily through ASP. So, now we have a real story to tell at the departmental level. We reengaged with Standard Register and went through our process and I am very strong believer that you will be hearing some positive new very shortly relative to that new relationship and some success in the market place.

Mark Cahill

Does that mean third quarter? That’s how I interpret that.

Brian Patsy

I will just say that within the remainder of the year you are going to hear some positive news and some traction in that relationship.

Mark Cahill

Regarding the Catholic Healthcare West deal, you mentioned that you are going to implement into three hospitals to begin with and then more down the road. Are you thinking five, ten down the road?

Brian Patsy

I would rather not comment publicly out of respect to our relationship with them and some of our confidentiality. What I can say is obviously they are very large, they have 41 hospitals and there are a number of hospitals that are on the plan for implementation and we are starting with three this year and most likely there will be more than three that will begin. We have already started three. We are in mid-implementation on three. Most likely there will be others this year and then hopefully others to follow in subsequent years.

Joe help me, is that a four or five year agreement?

Joe Brown

It is a five year.

Brian Patsy

Five-year agreement, so there is a rule out plan that extends beyond this year. I can share that with you.

Mark Cahill

With respect to the multi-language capabilities that you are implementing into the products, will that go into beta product by December do you think?

Gary Winzenread

I don’t expect it to be beta until summer of 2009.

Mark Cahill

Where does the total pipeline stand at now, is it still around 75?

Paul Bridge

It is actually a little higher right now and we hope to have that climb even more the rest of the year once we get all the traction through our new direct sales people as well as reengaging our business partners.

Operator

Your next question comes from Dan Veru of Palisade Capital Management.

Dan Veru - Palisade Capital Management

I was just wondering if you are getting a gauge of the overall health of the hospital market from a spending standpoint? Depending on what size Enterprise is, we booked your there has been some push outs and deferrals of making large capital investments. I mean is some of the strength that you’re seeing in the web hosting side of your business an indication that there isn’t money for new soft Enterprise wide implementations. Are there any sort of data points you can share with us about what’s happening in the macro environment and can we conclude that there’s just a pick up in spending or that that’s just started?

Brian Patsy

I will answer briefly and then I will ask Scott Boyden to add some color commentary from his perspective again, because he has joined us within the last 60 days and has a fresh perspective on this.

Certainly budget is one of the considerations, but frankly I see other stronger drivers that are pushing some of these decisions toward an ASP. I think it’s a quick win. You know Scott Boyden talks about first downs and I think that we have this phrase internally of when we interact with the decision makers, namely the chief information officer, they’re looking for wins on their watch, quick wins. I think we can offer them a viable solution here that doesn’t take three years to see a pay back. So it isn’t just the dollar, it is frankly the fact that they can get this installed quickly without having to dedicate a lot of resources on the hospital side, because we do a lot of the heavy lifting and get this installed and get it actually giving a payback within in months as opposed to years.

Scott are you still out there and can you add some color comment from your perspective?

Scott Boyden

Brian, I would just echo exactly what you just said. I think what we are beginning to see, especially in the larger hospitals, is that they’re realizing that despite what they are currently implementing, or what their plans are in terms of trying to reset Nirvana of completely paperless, one legal electronic health record. I think despite that they are now forced to pay attention to certain departments in their hospitals that are just absolutely struggling and choking in paper.

I can’t tell you directly who we are speaking with, because I don’t want to tip off our competitors, but I will tell you that there are very, very large, very prestigious institutions who would surprise you at the level of un-sophistication just in terms of paper tying them up and tying up their resources and tying up their efficiencies and I think those are the institutions that we’re beginning to see who are looking for kind of those first downs, those incremental wins.

I think where we sit is that not only can we help them in those specific departments, but while doing that we don’t create a silo, meaning that we can also fit into the bigger strategic picture, because we can do the whole enterprise and so right now it is just a question of who has the burning platform and which department does it reside in. I think we have a pretty good handle on that, but that’s at least the message that I hear that is being resonated really across the country and particularly at the higher levels. It is almost as if the bigger the institution, the more the chaos and the more paper particularly in the HIM departments.

Dan Veru - Palisade Capital Management

But, that is not a new phenomena. That certainly has been going on for quite some time. Why all of a sudden, has it just reached a tipping point in your view?

