Exhibit 99.1
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
Confirmation #3400595
Page 1
QUALITY SYSTEMS
Moderator: Louis E. Silverman
February 7, 2005
3:30 pm CT
Operator: Good afternoon my name is Shannon and I will be your
conference facilitator. At this time I would like to welcome
everyone to the Quality Systems Third Quarter Fiscal 2005
Earnings Conference Call.
All lines have been placed on mute to prevent any background
noise. After the speakers' remarks there will be a question
and answer period. If you would like to ask a question during
this time, simply press star then the number 1 on your
telephone keypad. If you would like to withdraw your question
press star then the number 2 on your telephone keypad. I would
now like to turn the call over to Mr. Louis Silverman,
President and CEO of Quality Systems. Please go ahead sir.
Louis Silverman: Thank you Shannon and welcome everyone to Quality Systems'
Fiscal 2005 Third Quarter Conference Call. Paul Holt, our CFO,
Greg Flynn, Executive Vice President and General Manager of
our QSI Division and Pat Cline, President of our NextGen
Healthcare Information Systems division once again join me on
this afternoon's call.
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Please note the comments on this call may include statements
that are forward looking within the meaning of the securities
laws including without limitation statements related to
anticipated industry trends; the company's plans, products and
strategies; projected operating results; capital initiatives
and the impact of legal, regulatory and accounting
requirements.
Actual events and results may differ materially from our
expectations and projections and you should refer to our SEC
filings including our Forms 10-K and 10-Q for discussions of
the risk factors, management's discussion and analysis and
other information that could impact our actual performance.
We undertake no obligation to update any projections or
forward-looking statements in the future and please note that
the company's past performance is not necessarily indicative
of future performance.
For the quarter, the company set new revenue and earnings
records. In the December quarter revenue totaled $22.1
million, up 21% over the prior year. Fully diluted earnings of
64 cents per share exceeded prior year fully diluted earnings
per share of 40 cents by 60%. The quarter's top line results
were driven by record revenue performance at our NextGen
division where the $18.3 million in revenue attained by the
division for the quarter represents a 31% year-over-year top
line increase. The QSI division had quarterly revenue of $3.7
million, which represented an 11% year-over-year decline in
top line performance for that division.
Company wide gross margins were very strong at 66%, which
represents our highest level in recent years. Paul Holt will
cover this item and others during his prepared remarks on the
quarter.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Operating income for the quarter at NextGen came in at a
record $6.7 million, 78% ahead of the prior year performance.
QSI divisional operating income declined approximately 23% on
a year-over-year basis, though the operating margin for the
division came in at just under 28% for the quarter.
Company wide SG&A expenses increased materially on both a
sequential and year-over-year basis.
Our EDI unit set a record at $2.7 million in revenue for the
quarter. I'll once again remind participants that EDI revenue
is reported as part of divisional revenue each quarter. Paul
Holt will break out divisional EDI totals as a convenience
later in the call.
Corporate expenses for the quarter came in at $1.3 million.
That represents over a 30% year-over-year increase, as well as
a 14% sequential increase. Expenses in the corporate area
continue to grow in response to the company's overall growth
as well as external factors such as Sarbanes-Oxley 404
Internal Control Compliance Efforts.
Cash and cash equivalents increased to a record $66.4 million
during the quarter, up from $59.5 million in the prior quarter
and $45.3 million in the prior year.
Headcount at quarter end was 367, which taken with the
revenues for the quarter generated annualized revenue per
employee of $240,000. Note that this figure is not something
that we use as an internal management or measurement tool. The
quarter's revenue per employee figure is, however, relatively
consistent with the levels attained in prior quarters.
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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The company's Board of Directors has recently authorized a $3
per share dividend to be effective for shareholders of record
on February 24, 2005, as well as a two for one stock split
that will become effective for shareholders of record on March
4, 2005.
Acquisition search activity continues and I will reiterate as
I have mentioned on prior calls that we're not interested in
just doing a deal for the sake of doing a deal. We will
actively pursue opportunities of strategic significance that
also represent a good financial fit for us. Absent those
characteristics, we'll remain patient and continue to focus on
our organic growth.
In the next couple of weeks the company will present at the
UBS Conference in New York City and the Roth Capital
Conference here in Southern California. We're also scheduled
to present at the Sidoti Conference in New York City in early
April. Additionally, meetings with members of the investment
community are scheduled for four additional cities in the
coming weeks.
In closing my prepared remarks for the morning, actually I
should say for the afternoon, I'd like to point out that the
performance for the company during the quarter continues a set
of quarters where our actual performance has exceeded our
internal expectations, at times by a fairly wide margin. I
want to again express my thanks to all members of our team for
their contributions to the company results.
