Aug 5, 2008
Executives
Glen Tullman – Chairman and CEO Bill Davis – CFO
Analysts
Sean Wieland – Piper Jaffray Corey Tobin – William Blair Sandy Draper – Raymond James Richard Close – Jefferies & Co. Charles Rhyee – Oppenheimer & Co.
Atif Rahim – JP Morgan Richard Davis – Needham & Co.
Operator
Good afternoon. My name is Ashley and I'll be your conference operator today.
At this time, I would like to welcome everyone to the second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any back ground noise.
(Operator instructions) Thank you, I would now like to turn it over to our host Mr. Glen Tullman, Chief Executive Officer.
Sir, you may begin your conference.
Glen Tullman
Thank you very much and good afternoon. I couldn’t be more excited about our call today or the prospects for Allscripts.
And before we get started, I am going to ask Bill Davis to read our disclosure statement. Bill?
Bill Davis
Thanks, Glen. The statements made by Allscripts or its representatives in this conference call will include certain forward-looking statements that are based on the current beliefs of Allscripts management as well as assumptions made by and information currently available to Allscripts management.
Wherever practical, Allscripts will identify these forward-looking statements by using words such as may will expect anticipates believes intends estimates could or similar expressions. These forward-looking statements are subject to a variety of risks and uncertainties, including those listed in the earnings press release issued by Allscripts today, and in Allscripts filings with the Securities and Exchange Commission, which could cause Allscripts actual results, performance, prospects or opportunities in 2008 and beyond to differ materially from those expressed in or implied by these statements.
Except as required by the federal security laws, Allscripts undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this release. In addition, a portion of this conference call will cover the proposed business combination involving Allscripts Healthcare Solutions Inc., and Misys Healthcare Systems LLC, a wholly owned subsidiary of Misys PLC.
In connection with this proposed transaction, Allscripts intends to file with the Securities and Exchange Commission a preliminary proxy statement, a definitive proxy statement and other related materials. The definitive proxy statement will be mailed to the shareholders of Allscripts.
Before making any decision with respect to the proposed transaction investors and security holders are urged to read these documents and other relevant materials when they become available because they will contain important information about the company and the proposed transaction. Investors and security holders can obtain copies of Allscripts materials and all other offer documents filed with the SEC when available at no charge on the SEC's website www.sec.gov.
Copies can also be obtained at no charge by directing a request for such materials to Lee Shapiro, our President and Secretary at our corporate officers in Chicago. Investors and security holders may also read and copy any reports, statements and other information filed by Allscripts with the SEC, at the SEC public reference room at 100 F Street in Washington DC.
Please call the SEC at 1-800-SEC-0330 or visit SEC's website for further information on its public reference room. Allscripts Directors, Executive Officers and other members of management and employees may, under the rules of the SEC be deemed to be participants in the solicitation of proxies from the stockholders of Allscripts in favor of the proposed transaction.
Information about Allscripts, its Directors, and its Executive Officers and their ownership of Allscripts securities is set forth in our Form 10-Ka, which was filed with the SEC on April 25, 2008. Additional information regarding the interest of these persons maybe obtained by reading the proxy statement and other relevant materials to be filed with the SEC when they become available.
With that, I'd like to turn the call back over to our CEO, Glen Tullman.
Glen Tullman
Thanks, Bill. I’m happy to have this opportunity to share my thoughts about our people, our clients the strength of our market and positive trends driving it in our business performance.
While Bill will cover the financials in detail later during this call, I want to begin by saying that I am very pleased with our strong operating results for the quarter, sales where in excess of $55 million and this quarter set new records for Allscripts with $81.5 million in total revenue and $68.2 million in revenue from software and related services, a 25% increase over Q2 results from a year ago. Our TouchWorks business unit lead the way, do impart to solid progress we made with version 11.0 of our TouchWorks electronic health record.
As a result our bottom line excluding transaction related expenses came in at $4.2 million for the second quarter and $5.9 million for the first six months of the year. Let me begin the discussion on the quarter by talking about our people.
Our team state focused and delivered for our clients while we continue to invest in the right things. Driving revenue with a 25% year-over-year growth rate, developing new products and innovating all at the same time requires energy and commitment and our team has it, and we asked many of our best people to work on activities related to our pending merger with Misys.
Even with all this in motion our people stepped up to the challenge and delivered to our clients. I’m very proud of them, with respect V11.0 we have made significant progress with certified workflows, enhance documentation and a reduction in cycle times which translated directly into our results.
The bottom line is we expect continuing improvement going forward. What’s most exciting is the way our clients are using our software and solutions from all of our business units to transform healthcare in the community they serve.
Committed people and great clients are powerful combination and I’m please to say that our partnerships with our clients are stronger today than they have ever been before. The best evidence of this will be seeing tomorrow at our Annual Users Conference when close to 2000 clients and partners join us in Chicago.