Scott Boyden

Well I can’t give you any historical perspective. I mean I’m 60 days into this. I think that from the buyers that I’ve met and being in healthcare as long as I have, I think everybody has a tipping point and I think once you reach it then you decide that you need to act. For whatever the reason, I think people have decided that they need to act. My supposition is that in the past maybe they felt like, well they didn’t quite know how to define what we do and we need to do a better job at telling customers what we do do and prospects, which is an initiative that we have under way. Maybe they thought the document solutions were going to go away when they implemented their big CIS system and now that most of them are beyond that point and they are through implementations or they are trying to get through them I think they are realizing that they are going to need some sort of other solution to help them out and kind of take the hands off their throats because they are not getting any oxygen in some of these departments.

We have even seen projects where CIOs don’t know about the plans there, some of these departments are choking so much so I just think it’s now at a point where it’s reached in certain institutions some pretty significant levels and they don’t have a choice. They’ve got to figure out a solution. They cannot wait any longer for kind of the big bang to take effect and they can’t wait any longer to try something else with another vendor. They have got to fix it.

Brian Patsy

I think Scott absolutely nailed what is going on here. I have been at this a long time, as you know, we go way back and even when document management was a relatively new technology 18, 19 years ago when we started, you go through an educational process and there is this expectations in terms of results. I think the same thing happened with the clinical information systems going back with all the promise of ten years ago and five years ago that we’re going to make your hospital paperless. We are going to create this return on your investment and as Gardner would describe it, we went from the stage of enlightenment to the trough of disappointment and that takes time. All these hospitals drank the Kool Aid of this master vision of a paperless hospital, spent $50 million and then found out they weren’t getting the return on their investment and that took five, six, seven years, because that is how long these implementations last.

Now I think, as Scott appropriately described it, we are at a tipping point where the market is educated. They get it now. They understand that this is not a zero sum game. There is digital data and there are documents and you need to pay the piper in both arenas and you need to look at it on an enterprise basis instead of creating individual silos by department.

It is kind of happening for us and we just need to take advantage of this shift in kind of mind share from the purist view of the world that everything is going to be digital to the realist view of the world that we truly live in a hybrid society and will continue to do so, so let’s get on the program and that’s what happening in my opinion.

Dan Veru - Palisade Capital Management

Any competitors, old or new, that you’re seeing as you present, I mean who do you bump into the most as you go through new prospects?

Brian Patsy

There are three buckets of competitors. I clearly don’t want to give any individual competitor airtime on our watch here, but there is three buckets. The first bucket is what I would call the clinical information system/billing information system companies, better known as hospital information systems. Those are the ones that are selling these $20 to $50 million solutions that supposedly take you to the paperless hospital. GE Healthcare is one in that bunch and they get it and they understand that you need to address the hybrid medical record. The others have either acquired or built their own solution, except for Epic, who has stayed out of that arena. That is one bucket of competitors.

Our response to those vendors is that we take an enterprise view and if you look at the statistics of hospitals in the US, there are dozens of vendors; so if you pick one vendor to solve your enterprise document management, document workforce solution, they are going to be by design having to connect with their competitors. So, our independence and our Enterprise view is our answer to that challenge.

The other bucket is those companies that sell software tools where you can go build your own solution. My only response to that is good luck. Hospitals know how to treat patients, but they are not exactly the best product design specialists in the world; so if a hospital decides to build it then we move on.

In the third bucket are those specialty companies that look and smell like us, but our differentiator there is clearly our workload and clearly our Enterprise view, because those specialty competitors, for the most part, focus on medical records and to some extent patient financial services, whereas we have moved, in a big way, into the administrative areas.

Dan Veru - Palisade Capital Management

As the company grows and again, I am not looking for a laser precision sort of answer here, as you continue to grow out the hosting services business versus software sales new implementations what do you believe will be the right balance of revenues between the two as the company grows? Do you think that 50% will be a hosting type of a revenue base as the company matures? I am trying to get at sort of what should be over, fast-forwarding a couple of years, what the company should look like from a recurring revenue standpoint?

Brian Patsy

That’s a fair question and I will give you my view of the world. I think the trend is clearly toward ASP. I can’t give you a percentage, but in a perfect world what I would like to see as a CEO of the company is a 50/50 mix on the high end, or better, with ASP and I think that trend, we are clearly starting to see that this year. The wild card that excites me as well is the low end of the market and I think there will be a predominance of ASP solutions at the low end of the market and those are the smaller hospitals who can’t afford the large capital budgets or don’t have the IT staff to manage these complex systems and departmental approaches where you get those quick wins on a problem by problem basis within a department. That is why I am so energized by the potential of the standard registry really, because they have a very large install base in healthcare and have the skill sets and the workforce and the sales force to promote our stand-alone workflow solutions at departmental levels; at that end of the market I see a 75/25 or greater mix with 75 being hosted.