I also want to clearly point out to current and prospective
analysts and investors that while we are extremely pleased
with the quarter's performance there are absolutely no
guarantees that the company or either of its divisions will
exceed or even sustain the level of performance turned in
during the quarter.
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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It's possible that the quarter's performance will encourage
investors or analysts to set new short, medium or long-term
expectations for the company. In response to this possibility
please continue to note that we do not give out financial
guidance and we don't comment on the guidance advanced by
members of the financial community.
I'll now turn the call over to Paul Holt, our CFO, for
additional financial details on the quarter.
Paul Holt: Thanks Lou and hello everyone. We're continuing to see growth
in both of our revenue categories, System sales and
Maintenance and other. Our consolidated system sales rose to
$11.7 million this quarter. That's an 18% increase compared to
the prior year, $9.9 million. Maintenance and other revenues
rose 25% to $10.4 million compared to $8.3 million in the year
ago quarter. A very low level of hardware and third party
software included in system sales resulted in our consolidated
gross profit margin this quarter coming in at the highest
we've seen in recent years, 66% of revenue.
Total SG&A expense increased by approximately $1.5 million to
$6.4 million. This compares to $4.9 million in the year ago.
The largest contributor to the increase in SG&A expenses came
from the NextGen division and that was $.6 million in selling
related compensation expenses to our expanded NextGen sales
force. NextGen also had another $.6 million increase in other
SG&A expenses. We also had a $.3 million increase in corporate
related expenses. Total corporate expenses were $1.3 million
this quarter. That compares to $1 million a year ago. SG&A
expense as a percentage of revenue this quarter increased
29.1% compared to 26.9% in the prior year quarter.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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R&D expense grew 5% compared to the prior year quarter at $1.7
million. That compares to $1.6 million a year ago and again
most of this increase was related to investment in the NextGen
product line.
Our effective tax rate was lower compared to last year at
37.1%. That compares to 38.4% a year ago. Our rate this
quarter was impacted by a proportionately higher amount of R&D
tax credits reflected in this quarter's tax provision. That
was slightly offset by a higher federal tax rate. During the
quarter ended December 31 we recognized $.2 million in tax
credits from prior periods, which had not been recognized
previously.
Our NextGen division recorded growth in both software license
and implementation revenues resulting in a 21% year-over-year
growth rate in system sales. System sales in the NextGen
division rose to $11.3 million this quarter compared to $9.3
million a year ago.
Again, growth in the NextGen base of installed users has
driven our maintenance and other revenue higher, actually 51%
higher, at $7.1 million versus $4.7 million a year ago. Our
maintenance revenue in the NextGen division was up 54% from
last year at $4.9 million versus $3.9 million a year ago,
while EDI revenue grew 74% to $1.5 million compared to $.9
million a year ago. As Lou mentioned, our operating income in
the NextGen division was significantly higher, up 78% to $6,
727,000 compared to $3, 789,000 a year ago.
Our QSI dental division reported a year-over-year decline of
11% in reported revenue at $3,742,000 compared to $4,198,000
last year. Operating income for this division was $1.037
million. QSI division EDI revenue was $1.2 million for the
quarter compared to $1.3 million a year ago.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Moving on to our balance sheet, our cash grew by approximately
$6.9 million this quarter to $66.4 million or $10.18 per
share. That compares to $59.5 million or $9.26 per share at
the end of the prior quarter.
This quarter we received a $2.1 million tax benefit related to
employee stock option exercises. We also received $1 million
in actual proceeds from employee stock options.
Our turnover of accounts receivable measured in DSOs increased
7 days to 115 days this quarter compared to 108 in the year
ago quarter. On a sequential basis this DSO number was also up
seven days. Breaking that number down by division our DSO for
QSI division was 90 days and 121 days for the NextGen
division. The primary driver of the increase in DSOs is
attributable to an increase in undelivered services billed in
advance and included in accounts receivable.
Deferred maintenance and services revenue now stands at $23.7
million. That's an increase of $2.8 million compared to last
quarter and $6.4 million compared to a year ago. The primary
growth driver of our deferred revenue is, again,
implementation and training services in the NextGen division.
For those of you who are tracking this, our non-cash expenses
for the quarter break down as follows. Total amortization
expense, $492,000, that's amortization of capitalized
software. That breaks down to $56,000 for QSI and $436,000 for
NextGen; Total depreciation expense, $258,000. That's $41,000
for QSI and $217,000 for NextGen; deferred stock option
compensation is also a non-cash expense and that was $108,000
for the quarter.
