TriZetto Group Q3 2007 Earnings Call Transcript

| About: TriZetto Group (TZIX)
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TriZetto Group, Inc. (TZIX) Q3 2007 Earnings Call October 30, 2007 5:00 PM ET

Executives

Brad Samson – Vice President of Investor Relations

Jeffrey H. Margolis – Chairman of the Board & Chief Executive Officer

Kathleen B. Earley – President & Chief Operating Officer

Robert G. Barbieri – Chief Financial Officer & Chief Accounting Officer

Analysts

Corey Tobin – William Blair

Richard Davis – Needham & Company

Newton Juhng – BB&T Capital Markets

[Mike Cherney] – Deutsche Bank Securities

Richard Close – Jefferies & Company

Alex Alvarez – Goldman Sachs

Andrew Weinberger – Galleon

[Ben Stillski] – Piper Jaffray

Leo Carpio – Caris & Company

Donald Hooker – UBS Securities

George Hill – Leerink Swann & Company

Operator

Welcome to TriZetto’s Third Quarter 2007 Results Conference Call. Today’s call will be in listen only mode. Following the presentation there will be a Q&A session. Instructions will be given at that time. I would also like to inform all parties that today’s call is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the call over to Mr. Brad Samson, Vice President of Investor Relations. Sir, you may begin.

Brad Samson

Thank you. Good afternoon. Welcome to our call. The call is being webcast and an audio replay will be available for 30 days on the TriZetto website as well as other third party sites. Following initial commentary, we will open the line for question for which the operator will provide instructions later. Please note that this call may include forward looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and are only predictions. Actual events or results may differ materially. In evaluating these statements you should specifically consider various factors including, the number of risks outlined in detail in our SEC filing including our annul and quarterly reports on forms 10K and 10Q. These and other factors may cause our actual results to differ materially from any forward looking statements. We do not undertake to update any forward looking statements. Also, certain non GAAP financial measures may be discussed during this call. Definitions of these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and on our website.

With that said, let me introduce TriZetto’s Chairman and CEO, Jeff Margolis.

Jeffrey H. Margolis

Thanks Brad and a very good afternoon to everyone. It’s an exciting time at TriZetto right now as we are in the midst of celebrating the creation of TriZetto 10 years ago this month. As we celebrate our 10 year anniversary I am extremely proud of the value and positioning that has been created by our current team of nearly 1,900 employees and those who preceded them. Since inception TriZetto has generated over $2.1 Billion in revenue and has built the leading information technology and services company that specifically serve entities that organize systems of healthcare, healthcare payors.

Steadily, profitably and by strategically investing in a longer term view of healthcare industry change, TriZetto has built an unrivaled integrated technology footprint of well over 100 Million US lives and over 350 payors. The industry expertise and focus of TriZetto professional associates and the truly remarkable set of customers that comprise TriZetto’s footprint are our competitive advantage and yet, I believe we are just beginning our efforts to generate tremendous value.

I recognize that some of our investors would like for TriZetto to beat our chest a little louder, after all we invented enterprise software as a service for the healthcare industry and today provide hosted Internet software services for over 10 Million lives. We pioneered Internet based cell service portals so that payors could interact with providers, members and employers and have more than 100 payors who build their portals based upon web solutions that we have licensed to them.

Our personal CareAdvanced software has approximately 11 Million lives licensed and enabled for electronic personal health records. And, while others out there are talking about single payor portals, TriZetto has the first commercially available real time point of service solution in the market place and our customers provide a network representing an estimated 80-90% of physicians and hospitals in the US.

So why, you may ask, don’t we issue a steady stream of sensationalistic press releases or invest in countering the hype provided by other organizations. The answer is because TriZetto’s focus is on creating success for our customers and helping them support their customers, that is, healthcare consumers and their caregivers in a rapidly changing environment. Our customers do represent a unique community. It is fascinating to see this community in action when it gathers several times a year at events such as TriZetto’s payor conference where hundreds of our customers and prospects come together to talk about industry issues and solutions. What can be observed when this group is together, even though many attending organizations compete with one another in the market, is a powerful level of synergistic energy much like a tropical storm that grows in strength proportionally with its size. Many of our sales side analysts have attended our payor conference and I think they can give you some insight.

But, although we sell into a specialized community of complex businesses, I think that it’s fair to say that among our customers where our unaided brand awareness exceeds 97% we benefit from the same kind of community that adds so much value to premium branded companies like Apple. Outside of our customer community however, we are much more of an intel inside or a BASF who uses the expression, “We don’t make the products, we make the products better.”

Billing healthcare services is the business of our customers. And yet, TriZetto’s industry footprint also represents a broad distribution channel for products and services into and through the payor industry. As you know, a significant part of our strategy is to drive additional products and services through that channel to increase the value of our solutions for payors and in turn fuel TriZetto’s growth. We leverage that opportunity to internal development of products and services, partnerships and, when it makes sense, acquisitions. There’s nothing else like TriZetto’s quite but powerful channels in the payor industry and it cannot be easily or quickly replicated, if at all. So, unlike many buzz word of the day entities that keep popping up, our footprint has unique and lasting value for TriZetto’s customers and shareholders.

Long term, this standardized technology footprint represents a unique opportunity to make healthcare in its broadest meaning better for everyone. This group of payors and their members using various pieces of our increasingly integrated technology is a platform on which new, much needed products and services, can and must be built. The problems our healthcare system must overcome will take some big leaps in systematically applied technology. The kind of technology platforms that TriZetto has and will continue to invest in and such massive change cannot be accomplished on a fragmented basis.

There are many organizations running around with PowerPoint decks that talk about pay for performance, consumer engagement and behavior change, quality measurement, transparency, care, disease management and wellness. But, what’s glossed over is that a core foundation of linked technology platforms and data is necessary to give these ideas any real chance to change healthcare on a broad scale. TriZetto is the only company with that foundation. Our customers understand this part of TriZetto’s unique value but, I don’t think enough of Wall Street does.

The management team of TriZetto recognizes that in an ideal world we would translate the industry transformation from wholesale to retail healthcare on a real time point of service basis combined with the coordination of advanced care management into a finite set of software and service sales metrics that are easily timed and financially quantified for investors. I would remind our investors that TriZetto has historically demonstrated an ability to grow rapidly in a consolidated market space, has added solutions to its portfolio that are predictive of industry change and has done so in a manner that focuses on the production of increasing cash flow per TriZetto share.

Let me add a couple of key points of color to that. The payor industry tends to be counter [inaudible]In other words, when premiums and memberships are rising payors tend to think they don’t need to make as many information technology changes or investments. However, when things get tighter, as they’ve increasingly become for payors of late, we often see growth in IT spending. In fact, for the first time, Care Management made it to the top three investment priorities for 2008 in Gartner’s latest Healthcare Insurer IT Priorities Research Report. It’s never been in the top 10 before. This is consistent with what we’ve been saying about the important of payors addressing the cost and quality of care which consumes more than 80% of the premium dollar they take in. Further, core administrative systems which underlie all substantive transformation initiatives in healthcare, I’m going to repeat that, core administrative information systems underlie all substantive transformation initiatives in healthcare continue to be a the top of the list as well. And, even without complex transformational needs we expect that new ICD10 requirements will be a catalyst for administrative systems reviews over the next several years.