Dan Veru - Palisade Capital Management

Did the share count drop as a result of the expiration of the warrant to Hill Street Capital?

Paul Bridge

The share count didn’t change because they were never included.

Dan Veru - Palisade Capital Management

That was never in the fully diluted count?

Paul Bridge

No, well it would have been in those periods in which we had earnings, but in the last two quarters because they have been a loss it would have been anti dilutive.

Operator

Your next question is a follow up from Tom Carpenter.

Thomas Carpenter - Hilliard Lyons

Can you update us on our Emergis plans for expansion, if any, in the US or other geographies? I know they have a modest sized install base in the old days for their Oasis product.

Brian Patsy

Emergis does have a presence in the US and they have sales personnel physically located in the US and obviously they have some accounts in the US. So, they are actively marketing in the United States.

Thomas Carpenter - Hilliard Lyons

Are they ramping that or is that steady state?

Brian Patsy

You know I can’t speak for Emergis, but I know that they strategically think this is an important market.

Thomas Carpenter - Hilliard Lyons

Can you give us an update and I don’t know if you want to count Scott or not, but the number of sales people that you have and delineate on, to use your terms, farmers and hunters?

Brian Patsy

Well the head count is somewhere in the range of 15 to 20.

Scott are you still on board and want to respond?

Scott Boyden

Twenty-one in sales and marketing.

Brian Patsy

I don’t know if we lost Scott or not, but our plan is to get the most productivity out of the team we have and we are in the process of evaluating how to best accomplish that in terms of utilizing our direct sales force and supporting our channels, so stay tuned on that front. Scott is working on evaluation our organization and how we would get the best productivity off of the staff we have.

Thomas Carpenter - Hilliard Lyons

Okay because I know before you had kind of some farmers and hunters, some dual that caught on new and also sort of some new fishing accounts.

Brian Patsy

That was pre Scott Boyden and what I have asked him to do because of his track record of success and his experience is to really analyze that mix and make a recommendation to me in terms of how we might adjust it to be even more efficient. Frankly that recommendation is imminent, so I would rather not comment.

Thomas Carpenter - Hilliard Lyons

So far this year you guys have done a good job in ASP and also had a couple of software deals. I know one of those is going to be recognized next year. When you look at the second half of this year, I think somebody asked about next year, but the second half of this year, are we going to see more of the winds, the traditional systems sale model where the money is in that, the revenue will be recognized in that quarter?

Brian Patsy

Well obviously I can’t speculate and comment on futures other than to say that in looking at the mix there is a mix of ASP and traditional deals. There are also GE transactions in the mix and I don’t know if it will be as heavily loaded toward ASP in the second half of the year, but I will tell you that you will be seeing kind of a robust number of transactions between now and the end of the year.

Operator

Your last question is another follow up from Mark Cahill.

Mark Cahill

I just wanted to pursue that discussion of the market for high-end, middle and low-end. Do you see GE as your arm to go after the high-end and stay in the register at the middle and low end?

Brian Patsy

Again, I see GE and Emergis as primarily high-end, where we leverage their existing relationships where they have a partnership with a institution and a substantial investment in a clinical billing or clinical data repository and we basically piggy back onto that relationship. Then also at the high-end I see our account executives marketing direct to those other customers that aren’t existing GE or Emergis customers or prospects. Then I see us expanding our relationship with standard register for the middle and low-end and primarily departmental solutions so that we can plan those seeds and then sell up to the Enterprise and take advantage of the relationships and the place that they have at the departmental level and our account executives that would kind of fill in the blanks there in terms of a middle market up, but not the low-end of the market: that would be too costly in incremental sales expense. We look to a distribution partner such as Standard Register to give us reach at the low-end of the market in the departmental basis.

Mark Cahill

Is Scott going to push his direct sales force more towards the middle market do you think?

Brian Patsy

No actually I think more towards the high end of the market.

Mark Cahill

Has he requested more new hire’s yet?

Brian Patsy

I’d rather not comment on our strategic plans. Right now we are just assessing what we have so stay tuned.

Paul Bridge

I thank everyone for joining us and wish to advise you that the third quarter 2008 earnings release and conference call are currently scheduled for the afternoon of Tuesday November 25, 2008. Thank you very much and this concludes our conference call.

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Source: Streamline Health Solutions, Inc. F2Q08 (Qtr End 07/31/08) Earnings Call Transcript
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