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Our investing activities were as follows. Total capitalized
software $746,000. That breaks down to $22,000 for QSI and
$724,000 for NextGen; Total fixed asset investment was
$362,000. That was $27,000 for QSI and $335,000 for NextGen.
Again, I'd like to thank you for all your interest in this
company and I'll turn things over to Greg Flynn, Executive
Vice President and General Manager of our QSI division, who
will provide an update on the QSI division.
Greg Flynn: Thank you Paul and thank you to everyone on the call for their
interest in our company.
The metrics of the QSI division have already been covered in
detail by Lou and Paul, so I won't be redundant. In summary,
while I would have liked to have seen better performance on
the revenue side, I again am pleased by the profit
contribution made by the QSI division to the company.
Of particular note again was the growth in our EDI business
with revenues up approximately 5.8% over the prior quarter and
NextGen EDI revenue up approximately 10.6% over the prior
quarter.
As you know, QSI division staff pursue and process the EDI
business for both the QSI and NextGen divisions. I feel that
we're making noteworthy strides in growing this part of our
business.
On the product development front, as I usually report, our new
dental software version 9.3 is now moving to beta test and the
quarter also saw numerous enhancements to our CPS product.
This is the dental equivalent of the electronic chart.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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In particular, we incorporated new time saving,
ease-of-navigation and workflow features to CPS. All such
features are geared to maximizing productivity and minimizing
the user interaction time. Our dental clients, generally high
volume patient offices, have proven to be an invaluable source
of input and consequent enhancement for our CPS product.
As always, let me comment on our sales staffing and pipeline.
Our sales staffing remains unchanged from last quarter and our
pipeline itself also is virtually unchanged at $3.95 million.
We define our pipeline as sales situations where QSI is in the
final three purchase choices and we believe that the sale will
occur within 180 days.
In turning the call over to Pat Cline, our President of the
NextGen division, I would like to personally thank the NextGen
staff, Pat's crew, and the QSI division for their
contributions to our continued growth. Pat great job.
Patrick Cline: Thanks Greg. Hi everyone. In the third quarter NextGen
executed over 55 agreements with new customers. Once again
about two thirds of these customers licensed both the NextGen
EMR and the NextGen EPM products. The remaining deals were
roughly split between EPM and EMR, with a slight edge this
quarter to the EPM side.
Our sales force increased to 35 people, including 4 inside
sales people, and our pipeline has increased to about $44
million.
Our new NextGen 5.0 platform continues to do well in the
marketplace. Our customer base is migrating in a steady pace
to this platform that integrates our EPM and EMR offerings.
The overall market for our products remains strong. We're
about to enter the trade show season, so hopefully we'll see a
marked
QUALITY SYSTEMS
Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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up-tick in the number of leads that our sales force has to
follow. The season starts with the HIMSS Conference beginning
this coming weekend.
In closing, I'd like to once again thank the employees of
NextGen for another terrific job. (Shannon) we're ready for
questions.
Operator: At this time I would like to remind everyone, if you would
like to ask a question press star then the number 1 on your
telephone keypad. We'll pause for just a moment to compile the
Q&A roster.
Your first question comes from the line of Sean Wieland with
WR Hambrecht.
Sean Wieland: Hi guys, congratulations on yet another great quarter. I feel
like I always ask the same question, but I'm going to ask it
again. Can you talk about what are some macro level issues
here that you think are driving demand? Specifically can you
talk about pay for performance? As it relates to your customer
base is that a driver of demand here? Can you talk about the
market that you're selling into, small versus medium versus
large docs and where you see you have a competitive advantage?
And if you could add any commentary on Hill Physicians that
would be super.
Patrick Cline: Okay, that's a long question and probably unfortunately a
little bit longer of an answer. Sean, there are a number of
drivers, as you know, moving the pace of adoption, hopefully
at a little faster pace. The government has become more of a
driver. The government is working on the adoption issue on
many fronts. President Bush, you know, mentioned again
healthcare IT in the recent State of the Union address and
many in the government sector are pushing for increased budget
dollars targeted toward adoption of the electronic health
record.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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You also mentioned pay for performance. There are also many
private sector drivers. Specifically we're seeing many
payers push for adoption of these systems and in many cases
we're seeing payers and other private entities fund the
purchase of systems, either partially or totally. There are
now so many sources of funding available for purchases of
electronic health record systems that we've recently hired a
new person whose job is to determine the source of all of
these funds and to track the funding sources to help our
customers' access the funds.