Government sponsored plans and our customers continue to be a strong tailwind for our growth. With the rollover of the baby boom generation and Medicare just beginning, Medicare spending is expected to grow at a 10% clip through 2014 and hereto, care management is being considered an important tool for maximizing the efficiency of the dollars spent. Beyond the US, we continue to see growing opportunities internationally. By many of the inquiries that we are getting it is evident that despite the attempted utopist views of nationalized healthcare systems that garnered so much attention from Michael Moore’s film this summer, these national payors are, in fact, struggling and will benefit much from utilizing technology and process in place in their commercial US. For example, back on our Q1 call we noted that we had sold facets to a group of US payors that are setting up to operate in China. They’re gearing up to go live in Q1 of 2008 and as their business grows in China we hope to see further expansion of the base software license as well as other software and service opportunities.

You can see why we’re so optimistic about the future. While all these things represent tremendous opportunity for our business for the next several years, you must remember that the biggest hurtle for many of our customers is overcoming their own historical success. The transformation that is taking place among payors towards consumer retail healthcare requires a dramatic shift of culture. For many of the payors rank and file employees, members were little more than enrollment forms, ID cards, claims, authorizations and referrals. But, this emerging consumer healthcare world we’re in is much more about encouraging and facilitating good health for every member and, this transition is difficult for our customers. So, this can be a limiting factory on how quickly we install some of our products as we’ve seen in CareAdvance. But, this does help us as well as it tends to spread our opportunities out over time giving us a more consistent long term growth trajectory.

I’m pleased to now turn the call over to our President and Chief Operating Officer Kathleen Early to talk more about TriZetto’s operations and specific highlights of the quarter. Kathleen.

Kathleen B. Earley


Thank you Jeff. The third quarter is always an interesting challenge to close business with two national holidays falling in the quarter and so many of our customers taking their annual vacation. While I wouldn’t characterize this as an easy quarter, sales product management and professional services did a nice job bringing the quarter home with a good mix of TriZetto’s many different products and services.

Let’s start the highlights with facets. One of our two premier core administration systems where we gained one new customer in the quarter, expanded five licenses for more members and delivered two significant billable modifications such that revenue was recognized. It is also important to note that customers continue to upgrade to the most current releases. I’m delighted to report we now have 42 of 77 facet customers on either 4.3 or 4.4 release. And, as those of you who have been around for a while know, customer upgrade typically generate good consulting revenue for us. In addition, facets 4.5 goes into limited release tomorrow which contains more than 100 enhancements focused on greater efficiency of core processing, enhanced consumer directed capabilities, Medicare and Medicaid enhancements and other new features requested by customers.

QNXT our other premier core administration system had a very strong quarter. We were excited to sign not one but two hosted QNXT customers. This is an important milestone as cross selling hosting services is one of the more significant opportunities with the QCSI acquisition. In addition, one of the hosted customers is a super behemoth who will leverage it to serve their Medicare Advantage, Medicare Fee for Service and Medicare Part D members. We also sold a major upgrade to one of the larger existing QNXT customers. With these solid third quarter results for core administrative software I consider the QNXT integration on a sales and organization level to be closed. These two hosted sales, one to a behemoth, validate our strategy that core administrative systems continue to be important to payors who want to play a key role in participating in the growth markets of healthcare that Jeff just discussed.

[Inaudible] garnered two deals in the quarter. One was a new account for critical CareAdvance, the other was an existing flagship CCA customer that has now purchased Personal CareAdvance. This is exciting because we believe this account will also become a flagship account for TX with CCA. With one more client going live in the third quarter we now have 16 CareAdvance customers with nine in production that cover more than 20 million unique lives. The pace at which customers can reengineer their cultures and business prophecies continue to be a significant factor governing adoption and implementation for us yet, CareAdvance continues to be a high interest product among our customers and prospects and our pipeline remains strong.

Our NetworX products continue to have strong interest. We held a provider contract management webinar in conjunction with our partner M Taurus during September which yielded 77 attendees representing 50 different organizations most of which are top network prospects. In addition, we had two more customers go live on NetworX during the quarter. And, after training our sales force on the product earlier in the year and now supplementing that with targeted webinars and other marketing campaigns our pipeline remains robust for this product suite.

Last quarter I mentioned the sunset plan for our 25 year old fax product line which is a mainframe based Cobalt product. This generated more concern than we intended or was warranted. First, the maintenance stream from fax is small. In the third quarter, for example, maintenance revenue was $1.5 million and while the margins are decent our leverage is much greater if we can redeploy our assets in growth products and services. In addition, many of the 35 fax customer are of a pretty good size and a couple of conversions to Facets to QNIX will quickly make up the revenue difference. The port for claim Fax and Group Fax does not end until March, 2009 so there’s plenty of time for customers to access whether they want to convert their systems. Each of these 35 customers is assigned to a sales person since they have now turned into sales prospects and several are investigating Facets as a core replacement system.

There are a couple of other operational highlights worth mentioning this afternoon. Our BA business held its 25 Annual Benefits Administration Client Conference. We had our best attendance in over four years with 180 customers attending from 71 different organizations. We also had three prospect companies attend, one of which has already resulted in a sale. The overarching theme of the meeting was to unveil our premier partnership program which is a two prong DA reinvigoration strategy. By leveraging our footprint we are creating high value add solutions that make our benefits administration customers more competitive in their market. In the third quarter five contracts under the premier partners program were completed and we are optimistic about this programs future as additional solutions are developed.

On the development and professional services front great progress has been made at expanding our lower cost, lower resource capabilities. We have over 100 personnel trained and deployed to active projects in core development and on billable caravans and network assignments in professional services. And, we also leveraged this capability further in our hosting and BPO businesses. We view this multisourcing as a way to continue to expand our services and revenue while also driving margin expansion.

Finally, this year we’ve been developing TriZetto’s constituent view model which addresses the growing need for our customers to better understand their own customers or constituents in the evolving world of consumer retail healthcare. In other words, what do brokers, providers, consumers and other key constituents need from the consumer health plan of the future? This model is providing a foundation for demonstrating our thought leadership and TriZetto’s newest product capabilities. These concepts are driving boarder customer discussions and we will be featuring these concepts at our annual vision summit in November. This invitation only event is expected to bring together nearly 100 key customers and prospects including 30 from our QNIX relationship. If you want to learn more about this constituent view don’t forget that we have a number of great white pages on the TriZetto website which I know you’ll find informative.

Summing up, I was proud of the team’s work through the always difficult summer quarter. We did some material reorganizing at the beginning of the year and I think it shows what a high performance organization we have that it performed so well through all three quarters. I have every reason to believe that with this team and our strong pipeline, our high level of customer service and sales performance will continue through the fourth quarter and into 2008. Now, I’ll turn the call over to our CFO, Bob Barbieri for this financial highlights.