As you can imagine this is a great opportunity to educate our clients and celebrate their accomplishments, but it also provide the openings to discuss our other products and services. While all of this is going on inside our customer base, the market continues to expand and the trends and actions of the federal and state governments are all helpings for a solid growth across the market.
I’m sure you are all aware that congress recently past landmark legislation on electronic prescribing, that for the first time will provide meaningful incentives for physicians to automate. We estimate these incentives range from $2500 to $4000 per physicians.
As the largest provider of the electronic prescribing software in the country with more end users and more prescriptions transmitted electronically than any other company we stand the benefit. In fact, we are already seeing evidence of increased interest.
As an example two day’s after congress approved the Medicare legislation, more than a 1000 attendees including physicians, administrators, CIOs and CEOs joined us for an Allscripts hoisting webcast to explain the legislation and how to leverage it. We believe that getting physicians to use electronic prescribing serves as the on-ramp to the electronic healthcare highway and I want to clarify one point on this legislation.
Physicians will receive the incentives whether they use standalone e-prescribing or e-prescribing as a part of one of our electronic health records. Allscripts is the only company to provide both options.
So, whether a practice is adopting standalone e-prescribing or a full electronic health record Allscripts unequally positioned to meet the needs of the market. Additionally, the starts safe-harbor as I’m sure your where provides hospitals the opportunity to help subsidies the deployment of either e-prescribing or Electronic Health Records and we have seen considerable opportunity and activity in this area.
As I’ve often stated, healthcare can benefit from a push from the government, but it doesn’t require it. There is an amazing amount of energy already built into the market.
A good example is our July Executive Summit that we held in Chicago, with a 110 prospects a significant opportunity and a significant turnout from across all of our businesses. We typically go to contract with a significant number of the attendees that join us at these events.
With that said, the best indication of market momentum is our sales performance and with $55.9 million in sales this quarter there is a lot to talk about. During the quarter, we signed Blue Cross Blue Shield of North Carolina, for state wide e-prescribing program, building upon a successful pilot that we announced almost two years ago.
This states largest health insurance, insurer I should say with more than $3.6 million members. Blue Cross, Blue Shield of North Carolina is offering Allscripts to electronic prescribing software at no-cost to physicians throughout the state, and they are also providing a $1000 bonus to physicians who utilize e-prescribing on top of any government incentives.
Importantly the bonus in our software are available two physicians who are already using e-prescribing contain within and complete electronic health record. Once again Allscripts is the only electronic prescribing solution that Blue Cross, Blue Shield is providing at no cost to its prescribers and the only vendor featured with a direct to Allscripts button, no loss on there new e-prescribing website.
We think this state wide program sets an example prepares across the nation of how to leverage technology to improve the quality of healthcare services they deliver and speaking of statewide programs our TouchWorks team delivered a major implementation of our combined electronic health record and practice management solution for the New Mexico department of public help. As Governor, Bill Richardson’s office announce last week, all 49 of the States public health clinics are now successfully running our system via web based, remote hosted model.
The health department also received about $900,000 for a matching ramp program help private practices cover the cost of electronic health record systems and we are in a strong position to capture that business as well. Earlier today we issued two press releases about agreements signed in the second quarter.
We announced that Hartford Healthcare Corporation in Hartford Connecticut will implement our emergency department information system as well as our Electronic Health Record taking advantage of the stock rules. Harford is the latest of several major hospital agreements we’ve signed that connect physicians in the emergency department to physicians outside the hospital using our systems.
With our Allscripts connect initiatives, something you will here more and more about, we are bridging the information GAAP in connecting physicians in all environments which we believe will improve the quality of patient care reduce unnecessary procedures and errors and therefore lower cost. Being on the network, the Allscripts network that is we’ll seen move from a nice to have to our requirement of doing business for physicians they will want just like your banker or your broker the best information provide real time to make the highest quality most cost effective decisions, and we continue to see meaningful activity by hospitals like Hartford and each Jefferson general hospital in new islands, which we announced earlier in Q2 who view the start changes as an important opportunity to engage with physicians in their community.
They see physicians as their LifeBlood and are using technology to connect with them for referrals. Another example of hospital traction that we announced today is Evangelical Community Hospital in Pennsylvania.
Evangelical will host our electronic health record for a 100 physicians and subsidize its cost in on going fees associated with providing the system to physicians in that community, as allowed under the stock regulations. The 135 bed hospital is also implementing and element of our electronic health record that many hospitals find attractive.
Our iHealth, personal health record provided in partnership with Medem for patients who want to have their medical information accessible by care givers wherever they may travel and Evangelical will implement Allscripts study manager providing the data tools to more easily participate in clinical research. Study manager creates new revenue streams for physicians inside and outside the hospital and provides advanced care options for patients.