As you know, there are also other drivers. Technology, the
fact that it's easier now to quantify a return on investment
on the electronic medical record side and the tremendous
push of both, again, the government and the private sector
for quality with that push coming from employers and
therefore payers.
You also mentioned large versus small. I would say that we
don't really have a sweet spot. We tend to fare very well in
the larger enterprises, practices of 50, or 75, or 100, or
200 physicians, but increasingly, especially with our new
inside sales force, we're doing very well at the lower end
of the market. About 80% of the physicians in the country
practice either by themselves or in small groups and we
don't want to take our eyes off of that ball. So we're doing
things to lower the cost of sale and ultimately lower the
cost of our systems, yet still maintain our profitability in
the small practice market.
Sean Wieland: Okay and then is there any update you could share on Hill
Physicians? Is that a deal that was counted in the fourth
quarter or is that an ongoing opportunity?
Louis E. Silverman: Sean this is Lou. We've not made a practice of commenting on
specific deals in specific quarters and I think we'll kind
of keep that tradition intact.
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Moderator: Louis E. Silverman
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Sean Wieland: Okay. How about the EDI business, what's - what do you see as
the opportunities there? Is there any changes there?
Greg Flynn: Pat if you want me to go ahead . . . . I'll go ahead. I mean
it's obviously a growing business and as we increase our
customer base on the NextGen side we view it as a growing
opportunity.
Patrick Cline: I would agree with that.
Sean Wieland: Okay and is it a growing opportunity in just that the overall
volume of transactions or in the services that are being
layered into that?
Greg Flynn: It's more volume based than additional services, to answer
accurately.
Sean Wieland: Great. Okay, thank you very much.
Greg Flynn: Thanks Sean.
Operator: Your next question comes from the line of Brandon Osten with
Sprott Securities.
Brandon Osten: Hi guys, as usual another good quarter.
Patrick Cline: Thank you.
Brandon Osten: If I could just sort of delve in here, one of the numbers I
didn't get was the total number of deals that you guys signed
on the NextGen side.
Patrick Cline: I didn't cite the total number of deals. I think on a go
forward basis I'm not going to go through the total number of
contracts, but rather the number of
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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contracts with new customers. As it has become far more
difficult for us to get our arms around what's a new contract
versus what's a small upgrade and what's an add on sale for a
new customer, or an existing customer rather, buying a couple
of new licenses. We are having more and more difficulty
putting the sales to existing customers into different
reporting buckets.
So, we're going to talk about what we think most people care
far more about, which is the number of new contracts and I
believe the number was 57. What I said was over 55.
Brandon Osten: Okay. And then maybe in a different vein, can you sort of give
us a number or a feel for the direction of average deal size?
Patrick Cline: I think the average deal size probably stayed about inline
with what it has been. Paul you might have the actual number,
but I didn't - though I haven't personally done the math I
didn't see on the back of the envelope type of thing any
material difference.
Louis Silverman: And Brandon we're going to ask you to get a little closer to
your phone. It's awfully difficult hearing you on this end.
Brandon Osten: Is that better?
Louis Silverman: Much better.
Brandon Osten: Okay. What about that QSI contract you were talking about two
quarters ago? Is that still in the works or is it - what's
going on with that?
Greg Flynn: The decision was delayed and is still pending.
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Moderator: Louis E. Silverman
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Brandon Osten: Still pending.
Greg Flynn: That's the government's Indian Health Contract I believe
you're talking about.
Brandon Osten: Right, okay. Okay, pending. On the tax deferral, I don't know
if I call it an issue, but the whole capital gains deduction
for purchases made in calendar '04, did you guys see an effect
on sales there? Were there any guys who sort of said, "I've
got to get this tax credit in. Rush this installation to
December 31." Did you guys see any boost from that?
Patrick Cline: We did see a little bit at the low end. I wouldn't say it was
a big driver in the quarter, but our inside sales force did
successfully point out that tax break or tax advantage and its
expiration to a number of the smaller practice prospects.
Brandon Osten: Okay. And on the SG&A jump, I guess it was - I mean I say jump
because it was about $1 million in the quarter, was that -
first of all, with all the adjustments that were made to
compensation and what not were the bulk of those done or was
the bulk of that reflected in Q3 or is there some carryover
into Q4 there?
Louis Silverman: When you say adjustments Brandon can you be a little bit more
specific?
Brandon Osten: Okay, sure. I mean if quarterly SG&A was expected to go up
$1.25 million based on, you know, whatever measures were
taken, whether it was compensation increases or whatever, you
know, was it $1 million expected and we jumped $1 million in
Q3 or was it sort of $2 million, but it happened half way
through the quarter so we would expect, you know, a further
boost in Q4?