Robert G. Barbieri

Kathleen, thank you. Good afternoon everyone. I’m very happy to be here for my first official quarterly call. I know there’s a lot of anticipation about guidance which we noted in our press release and I’ll expand upon that later. Since I’ve been here 11 weeks thus far, let me start off with some observations. Over those weeks I’ve visited many of the company’s field locations and participated in a number of word and leadership team activities. These address strategic operating and tactical issues. Let me summarize a few points. First, it’s evident to me that the company’s strategic opportunity is tremendous. Second, the financial team from the leadership level and throughout the whole organization is very strong and scalable and, recently we’ve refined our structure to be more closely aligned with our overall company strategy. Third, I’ve been impressed with the rigor and the quality of the company’s financials and the board’s audit committee and our discipline process. So, overall I’m very excited to be part of the executive team and to be in a position to help advance the company into its next stage or profitable growth.

So now, let’s cover the financial results. TriZetto delivered another strong quarter within our guidance and are solidly on track for achieving our now raised guidance for 2007. Let’s start with some revenue highlights. Quarterly revenue in the third quarter of $106.9 million was 24% ahead of the year ago quarter and represented our third $100 million plus quarter in our history. Let me make a brief comment here. Since arriving at TriZetto a number of investors and analyst have inquired as to the organic growth rate of TriZetto’s revenue. Based upon my analysis of our year-to-date financial results, and our fourth quarter forecast, I expect our 2007 organic growth to be in line with the company’s long term organic revenue targets of between 8-12%.

Highlighting our recurring and nonrecurring breakdown in the third quarter, recurring revenue was $59.5 million or 56% revenue, that compares to $57.7 million or 50% in Q2 of this year and $42.8 million or 50% in the year ago quarter. Recurring revenue includes software maintenance, term license software and outsource business services which includes hosting and business process outsourcing. Let me break those recurring items down further. Outsource services revenue in the third quarter was $24 million compared to $23.3 million in the second quarter and $20.4 million in the year ago third quarter. Software and maintenance set a sixth consecutive quarterly record of $31.9 million in the third quarter compared to $30.8 million in the second quarter of this year and $22.4 million in the year ago third quarter. Recurring or term software license revenue was $3.6 million in the third quarter, roughly equal to the prior second quarter.

Let me switch over to nonrecurring revenue which was $47.5 million in the third quarter and included perpetual software license revenue, consulting and other nonrecurring services such as customizations and modifications for our customers. Nonrecurring software license revenue in the third quarter was $9.9 million compared to $19.8 million and $19.0 million in the year ago third quarter. This illustrates the lumpiness of our bookings and revenues streams that occur in some quarters. As many of you would infer obviously, inclusion of another deal in the quarter would have significant impact on that quarter. But, the really important point of this is that the finding of any one or two deals in and out of any specific quarter really doesn’t change the overall momentum of our business model. Consulting and other nonrecurring services revenue for the third quarter was a record $37.6 million compared to $37.4 million in the second quarter and $24.7 million in the year ago quarter.

Let me provide some color on bookings. Third quarter bookings were $74.5 million compared to $93.8 million in the second quarter and $75.9 million a year ago. Now, I know some will be disappointed in that number but, you shouldn’t be. The company has been very clear in stating that bookings can have a great variability from quarter-to-quarter and year-over-year with the mix of products and the timing of contracts. Further, I know the company has consistently said that it needs to average about $70-$75 million in bookings for each quarter to make its year depending on the product mix. Our year-to-date average is $89 million per quarter so you should see that we’re well ahead of the game. At this point last year the company was averaging $81 million per quarter in bookings.

In the quarter there were 72 software license contracts which included maintenance and totaled $33 million. These comprised 44% of the total third quarter bookings compared to 50% in the year ago quarter. There were 21 outsource services contracts totaling $16 million and comprising 21% of total bookings in the third quarter versus 28% in the year ago quarter. 222 consulting and nonrecurring service contracts generated $26 million in bookings which comprised 35% of total bookings compared to 22% in the year ago quarter. These revenue and booking numbers illustrate that we continue to have multiple paths through our quarter and the mix of products and services will vary from period to period.

Our total backlog in September 30, 2007 was $941 million compared to $944 million at June 30th of this year and $748 million on September 30th a year ago. Twelve month backlog was $226 million as of September 30, 2007 compared $229 million at June 30th this year and $192 million at September 30th a year ago. Our gross margin for the third quarter was 39.1% growing 120 basis points from 47.9 in the third quarter in 2006. This improvement was primarily driven by operating efficiencies and improved pricing of our services. However, it was down from 51.5 in the second quarter driven by our lower mix [inaudible] contracts.

Our R&D expenses for the third quarter was 14% of revenue consistent with the second quarter and compared to 12% in the third quarter of 2006. This represents a $4 million increase year-over-year due primarily to higher compensation costs and increased usage of outside consultants to support additional products resulting from the planned data management and the QCI acquisition.

Our SG&A expense was $25 million in the third quarter compared to $29 million in the second quarter and $36 million in the year ago quarter. The $11 million decrease from the year ago quarter included the $15 million patent litigation settlement last year offset partially by higher compensation costs from acquisitions, staff growth and merit increases.

Our third quarter adjusted EBITDA was $21.7 million up 21% compared to $17.9 million a year ago. As a percent of revenue it decreased 40 basis points and 20% of revenue. Let me remind you that adjusted EBITDA does not included stock base compensation and therefore does not include the impact of FAS 123R. Management plans to maintain this definition of adjusted EBTIDA to help investors understand our comparable performance year-to-year. Management focuses on adjusted EBTIDA offset by capital expenditures, the net cost of debt service and taxes in the creation of shareholder value.

Income before taxes was $12.8 million in the third quarter compared to a loss of $5.8 million a year ago. This is a very relevant measure for TriZetto since it is not impacted by the change in the tax rate or the fluctuation in EPS calculations arising from the accounting for convertible debt. Net income from the quarter was $9.6 million or $0.17 per diluted share. That compares with a net loss of $5.7 million or $0.13 loss per diluted share year ago quarter. Our EPS for the quarter and year-to-date treats the convertible debt issuance as if they were fully converted to equity. The issuances which may be settled in cash or stock or treated as debt, the diluted share count for the third quarter would be approximately 47 million shares.

Let me make a few comments on year-to-date EPS to enhance the understanding across our investor base. Due to end Q3 contained two offsetting adjustment items related to the accounting for our convertible debt offering which contained a documentation error which was subsequently corrected. This clearly was documented in our second quarter end Q. The net affect of these one time adjustments was less than $0.005 per share EPS. In the third quarter we stepped up actions to achieve our targeted 40% tax rate for the year. On a year-to-date basis our 39% tax rate is in line with our full year objective. What I’m telling you is that I consider EPS on a year-to-date basis to reflect our true operating performance.