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Louis Silverman: I'm not sure I'm following your question entirely, but I'd
like to point out clearly, that we have not issued forward
guidance on any elements in our financials. We've mentioned
that our goals are to continue to grow our sales force. If our
sales force grows and continues to be successful, selling
expense will go up. Corporate expenditures are increasing and
I think in a general way we've pointed out that those are
certainly within our expectations on a go forward basis. I
will confess to not exactly tracking where the rest of your
question is going - if it's going - if I haven't answered it
thus far.
Brandon Osten: Well yeah, I mean maybe phrased a different way, is 30% of
revenues a fair number that you guys are comfortable with or,
you know, or is sort of 25% - 26%, which is where we've been
in the past more of a, you know, more of an expectation on
your side?
Lou Silverman: As you know Brandon, from being a veteran of these calls, we
don't - we haven't and don't intend to start managing the
business based on percentage of revenues. This quarter is
another good example where the lower level of hardware in the
quarter has done a couple of interesting things to our metrics
when you look at certain numbers as a percentage of revenue.
So I think the most accurate answer to your question is that
we just aren't managing the business to a percentage and we do
expect that a number of elements in SG&A will continue to
increase, although based on the timing of additional hires or
certain other expenses it's hard to know whether that's
absolutely going to be on a steady, state basis or a little
more of a step function type of thing. Certainly the expenses
are heading north as opposed to south if our projections have
any accuracy at all.
Brandon Osten: Sure. And I guess Paul you broke out the increase in SG&A, how
did that breakdown again?
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Moderator: Louis E. Silverman
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Paul Holt: Yes, although my comparison was with a year ago.
Brandon Osten: Oh okay.
Paul Holt: But if you want it I'll give it to you.
Brandon Osten: That's okay. I'll check it in the transcript. Just a few more
quick points here, on the hardware sales if I look at the cost
of sales versus system sales, obviously cost of sales is going
dramatically down while system sales is going dramatically up.
And, again, I know you guys don't give guidance, but this has
been a consistent trend in the past, so from sort of a
purchasing standpoint of your customers are you finding that
this is becoming the trend or, you know, amongst your customer
base or is this something that you're influencing or is this
just random walk down gross margin (unintelligible).
Lou Silverman: I think we've talked, and Pat's talked in the past, about the
increasing sophistication that the clients in general have in
terms of hardware purchases and I think you're accurate in
pointing out that we've had lower levels of hardware over the
past number of quarters. So while I'm reticent to officially
label that a trend, I think it happens to be our reality over
the past few quarters.
So, we have no idea what the next quarter is going to look
like and we could see a sudden increase in hardware sales,
which would not have surprised nor disappointed us. In the
same vein we could see a continuation of the trends that we've
seen over the last few quarters and that would not have
surprised nor disappointed us.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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So it's really a customer specific, situation specific kind of
event on our end quarter-by-quarter. But certainly, as you
point out, we've seen an increasing level of gross margin with
a corresponding decrease in the relative role of hardware in
our revenues over the past few quarters.
Brandon Osten: Is there any interest in breaking out hardware revenues in the
future or not really?
Paul Holt: Brandon we have that in our MD&A disclosures in our Q.
Brandon Osten: Okay great.
Paul Holt: So we put that in last quarter and you should be able to see
it there.
Brandon Osten: Okay, I'll circle back. Thanks.
Operator: Your next question comes from William Bermudez with W&C
Investments.
William Bermudez: Yes, my question becomes would you folks be willing to explore
other lines of business within the medical and/or dental
field, but mostly the medical, in particular the veterinary
field, as others have?
Louis Silverman: This is Lou. While we wouldn't unequivocally rule anything
out, a move into the veterinary field is not something that we
have put at the top of our priority list in terms of expansion
opportunities. But we certainly appreciate the suggestion and
your interest.
William Bermudez: Thank you.
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Moderator: Louis E. Silverman
02-07-05/3:30 pm CT
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Operator: Your next question comes from Gene Mannheimer with Roth
Capital Partners.
Gene Mannheimer: Hi guys, once again great quarter.
Louis Silverman: Thank you Gene.
Patrick Cline: Thank you.
Gene Mannheimer: Most of my questions have been answered, but let me ask about
the sales cycle. Are you seeing any elongation of that cycle
as physicians sort of mull over their options or is it pretty
consistent with recent patterns?
Patrick Cline: It's been relatively consistent.
Gene Mannheimer: Okay. Also, you mentioned that in the quarter about 2/3 of the
new agreements were both EMR and EPM sales. In the case of the
practice management sales are these replacements of other
vendors systems or typically replacing the clinics homegrown
system?