For the third quarter the effective tax rate was 24.9%. Remember, that last year’s third quarter had an effective tax rate of approximately a -1.8. So, there is a net negative impact to our EPS of size $0.05 attributable to our current quarter’s tax rate. Although it did not affect the tax rate we’ve thus far utilized approximately $26 million of our federal net operating loss carry forward on our balance sheet in 2007. We have a remaining balance of approximately $18.6 million.

The accounting for our two convertible notes may result in a great deal of variability in diluted EPS from quarter-to-quarter and year-over-year because, the convertibles may or may not at different points in time affect diluted share count. We may also want to talk about basis EPS which was $0.21 in the third quarter versus $0.13 a year ago. Again, last year’s third quarter effective tax rate was approximately a -1.8% so there’s a net negative impact to our basic EPS of $0.07 attributable to the current quarter’s tax rate. We believe that basic EPS will be increasingly more meaningful for our investors to measure our performance.

One thing I’ve noticed since arriving at TriZetto is that we have a long history of emphasizing share count control to maximize shareholder value. I don’t know if companies exercise this kind of care, good share count management provides an effective multiplier which allows us to expand our EPS and our cash flow per share at a faster growth rate than our top line. While we’re talking about shares, at last week’s board meeting we received an increase in share repurchase authorization. Previously, we were authorized to repurchase up to 1 million shares. The new board resolution authorizes us to repurchase up to a lesser of 3 million shares or $50 million. Additionally, we renegotiated the share repurchase limitations with our lenders which was previously limited to $5 million.

As of September 30th our cash, cash equivalent and short term investments total $250 million. This compares to $257 million at June 30, 2007 and $88 million at September 30, 2006. Cash flow from our operating activities was -$5 million in the third quarter compared to $2.6 million in the second quarter and $14.5 in the year ago third quarter. Significant use of cash in the quarter included repayment of a line of credit, the second half payment of the patent litigation settlement and payment of principal and interest on the term loan. The year-over-year decrease in the quarterly operating cash flow was primarily due to a $7.5 million final payment to McKesson for the patent litigation settlement as well as differences in the timing of vendor payments which resulted in $7 million change in our accounts payable balance. Even with the patent litigation settlement payment this year, 2007 year-to-date cash provided by operations is slightly ahead of last year.

Our DSOs were 71 days in the third quarter compared to 60 days in the second quarter this year and compared to 63 days in the year ago quarter. DSOs can be affected by the timing of software sales in the quarter. Our capital expenditures were $5 million in the quarter versus $7 million in the second quarter and $5.1 million in the year ago quarter. The third quarter spend was comprised of $2.7 million for PP&E mostly related to our data center and $2.3 million for capitalized R&D predominately for our Facets, HealthWeb, NetworX and CareAdvance products. We continue to exercise good control over capital spending and we expect it to come in around the middle of our guidance range of $25-27 million this year.

Based on our year-to-date results and expectations for the fourth quarter we are raising guidance for 2007. For the full year 2007 TriZetto expects between $445-$455 million of revenue representing a 28-31% increase over 2006. TX expects diluted EPS to be in the $0.46-0.51 range which includes an estimated $0.21 per share negative impact as compared to 2006 due to the effect of a full tax rate in 2000 caused by the application of the remaining NOL cash benefit balance sheet.

Non cash items having a negative impact on 2007 diluted EPS total $0.54. These items include the expensing of equity based compensation estimated at $0.11, appreciation and amortization estimated at $0.35 and the impact of utilized and [inaudible] converted methodology for share count estimated at $0.08 which was not factored into the original 2007 EPS guidance. Basic EPS is expected to be $0.57-$0.64 on a basic share count of approximately 45 million.

Adjusted EBITDA for 2007 is expected to be between $93-$98 million an increase of 39-47% over 2006 adjusted EBITDA. Diluted share count for 2007 which is determined as if both of the companies convertible debt issuances are fully converted to equity is expected to be approximately $61 million. These issuances which may be settled in cash or stock or treated as debt, the diluted share count for 2007 would be approximately $48 million.

At this stage based on our planning and in response to question I received from investors, I would also like to provide some preliminary guidance for next year. For 2008 the company is expecting revenue between $480-$500 million representing an 11-14% growth rate from continuing operations and reflects the company’s planned exit from non strategic onsite administration, EPO and claims link services which generated approximately $15 million of revenue in 2007. To save you the calculations, the revenue guidance represents an 8-10% growth on an absolute basis if you ignore the lines of businesses that we’re exiting.

The company is targeting 2008 diluted earnings per share growth of at least 30% and expects that we’ll also provide more detailed guidance on its full year 2007 results announcement. At this time I want to turn it back to Jeff. Thank you.

Jeffrey H. Margolis

Thanks Bob. It’s good having you on board as a member of our executive team. I’m very pleased to report our 14th consecutive quarter of meeting or beating our guidance. I’m equally pleased with our progress towards our now raised full year expectations. I trust that we’ve communicated some of the unique value that TriZetto holds in the healthcare industry based on the strength of our business which leverages the largest footprint of integrated technology, customers and members in the industry. We’re targeting strong growth to continue into 2008. And, with that operator, we will take questions. Operator?

Operator

Yes, sir. Would you like to open it up to questions?

Question-and-Answer Session

Jeffrey H. Margolis

Please.

Operator

Certainly. One moment, sir. If you’d like to ask a question please press star one. Corey Tobin with William Blair you may ask your question.

Corey Tobin – William Blair

Hi. Good afternoon. I wanted to touch upon a couple of things. We’ll start at the bookings for a second, if I could. I’m sorry, with the guidance for a second if I could. Just to be clear, the $15 million that you’re indicating here, that’s different from the fax product offering that’s going to discontinue in 2009 that we talked about last quarter? Is that correct?

Robert G. Barbieri

That’s correct.

Corey Tobin – William Blair

Okay. So, this is a different product alignment that’s also going to be sunsetted. But, it sounds sooner, as soon as next year?

Jeffrey H. Margolis

That’s correct. It’s a line that’s going to be discontinued Corey and we’re not changing anything due to the fax piece that you mentioned.

Corey Tobin – William Blair

So, we think of, I mean, the guidance of $480-$500, would that have been, I mean, is it accurate to think that would have been $15 million higher had you not, if you weren’t exiting these business lines?

Jeffrey H. Margolis

That’s exactly correct.

Corey Tobin – William Blair

Okay. Great. And, was there any booking impact this quarter from either the fax product line or these other product lines you’re talking about discontinuing at this point?

Robert G. Barbieri

No, if anything it was quite nominal. Very small.

Corey Tobin – William Blair

Okay. So, [inaudible] the bookings for a second, was there anything abnormal in this quarter that might have fallen one way or another? I mean, your comments that the bookings quarter might have been a little disappointing. I mean, there were so below what, I think, we were looking for others as well. So, is there anything in particular that you saw in this quarter that might have held up bookings from what you’ve seen through the prior parts of the year?

Kathleen B. Earley

This is Kathleen, Corey. No, I think it was actually a pretty normal quarter for a third quarter. It really gets all down to what I mentioned in my talk in terms of being able to get all the scheduled sales calls in play and in place on time given the vacations of our customers.

Corey Tobin – William Blair

There’s nothing you’re seeing from a weaning of the pipeline or anything along those lines?

Kathleen B. Earley

Absolutely not.

Corey Tobin – William Blair

And, finally, on the pipeline comment, you mentioned the pipeline remains strong especially for the CareAdvance offering, can you quantify this in any way? Is there any types of numbers you can put around that?

Kathleen B. Earley

No. We don’t talk about our pipeline discreetly by product. But, I can just tell you that it’s something that we monitor on a really, Bob and I take a look at the pipeline on a weekly basis, every single Friday with the sales call and then on a monthly basis we actually look out three and four quarters and, as you can well imagine, we’re right in the middle of our 2008 business planning cycle right now and I’m feeling very comfortable about where the pipeline stands.

Corey Tobin – William Blair

Okay. Great. Thank you.

Jeffrey H. Margolis

Thanks Corey.

Operator

Richard Davis of Needham & Company.

Richard Davis – Needham & Company

Hey, thanks very much. You guys singed a Humana, I think, to CareAdvance earlier this year and I guess, the theory behind them signing up with you guys is that they can kind of convert their business, or transform their business so they almost become a care and wellness firm rather than a, you know primary job would be to rationing payment and things like that. I think that’s a good idea for them but, and, business wise they can probably use that to undercut their competition. Have you seen, is that, one is that a correct assessment? Two, is that happening now? Three, if it’s not when do you think they’ll get that kind of payoff?

Jeffrey H. Margolis

Well, I mean, I think they’re very innovative company in their use and application of our technology and I think that you’ve already seen some payoff from them and, I think, I don’t know if you’ve noticed this but, you know, in terms of them being a health and wellness organization on an international basis, they’re on a pretty nice short list of companies that have an opportunity to do some business over in Europe as well.

Richard Davis – Needham & Company

Got it.


Jeffrey H. Margolis

I think they’re, I think they’re benefiting already from the uptake.

Richard Davis – Needham & Company

Okay. Perfect. That was my main question. Thanks so much.

Jeffrey H. Margolis

Thank you Richard.

Operator

Newton Juhng of BB&T Capital Markets.

Newton Juhng – BB&T Capital Markets

Good afternoon everyone. I wanted to touch base on how you’re formulating your guidance now versus, you know, when Jim was kind of at the helm there. Has there been any changes to the way you’re looking at it, or the types of haircuts you’re taking at this point? Or, is it kind of pretty similar to where you were before?

Jeffrey H. Margolis

Well, my global comment Newton will be you wouldn’t have gotten any indication this early before.

Newton Juhng – BB&T Capital Markets

True.

Jeffrey H. Margolis

Bob is, you know, I’ll let Bob speak for himself but, what we’re trying to do is based on where we are in our planning cycle, let you know what we’re seeing and also let you know what we’re targeting. But, the basic guidance methodology, I don’t believe we plan to change.

Robert G. Barbieri

The other thing that I would add is where we are in our annual process, we are winding up our business planning and that is our internal business planning but, Kathleen and I spend anywhere from one to more than one time per week evaluating pipeline, product by product and category momentum. So, if anything, we feel that we have a good forward view to provide some help right now. Now, we’re certainly going to come back with more detail and a bit more vigor when we do our full year close call. So, yeah, I can’t speak for what happened in the past but, if anything, we did hear that investors wanted a little bit more color and a little bit more optics around guidance and, I wanted to be responsive to that.

Newton Juhng – BB&T Capital Markets

Bob, obviously, it’s very helpful to put this out in this point and time. The other thing that I was wondering about was your tax position on the balance sheet. Obviously, it was pretty robust there, about $250 million. Can you give us an ideas as to, besides share buy back, where some of the dollars may get spent in the future? Things that you’re looking at, prospects, etcetera?

Robert G. Barbieri

Let me, I’ll try it first from a broad standpoint. Certainly, we’re in a good flexible balance sheet position which is good. I mean, a lot of companies are cash limited and you don’t want to be in the predicament. So, with that theory, you have share buy back, as part of TriZetto’s history, as most folks know also, inorganic and acquisitions, whether they were smaller [inaudible] or things that add a little more substance, were always important. But, you need to be on the ready. Like anyone whose dealt in the world of deals, they’re fragile, you don’t know when they happen, you don’t know if they happen so, you periodically examine things and you do want to have the financial wherewithal that if something presents itself that you’re ready. So, that’s the broad based kind of look, and Jeff, I’m not sure if you have anything else?

Jeffrey H. Margolis

The only other thing I’d add to that is, of course, we do have some debt, conventional debt on the balance sheet and so, as we look across these different options, we also have potential pay down of debt as a use of cash as well.

Newton Juhng – BB&T Capital Markets

So, in terms of the size of acquisitions that could potentially be out there, doesn’t necessarily have to be something of a smaller tuck in variety, it could be something a little larger.

Jeffrey H. Margolis

I mean, we don’t comment specifically on anything with acquisitions. If we have something in a stage that it warrants communicating to investors, we would, of course, immediately communicate that.

Newton Juhng – BB&T Capital Markets

Okay. Thank you very much.

Operator

Ross Mukin of Deutsche Bank Securities.

[Mike Cherney] – Deutsche Bank Securities

Hey guys, this is actually [Mike Cherney] in for Ross. I might have missed this before but, can we talk a little bit about what happened on the product revenue side? I know that there’s a sequential decline, as well as when you look at it year-over-year is also down. So, in case I just missed this, mind going over that a little bit?

Kathleen B. Earley

Yeah. This is Kathleen. Let me address that one and then Jeff or Bob can jump in. Actually, as I’ve said before that I think our pipeline is very strong on the software side. I’m pleased with our results year-to-date. As we’ve always said over the course of at least the last three years that I’ve been here, we have multiple ways to make any given quarter and I think that this is another quarter that proves that point. And, the last point I’ll make is that the third quarter is historically our shortest quarter in terms of actual numbers of days worked and sales calls that can be made on our customers given the fourth of July, Labor day and customer vacation. So, I am optimistic on the product revenue side on a going forward basis and I’m pleased with our performance. We fell within guidance.

[Mike Cherney] – Deutsche Bank Securities

Okay. And then, just to address the tax line again, I know you guys said that you had done some things to normalize the tax rate. Is this something that you can expect to continue going forward? Or, is this simply more of a catch up to get you back in the 39% range?

Jeffrey H. Margolis

Well, I would say it this way, it is a bit of a catch up so, certainly we did, we took advantage of going harder after R&D tax credits as well as some state tax kind of optimization planning. Though, we think to get to the 39 or the 40ish rate we’ll continue to look primarily around the state level for that. But, as you well know, probably the larger optimization potential is as the company goes to greater proportion of its business over seas. Then, what you would basically do is look for international advantage, lower tax rate jurisdictions but, right now we’re not at the stage in our corporate development but, we do have that tax strategy in mind as we move forward.