Patrick Cline: Well it's a combination of the two, but by and large it's a
replacement of a competitors practice management system.
Gene Mannheimer: Very good and who typically are, you know, you want to talk
about some of the usual suspects that you see in the
competitive landscape?
Patrick Cline: No real change to the competitive landscape. On the practice
management side, since we were just discussing that, it
continues to be Medical Manager, Misys, IDX, EPIC at the very
high end and a number of smaller players on the medical
records side, GE, Allscripts, A4, four or five other smaller
companies.
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Moderator: Louis E. Silverman
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Gene Mannheimer: Okay, very good.
Patrick Cline: And then of course the practice - I think the incumbent
practice management vendors each - some of the ones that I
mentioned, for example, Misys and Medical Manager have
electronic medical record systems that they're typically
selling to their installed customer base.
Gene Mannheimer: Okay. Thanks very much guys.
Operator: Your next question comes from Bob Plezia with RJJP.
Bob Plezia: Good afternoon. Could you talk about share trends?
Louis Silverman: Share trends?
Bob Plezia: Yes. Your growth is obviously faster than, "the market", so
how would you compare your share of market over the last two
quarters versus last year's quarter?
Louis Silverman: This is Lou. I guess I would say I'm reticent to compare the
numbers because I'm not sure we have a good baseline to
compare anything to. One of the things that is a factor in our
industry, relative to your question, is that there are very
few, if any, comprehensive studies that look at share by
participant in our market. There may be some, I'm not aware of
too many of them. I'm actually not aware of any of them that
have crossed my desk.
So I guess the simple answer to your question is, yes we've
been growing. We'll leave it for you to decide how fast the
industry is growing and what our
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Moderator: Louis E. Silverman
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share is doing as a result of that because we just don't have
a great baseline view to answer your question.
Bob Plezia: Can you breakout your sales by same store, so to speak, and
new business?
Louis Silverman: We haven't and we've recently expanded the amount of detail we
put into our MD&A disclosures, though that's not been one of
the areas we've expanded to, so we appreciate the question.
Bob Plezia: You mentioned a few moments ago that the vet business is not
one of your top priorities in expansion. What are your top
priorities in expansion?
Louis Silverman: Well I'd say at the very top of our list is to continue
executing within the markets that we are currently addressing.
We continue to feel that the opportunities in the medical
market are pretty strong. We nevertheless need to execute to
reach those opportunities. And I'd say that's our major focus.
The other things that we would look at I'd say we're not
really ready to comment with great specificity in terms of
some of the other areas that we might look at as growth
opportunities, but again, you and others on the call and
people that might listen later on should know that at the top
of our list is to continue to execute in our present markets,
both medical and dental.
Bob Plezia: Thank you.
Operator: Your next question comes from William Haus with Advest, Inc.
William Haus: Hey Lou, long time no talk to. Congratulations on a great
quarter.
Louis Silverman: Thank you Bill.
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William Haus: Just a couple of quick questions, maybe for Pat. Pat you
mentioned attempting to lower the cost of sale, could you
maybe talk about what factors, if any, are acting to maybe
increase the cost of sale other than maybe gas prices? And
what types of opportunities do you see are out there in
driving it down, whether it's technology, remote installation,
training, monitoring and support or are there other things
you're working on?
Patrick Cline: Well you covered most of them. I wouldn't characterize things
as the cost of sale being driven up. It's more that as we look
to the smaller practice market, which is a key market for us
in the future, we're trying to drive the cost of sale down
from its present level so that we can lower the system price,
make it more affordable, but again, maintain our profit.
The things that we're using, again, you covered most of them.
Web based demonstrations I might add to the list that you put
forth. We're doing most of the product demonstration to the
one, two and three doctor practices via the Internet by remote
means, saving on airfare and rental car and hotels and not
flying people to say, Juneu, Alaska to do a demonstration for
a two doctor group. Again, that allows us to maintain the
lower price.
We're also doing remote training, computer based training and
e-mailing proposals and those kinds of things. Again, just to
lower the cost, maintain the profit and lower the price.
William Haus: Okay and is that sort of, I guess, that process never ends and
you'll continue to look at ways of doing that? Where are you
now? Are you still - are you happy? Can you reach those folks
in, say, a single or two practice office effectively or are
you continuing to drive it down?
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Patrick Cline: We're continuing to drive it down. I don't think I'll ever be
happy. I think we can always improve. I'm reasonably pleased
with the progress that we've made to date on many of these
initiatives.