[Mike Cherney] – Deutsche Bank Securities

Okay. Great. Then, just one more quick question, going back to the buy back and the expansion of that, is that something you expect to be active on right away, or just something to give you a little more flexibility going forward considering your cash position?

Jeffrey H. Margolis

Right now it’s flexibility so, we’re not in a position right now to get specific on any actions. For right now, we do have the flexibility that we want.

[Mike Cherney] – Deutsche Bank Securities

Great. Thanks guys.

Operator

Richard Close of Jefferies & Company.

Richard Close – Jefferies & Company

Yes. You know, obviously, to raise your guidance you guys feel pretty confident and Kathleen you talked about the, you know, the strength in your pipeline and all that. Curious whether you could maybe give us some directional, you know, information with respect to if you sit here today, you know, coming out of the third quarter your pipeline as compared to maybe a year ago or even in the second quarter. Do you think the market is stronger today than it was a year ago? If you can help us out there.

Kathleen B. Earley

I would say that on a cost and quality of care side it’s equally strong as it was last year. I would say that I think that our strategy and focus on the growth segments on the core administrative side is playing to our advantage. So, from a core admin side with a lot of our customers and prospects looking at the government market side of things whether it’s Medicare or Medicare Private Fee for Service or Medicare Part D that, that is driving lots of changes. I’d also say to go back to what Jeff talked about in his talk which is that companies really want to get prepared to be health and wellness companies and in the long term not only do they have to be able to have platforms just as care management and NetworX but they also need to have a core administrative system that is state of the art that really allows an end-to-end solution like we’re talking about. So, some customers are starting on the cost and quality of care side and they’ll work back into the core admin side. Other customers are starting by replacing their core admin systems and then they’ll get to the care management side. So, we’re seeing it go both ways.

Richard Close – Jefferies & Company

Okay. Then, when we look at QNXT, I guess, product you had mentioned two hosted customers, one a super behemoth. I thought, mainly speaking, that product offering was for smaller type of firms so, it’s interesting to hear you with a behemoth there. Maybe if you could give us some more details around that win.

Kathleen B. Earley

Well yeah. We’ve also said though that both of our products are scalable but, if we absolutely have to target the products they do have individual strengths. The thing to keep in mind here is that this is a line of business within a behemoth that is targeting the government sector. So, it is the Medicare, the Medicare Private Fee for Service and the Medicare Part D. So, again, it’s a particular line of business within the behemoth. They’re not using the platform for all the core medical lives. So, we think it is very well suited in this particular case.

Richard Close – Jefferies & Company

Okay. Do you see other contract possibilities with other, you know, similar providers on that front for this product?

Kathleen B. Earley

Are you talking about on terms of the government programs?

Richard Close – Jefferies & Company

Yeah.

Kathleen B. Earley

We’ve had a number of sales on that front. It’s been a very strong driver in some of our sales decisions, or purchasing decisions both this year and at the end of last year.

Richard Close – Jefferies & Company

Okay. Then, what would the opportunity be international do you think? I mean, how big is that?

Kathleen B. Earley

I’m talking about for Medicare. You’re just talking about.

Richard Close – Jefferies & Company

I’m just talking in general. You had talked about international being in a growth avenue and, how big is the opportunity internationally?

Robert G. Barbieri

We think it could be sizable. Our foray into the international market is mostly opportunistic at this point. We want to make sure that as we think about putting our products in places that are serving markets outside of the US that we understand our distribution capabilities, that we have the right intellectual property protection around what we do and really, we’re waiting for some of the other markets to come back towards the way some of the thinking goes on in the US. And, I know that if you listen to conventional sound bites on talk radio, everyone would think that everyone outside of the US has got it figured out better than the US. It’s just not true. It’s just not even close to true. The single payor system they don’t know how much they’re paying to whom or when. They can’t keep track of it and, where they’ve essentially had doctors as employees and hospitals as facilities as they try to move to more of a world of integrated management of healthcare they don’t have the tools that they need either. So, we’re spending more time in the planning right now assessing what this is. Trying to figure out how to partner appropriately in these markets for distribution because, I don’t think we’re going to mount up a huge investment at least, not in 2008 to go over there directly ourselves. And, we should have a better idea of what that market sizing would be sometime next year and hopefully, sometime mid next year.

Richard Close – Jefferies & Company

Okay. Thank you.

Operator

Alex Alvarez of Goldman Sachs.

Alex Alvarez – Goldman Sachs

Thanks for taking the question. I wanted to start off just with the guidance here and maybe getting some additional color in terms of the expected 11-14% pro forma revenue growth next year. And, in particular, how you reconcile that with the 8-12% organic growth rate and how you would ask us to get comfortable with the ability of the company to meet that type of growth just given the recent bookings for [inaudible].

Robert G. Barbieri

Well, let me answer your question and I’ll start with your last phrase. How I’ve gotten more comfortable is just in observation in 11 weeks and going through. In many cases, if you have volatility in bookings you look for an underlying cause. The most serious, the most problematic is competitive losses. So, TriZetto is in a pretty unique position where if a deal doesn’t happen in any particular quarter it is basically, almost in most cases, driven by no decision in that particular [inaudible]. It doesn’t have an unhealthy blend of competitive losses which, gives you assurance that those potential opportunities are still there to be had, they’re just not in the particular period that you’re dealing with. Then second, how to be get comfortable? At least, at this stage we are granular. We are product by product, territory by territory so, we’re rather specific in how do we view these things. And, we’re still a size company that we can go pretty deep in the organization and touch the individual leaders and have them directly comment to us as to what they’re seeing. So, I think, that’s the approach. We will come back with some greater details, that will be probably the next time we chat in a broad setting like this.

Alex Alvarez – Goldman Sachs

So, does that imply that the pipeline, and I know you don’t want to get into details on it but, that the pipeline at the end of the quarter looked better than you would have expected just given the bookings in the third quarter?

Robert G. Barbieri

You know, again, being new, our practice has not been to give out pipeline metrics per say but, the pipeline is very strong. I would just characterize it that way.

Jeffrey H. Margolis

The answer is the pipeline is sufficient to cause us to look at the remainder of the year to increase guidance for the year and put forth the numbers we have for 2008 based on what’s in our total pipeline and what’s in our known backlog at this pint for 2008. So, I don’t know how much more granular we can get internally. And yet, obviously, we have selling to do to make our numbers every year, Alex.

Alex Alvarez – Goldman Sachs

Sure, no, I understand. I guess, moving on to the repurchase and I know a lot of questions have been asked. But, based on some of the possible uses of the cash that you’ve listed out, where would you put a repurchase in terms of the priority list for you?

Jeffrey H. Margolis

It depends on how our stocks trading relative to other uses of capital at the instant we would make that decision. How’s that?

Alex Alvarez – Goldman Sachs

So, you would go after some analysis and try to figure that out in terms of?

Jeffrey H. Margolis

I mean, we’re trying, we’re going to deploy the cash in the manner we think returns the best return for shareholders. And, when those opportunities arise to create a decision point there then we’ll take action.

Alex Alvarez – Goldman Sachs

Okay. One last one for me, and I’m sorry if I missed this, in terms of the $15 million of revenue that you expect to lose next year. What’s the margin profile of that $15 million? Is it contributing much of the operating income level? Or, at the gross margin level?

Jeffrey H. Margolis

Okay, so, again, remember we’ve been exiting the BPO business for, or I should say, we’ve been reducing our emphasis on the BPO business for some number of years. We continue to have select BPO in our centers but, what we’ve found, in answer to your question, is that providing onsite administrative BPO services by having our people on other people’s sites yields us less margins than our other offerings. And, certainly, well below our overall margin.

Alex Alvarez – Goldman Sachs

Okay. Thank you.

Operator

Andrew Weinberger of Galleon.

Andrew Weinberger – Galleon

Yeah, hi guys. Just two quick financial questions. One, would you mind for simplicities sake just breaking out your guidance just for a specific Q4 numbers? I just want to understand how you’re treating some of the items there. So, if you could break out, I guess, revenue, EBITDA and EPS for the fourth quarter. Then, I have just a quick follow up question.

Jeffrey H. Margolis

Well, we’re going to do that math for you just right here. We haven’t, we’ve guided the year but, let us just give you those quarterly numbers. Here they come.

Robert G. Barbieri

And, I’m sorry I didn’t catch your name. Sorry.

Kathleen B. Earley

Andrew.

Robert G. Barbieri


Andrew. Okay, thank you. Hey, for Q4 let’s start top line that would work out mathematically as revenue of between $110-$120 million, EBITDA between $24-$29 and EPS between $10-$15.

Andrew Weinberger – Galleon

Okay. Great. Thank you. And then, also, I think there’s some disappointment around the seasonality associated with your bookings. If I look at, you know, the last few years, you had a pretty big sequential up tick in Q4, is that same type of seasonal up tick considered when you gave sort of your raised guidance for 07 as well as your outlook for 2008? Or, do you, this year for some reason not necessarily expect that sequentially seasonal up tick in your bookings for Q4?

Jeffrey H. Margolis

It would be logical to assume based on the Q4 numbers we just gave you that there would be, you know, an up tick in bookings as compared to Q3.

Andrew Weinberger – Galleon

Great. Thank you very much.

Jeffrey H. Margolis


You’re welcome.

Operator

Corey Tobin of William Blair.

Corey

Hi. One quick follow up, if I could. You gave revenue EPS for 2008. Would it be possible to give.

Jeffrey H. Margolis

Wait, wait. We did not give EPS guidance for 2008. We gave revenue. We said we’re targeting EPS growth in 2008 of no less than 30%. Just to be clear.

Corey

Sorry. Sorry to put words in your mouth. Absolutely.

Jeffrey H. Margolis

It’s okay.

Corey

Can you give us the same outlook for EBITDA? Is it safe to assume 30% increase in EBITDA as well?

Jeffrey H. Margolis

I wouldn’t. What I don’t want to do is get that specific but, we do view 2008 as a year that we will drive for margin expansion. But, more to come as we come out with more detailed guidance.

Corey

Is there any other material reason why EBITDA growth shouldn’t be, I guess, maybe not percentage for percentage but, still relatively similar to earnings growth?

Jeffrey H. Margolis

Well, the other thing, just mathematically again, I touched on share count management. So, certainly, the multiplier is greatest at the bottom line for en EPS statistic. But, again, I’d like to leave it to the overall revenue guidance. I think that’s helpful and, if you can think in terms of your expectations of margin expansion and then where what we’re driving is again, the minimum growth at the EPS level of 30%.

Corey

Okay. And then finally, there’s no buy back anticipated in that number? I’m assuming, right?

Jeffrey H. Margolis

It would be, it would be available to us but, again, you know, we’re not, we do want to drive results and the time of the buy back activities as well.

Corey

Great. Thank you.

Operator

[Ben Stillski] of Piper Jaffray.

[Ben Stillski] – Piper Jaffray

Hi. Thank you for taking the question. For the Q4 guidance is there anything going on that’s a little different below the operating line? I’m just trying to reconcile the Q3 upside versus the full year EPS guidance.

Robert G. Barbieri

Well, since I came in and out of advanced derivative accounting, I hope not. So, I think we should have, you know, all other things being equal, that we should be relatively steady below the line.

[Ben Stillski] – Piper Jaffray

Okay. I mean, it just seems like EPS, Q4 EPS is a little bit light given the Q3 upside. So, I was wondering if there’s anything on D&A or interest expense or taxes that would eat into EPS?

Jeffrey H. Margolis

No.

Robert G. Barbieri

In your tax modeling you should be back to around a 40% tax rate for that.

[Ben Stillski] – Piper Jaffray

Yep.

Robert G. Barbieri

But, I don’t believe there’s anything else.

[Ben Stillski] – Piper Jaffray

Okay. That sounds good. Then, one more if I could. Are there any repercussions, or I guess, consequences positive or negative from the things going on with Wellcare for TriZetto?

Jeffrey H. Margolis

There’s nothing negative. They’re either not a customer and certainly, not a material customer of ours. So, we don’t, we don’t anticipate or see any fall out in regards to us with whatever’s going on over there. I guess, the up side is that a number of our customers that have an opportunity to expand into the Medicaid market in Florida such as Amerigroup and others, you know, perhaps we could see some growth business in some of our customers which might yield some benefit to us as Wellcare apparently has been stopped from marketing into, at least, that state right now.

[Ben Stillski] – Piper Jaffray

Great. Thank you.

Jeffrey H. Margolis

You’re welcome.

Operator

Leo Carpio of Caris & Company.

Leo Carpio – Caris & Company

Hi. Good evening. I have actually, three quick questions. First question, regarding back to Humana and the whole install experience, have you seen any, like initial outcomes coming out of that in terms of positive traction for them that you’re hoping to maybe be able to talk about in the near future? And, I’ll wait for the other questions.

Jeffrey H. Margolis

Leo, we really need to refer you to Humana for that. I don’t think they’re shy about talking about their experiences with CareAdvance but, we don’t want to speak on their behalf. In terms of, are we getting miserable results and savings, I believe the answer to that is yes.

Leo Carpio – Caris & Company

Okay. And then, my second question is regarding the QCI integration, is QCI growing right now at a faster, slower or same rate as your core Facet’s business? Or, how’s that coming along?

Jeffrey H. Margolis

It’s overall growth rate, the denominator is a lot smaller, right. So, I mean, its growth rate and our expectations for its growth rate is that it should grow somewhat faster on a percentage rate than Facet. But, as Kathleen mentioned we’re seeing strength in core administration systems in general right now.

Leo Carpio – Caris & Company

Okay. Well, that was all my questions. Thanks.

Jeffrey H. Margolis

Thank you, Leo.

Operator

Donald Hooker of UBS.

Donald Hooker – UBS Securities

Great guys. Thanks for taking my question. It’s just a real general question, are there other businesses that you might be looking to, I’m kind of just trying to understand what businesses are coming off and on. I know we had talked about Facet and BPO, are there anything else that we should be thinking about that you mentioned?