William Haus: And on your - and I know there's quite a stepping down on the
reimbursement help side and the payers stepping up, but from
your perspective, to get a real deep penetration, and maybe
this is five or ten years out, what type of percentage decline
in delivery costs or the cost structure from your end would
you expect to see or would be a good number in order to drive
the ability of the providers to apply right?
Patrick Cline: Well, I'm not sure. Driving the costs down is a critical part
of the answer, but to answer your question I think we can take
probably 10% to 20% out of the cost of the system, still
maintaining today's profitability by using some of the
technologies and techniques that we've talked about and a
couple of others.
I think what's more important, with respect to driving
adoption, is physicians realizing that these systems far more
than pay for themselves and that there is a quantifiable
return on investment with electronic health record systems and
that's starting to happen. I think physicians know that these
systems will truly improve quality and there's quite an
interest in that, but if at the same time they're more than
paying for themselves I think the adoption curve heads upward.
William Haus: That's a good point Pat. With more focus on outcomes I guess
they would want to - they'd get a payback there too. I
appreciate your color, thank you.
Operator: Your next question comes from the line of Sheila Cunningham
with Hillyard Research.
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Sheila Cunningham: Hi, thanks for the dividend, but I thought you were resisting
things like dividends and stock splits and I'm wondering,
what was the thinking behind the dividend? How you came up
with the sum and what you think is kind of a comfortable cash
cushion for your business and whether you look at it in
relation to total assets or revenues or kind of how you
figure it?
Louis Silverman: Sheila this is Lou. As we've discussed on many calls, the
issue of whether or not to split the stock or issue a
dividend and in what quantity to do either of those things or
what the methods are - those are entirely Board issues. And
veteran listeners on these calls will know that I have made
it a practice not to comment on what elements the Board did
or didn't consider in terms of reaching its conclusion. So,
clearly the Board deliberated on the issue, they made the
decisions and, that's kind of the bottom line, bottom line.
In terms of being resistant to either of those, certainly the
question of a dividend or a stock split has been raised on
many calls and, we have in the past not been at a place where
the Board has decided that was the right thing to do. Coming
out of our last Board meeting the new Board took a different
position and hence the two announcements that we made.
Sheila Cunningham: Okay.
Louis Silverman: In terms of a cash cushion, I think that we don't feel like
having cash is a detriment to us and I think that the cash
that we will have post dividend, should be at a place where
it doesn't negatively impact any of our initiatives that we
know of today.
Sheila Cunningham: Okay, but just to split a hair, I realize...
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Louis Silverman: And I would just add, to clarify, that the dividend that was
announced was a onetime special dividend.
Sheila Cunningham: Sure, right. But let me just split a hair, I appreciate your
- whatever about the - feelings about the Board and their
initiatives, etcetera, but I would hope that they consulted
you before they came up with the number because if you've got
some expansion plans that may include an acquisition, well
surely they should know, surely they should be polite enough
to ask you what kind of cash you thought you needed on hand.
Louis Silverman: I'll just go back to my answer that says that these are Board
issues and we'll leave it there.
Sheila Cunningham: Okay. Got you, okay.
Operator: Your next question comes from Josh Stewart with Sidoti and
Company.
Josh Stewart: Hi guys. I just wanted to see if you'd give me any color on
what's going on with the NextGen Express product? Whatever
you can give me as far as like, you know, are people buying
both the practice management and EMR, you know, can you say
how many you sold and, you know, how many of these inside
sales guys are selling?
Patrick Cline: I don't want to get into the habit of breaking things out by
product, but in general we're pleased with the way that
NextGen Express, which is a lighter version of the electronic
medial records product, is going. And we're very pleased with
the performance of our new inside sales group.
Josh Stewart: Okay and as far as EMR versus EPM is it about the same 2/3
are buying both or is that too early to say?
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Patrick Cline: Interestingly it has been.
Josh Stewart: Okay. All right great, thanks guys.
Operator: Your next question is a follow-up from Brandon Osten
Brandon Osten: Paul can you give us the software growth number in the NextGen
division?
Paul Holt: The software growth - are you talking about system sales in
total?
Brandon Osten: No, just the software. You guys are breaking it out in the
MD&A, so I thought you might have that number handy.
Paul Holt: It will be in the Q Brandon. We're probably going to be
filing, you know, we have a requirement to file that Q within
the next couple of days or so.
Brandon Osten: Okay.
Paul Holt: I'll leave it at that.
Brandon Osten: Okay. Is it - Okay, in terms of the internal sales force,
how's that doing relative to your expectation? And, you know,
what's your feel in terms of how the process is working there
with regards to, you know, being able to work against the
competition on sort of a remote basis?