Kathleen B. Earley

This is Kathleen. I don’t think so. At this point and time I would tell you that it’s going to be our normal process as we go through our business planning every year to be able to put our businesses in different growth categories whether they’re ones that we ought to invest to grow, whether they’re ones that are mature and that we ought to start to maintain and market. Or, whether there are things that we need to sunset or whether they’re ones that we need to exit. And so, from our standpoint, the only businesses that we are either exiting or sunsetting are ones that are either one, not strategic to our strategy; two, they’re lower than our average gross margin overall as a company; or three, we think that after 25 years in the marketplace that it’s time we start to leverage those internal resources on more products and services with greater leverage for the shareholders.

Donald Hooker – UBS Securities

Right. Am I correct in that there was a contingency payment this quarter to PDM?

Jeffrey H. Margolis

We did make one payment in July to PDM.

Donald Hooker – UBS Securities

Okay.

Jeffrey H. Margolis

And, that was slightly over $2 million.

Donald Hooker – UBS Securities

Okay. And then, one last question, in terms of, I don’t know, I guess, this will be detailed in your Q but in the past couple of Qs there’s some customer concentrations with Regions and WellPoint that you had pointed out. I mean, are there, that seems to be declining. Are there any businesses coming off? Like, other contracts or something expiring, or something we should be aware of?

Jeffrey H. Margolis

No. No, there’s no contracts that are expected in our continuing business. You know, we should mention that one of the contracts related to our onsite BPO services QualChoice of Arkansas is something that we, that is one of the areas where we’ve said, we’ve worked with them and we’re going to continue to provide them hosting services and technology licenses but, we’re not going to provide onsite BPO services. We use to call that our planned management business but, that’s too confusing with planned data management. But, where we have people onsite in Arkansas we’re not going to do that anymore.

Donald Hooker – UBS Securities

Okay. Thank you.

Operator

George Hill of Leerink Swann.

George Hill – Leerink Swann & Company

Hey, can you guys hear me okay?

Jeffrey H. Margolis

We can.

George Hill – Leerink Swann & Company

Hello?

Jeffrey H. Margolis

George we can hear you.

George Hill – Leerink Swann & Company

Hello?

Kathleen B. Earley

We can hear you.

George Hill – Leerink Swann & Company

Okay. I’m sorry I’m having technical difficulties at my end. And, I’m just wondering and, if you guys have already broached this, I apologize if you already have. Bob, some of your discretionary spending, I guess versus [inaudible] just came in a little later this quarter than I was thinking about. As you guys think about the 08 guidance can you talk about being, about it being a margin expansion? Or, can you just maybe speak about whether you think that’s expansion of the gross margin line? Or, through cost controls and keeping a lid on your discretionary spending?

Robert G. Barbieri

George, I would answer it this way, I think you should think of it, again, I will get more granular in the future of the expansion of the gross margin line and at the EBITDA line as well.

George Hill – Leerink Swann & Company

Okay. [Inaudible] Where you guys claim to, I guess, source the profits in excess of revenue growth in those lines?

Robert G. Barbieri

I’m sorry, George. I mean, yeah, I mean we’ve talked, yes, we did mention that, you know, that we expect that both EBITDA and earnings can out strip top line revenue growth.

George Hill – Leerink Swann & Company

Okay. And, I guess, just a question for Kathleen maybe, Kathleen however you comment about this. It looks like with you guys acquiring CareAdvance it had a small customer base that you guys have grown meaningfully. Now, it seems now that not just CareAdvance but the marketplace seems to be in a wait and see pattern. Some of your competitors in that segment of the market are also, you know, the growth probably hasn’t been probably where a lot of investors have been expecting it. I don’t know [inaudible] with the company’s been expecting if you’ve seen other companies in the disease management and care management space stumble a little bit and, you know, some of the people in the payor side, you know, question [inaudible] I see these programs. Can you just talk about the discussions you’re having with payors and if you’re having any of these similar conversations and, you know, what you guys are doing to make the ROIC profile of CareAdvance and care management products more attractive?

Kathleen B. Earley

Yeah, I would say George that we’ve been working very hard over the course of the last year in order to be able to do a couple of things. One is, train our sales force. So, we have, now have a two and a half day training session that our sales force goes through. The most important part about that training session is that we have a ROI model in the training session that actually takes our sales force and therefore our customers through the ability to actually construct and ROI model both on the disease management as well as on the utilization management side of the equation. And, I would say that for those flagship customers that we have, I think we spoke about it on the last call, Humana actually spoke at our payor conference. We actually had three of our customers stand up at our payor conference in front of many of our customers to talk about the benefits that they are realizing by implementing these products within their own organization. However, they are very, they’re the first ones to recognize that you have to change your business process inside the payor itself in order to leverage these products and services. You can’t take the products and just put them into your current business processes and think you’re going to get an ROI out of them. You’ve got to change the way you do business and have health and wellness be central to your core them. And, I think Jeff wants to jump in and add some things.

Jeffrey H. Margolis

And, I would just add that I think the characterizations that health plans are in a wait and see is not appropriate. They are not in a wait and see, they are in a figure out how to change their business models as quickly as they’re able to which, isn’t always as quick as, you know, everyone would like to see them move. But, they’re in a mode to change their business model as quickly as possible to be able to take advantage of these kinds of tools and technologies to become better at providing a better overall care and health and wellness experience for their members.

George Hill – Leerink Swann & Company

Okay. I’d say that’s good color, Jeff. Thanks. Then, I’ll just ask both of you guys one more time, do you feel like you’re fully staffed from a service and deployment capability in that segment? Or, do you still feel like you need to bring more people on?

Kathleen B. Earley

No, I think we’re fully serviced at this point. We made big investments early on in the year and we actually created a mentoring program in order to be able to bring those people up to speed. They actually shadowed people on the deployment. Of the 16 customers that we have, I mentioned that we have nine that are already up and live. I will tell you that we’re already working at five of the other seven and we continue to be retained at many of the nine customers. And so, we are fully staffed and capable of handling the deployment and feel very comfortable on that front.

George Hill – Leerink Swann & Company

Alright. Thanks.

Jeffrey H. Margolis

Alright operator, we’re.

Robert G. Barbieri

Just if I can, there was an earlier question, I just wanted to interject, about a couple of questions ago there was a question around planned data management and what payments and I did have an opportunity to double check and there was indeed slightly over $2 million in cash. What I wanted to add and there will be details in the Q, there was also $3 million, approximately $3 million, slightly less, in that settlement of stock that occurred in the quarter as well.

Jeffrey H. Margolis

So, about $5 million.

Robert G. Barbieri

It was about $5 million totaling and you’ll see the details in the quarter. Just wanted to add that for the person who asked the question.

Jeffrey H. Margolis

Okay. Alright operator I think we’re through with question here.

Operator

There are no further questions sir.

Jeffrey H. Margolis

Alright. So, anyway I want to thank everybody for taking the time to be on the call today and those of you who stuck with it to the end. And, we’ll look forward to talking to you in the near future. Bye.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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