Patrick Cline: It's meeting or exceeding our expectation. Again, it's
relatively early, so let me say I'm cautiously optimistic.
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Brandon Osten: Yeah, I mean do you - you're giving me - given the limited
experience you guys have had, like being only nine months or
something on this sort of, you know, five or less doctor
practices, do you feel like this is an efficient way to
compete in that market or are we going to get a better sense
after TEPR or, you know, how are you feeling in that regard?
Patrick Cline: I think it's an efficient way to compete in that market. And
yes, I think we'll have a better sense after TEPR.
Brandon Osten: And can we get into a little more detail on the competition?
It seems as though there've been some interesting competitive
happenings, you know, Apex seems to continue to go after these
very large deals, I guess Allscripts is trying to breakout of
that IDX installed base and, of course, Cerner bought the
Vital Works. My understanding from talking to people at Cerner
is for the express purpose of going after the ambulatory EMR
market. Do you have any comments? I wanted to - of course we
have the (Enter G) release by WebMD, so do you have any
comments on all those fronts? In general even?
Patrick Cline: Let me say that I think that Allscripts continues to compete
effectively in IDX accounts. We have not seen any marked
increase in competition with Vital Works or with Cerner as a
result of that acquisition, but I would say it's fairly early.
Brandon Osten: Have you encountered Cerner's product base outside of sort of
their large installation type of installs before to the point
where you would have, you know, a sense of how competitive it
might be?
Patrick Cline: Yes. We're relatively familiar with Cerner's offerings. We
have competed many times with Cerner. Sometimes we've won,
sometimes we've lost, sometimes we've lost and come back and
won later. Cerner competes with us
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when the purchaser tends to be a large health system that has
a relationship with Cerner and that health system wants to
move out to the ambulatory side. Cerner will come in and
present their offering and compete in that marketplace. We
have not seen Cerner selling ambulatory systems on a
standalone basis.
Brandon Osten: Okay and then in terms of sort of a typical deal that you're
signing now a days, what would be the number of doctors range?
I mean I know it's always been sort of a, you know, 50 doctor
to 250 doctor practice, but is that range tightening up? Are
we seeing strength in certain sizes and maybe not so much in
others or maybe you're focusing on certain sizes?
Patrick Cline: No, I would say the range is broadening. We're seeing more
opportunities in the 100 to 200 plus, but we're also seeing
opportunities with large networks of physicians that might be
1,000, or 2,000, or 3,000 physician groups, IPAs and that sort
of thing.
Brandon Osten: And last question, are you finding a change in who you have to
target inside an organization, who's going to champion the
cause for EMR or for a, you know, replacement of a legacy
practice management system? You know, whether it's the doctor
or the IT guy or?
Patrick Cline: Well certainly there's a difference between the practice
management side and the electronic health record side. On the
electronic health record side you're targeting both the IT and
executive people, as well as the physicians. Very few IT folks
are willing to overrule physicians and the physician selection
when it comes to a product the physician is going to use every
day, though some of them do, that's not the norm.
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On the practice management side it's typically the practice
managers and the executives and administrative folks that get
involved in feature and function selection.
Brandon Osten: Great, thanks a lot.
Operator: Your next question comes from John Beil.
John Beil: Yes, thank you and great job fellows, again, on the wonderful
quarter. I have just a quick question on standards. There's
been some discussion in the press about standards emerging,
either as a (unintelligible) of customers, vendors and
government or - I'm not quite sure where that's coming from
and do you anticipate any extraordinary hurdles or to adopt
any standards with what you have now?
Patrick Cline: Good question. Standards are evolving much more quickly than
we've seen them evolve in the past. Government has had some
involvement in standards, primarily with respect to
transactions and HIPPA, and that is in transmitting claims and
remittances and those kinds of things
But there's been much more work lately relative to standards
surrounding the electronic health record. We've seen HL7
standards evolve, well we've seen some new standards come into
play and start to evolve. One is called the Continuity of Care
Record, or CCR. I do see, at some point in the future, that
various electronic medical record systems vendors, vendor
systems, will be exchanging data, clinical data, using these
standards and I don't see that that is too far off.
John Beil: Great, thank you very much.
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Operator: At this time there are no further questions. Mr. Silverman are
there any closing remarks?
Louis Silverman: Thank you Shannon and I'd just like to thank everyone for
their participation on the call and we'll see you a few months
from now with our fiscal year end discussion. Thank you.
Operator: This concludes today's Quality Systems Third Quarter Fiscal
2005 Earnings Conference Call. You may now disconnect.
END