On the Practice Management front, we continue to see great results from our Practice Management solution for physician practices. I’d like to announce several large new clients, who selected our TouchWorks Electronic Health record and Practice Management solution during the second quarter.
Center Medical and Surgical in the State College Pennsylvania, the largest multi-specialty group in Central Pennsylvania is implementing our combined system for 55 physicians and 22 mid-level providers. The center for Orthopedic and Neurosurgical Care Bend, Oregon is implementing our combined solution, which is our electronic health record in Practice Management for system for 33 physicians, and Edward Health Service Corporation in Naperville, Illinois will provide our Practice Management solution on a standalone basis and combined with our electronic health record to a total of 76 physicians and 19 mid-level providers.
We are not only selling practice management, but we are able to deliver with seamless system go lives for clients. This means converting 100s of physicians at a time to a new system that generates their billing and scheduling, to the most sensitive parts of their businesses and doing so without a hitch.
To name just two very large examples, this is true of LSU Health Care Network in New Orleans with 500 physicians and Novant Health Care in North Carolina with nearly 900 physicians and I’m also pleased to report that Novant, which was just ranked forth most integrated delivery network in the United States and also uses our electronic health record signed the largest agreement yet for our new clinical quality solution tool or known as CQS. They are purchase of 900 CQS licenses for physicians will entirely automate their participation in paper performance programs, while also giving their physician substantial new disease management capabilities.
CQS fulfils the promise of healthcare IT, by leading physicians view aggregate patient data in real time. Unlike quality reports that come after the fact and immediately take proactive steps to help adverse patients and deliver preventive care.
To change gears our HealthMatics business, which focuses on smaller physician offices also had a very strong quarter. Financially, we had solid growth on the top and bottom lines as more and more physicians in small and medium-size medical groups are drawn to Allscripts.
For example integrated medical professionals of Long Island, New York, one of the largest Urology group in the country purchased additional licenses for both electronic and health record and our practice management solution, another example, Children’s Medical Group the largest pediatrics group in Mississippi purchased our integrated solution for 13 physicians at their three locations. The market even for smaller groups is moving.
Our hospital solutions grew, which includes both our care management and emergency department solutions also delivered a strong quarter. As an indication of the strength of our solutions our ED solution rank number one in both utilization and implementation in the class report, which as you know is the consumer reports of healthcare IT and to validate that point Stephanie Reel the CIO of Johns Hopkins recently paid our ED team a great compliment on the widely HIStalk blog.
Referring to the ED implementations, she told the blog In my carrier it was the first time a system came in ahead of schedule and under budget. Pretty impressive words from one of the most recognized CIOs in the industry and we made important progress in our care management group by quickly combining the best aspects of our Canopy and recently acquired ECIN Solutions into a single integrated web-based offering that is now the clear market leader.
At the ACMA conference, the biggest case management show of the year, close to half the attendees came to the Allscripts’ Care Management launch, a great example of our presence in this space, and on the sales front, our care management business had a record quarter selling into the Post-Acute market adding 439 new facilities who pay us a monthly subscription fee. These results significantly add to the Allscripts networks, which has already far and away the industries largest network of Post-Acute providers.
Over 200 of these new clients were homecare and hospice providers, so lots of exciting news and great performances from our hospital solutions group. Meanwhile our physicians interactive and NSG units continue to operate to plant.
At this point I would like to ask Bill Davis to discuss our financial results for the second quarter. Bill?
Bill Davis
Thanks, Glen. As Glen indicated we are very pleased with our financial result this quarter including strong clinical bookings, record revenues as well as measurable operational improvements in several of our businesses including TouchWorks in our version 11.0 implementation cycles.
We continue to believe that our financial and operational progress will only continue in the second half of this year. We are also very excited about the progress we are making to prepare for our merger with Misys Healthcare.
We continued to work towards the closing as they expected to occur in the later part of September. I planned on providing a more detail update regarding Misys merger in a few minutes, but I would like to first provide a quick overview of our second quarter performance.
Our total bookings during the quarter were approximately $55.9 million consistent with prior quarter bookings do not taking to consideration the $9.5 million of sales and medications. Our clinical software businesses contributed $53.5 million in bookings during the quarter excluding ongoing support.
This represents approximately 12% sequential growth over the first quarter of this year. Consistent with Glen’s comment earlier, we are very encouraged by the strong demand for our clinical software products and our team’s ability to continue to execute in the mix of a lot of change in our business.
Rounding up our booking performance for the quarter is our physician’s interactive business, which had booking of $2.4 million. Total bookings for the first six month of 2008, were approximately $107.9 million or 22% growth over the same six-month period in 2007, our clinical software businesses contributed approximately $101.3 million of our six-month booking performance and represents 25% increase over the last year.
Turning now to backlog we ended the second quarter with $291 million in backlog, the backlog breakout is as follows. License and service fees related to our clinical software businesses represents $144.7 million of our backlog, software subscription in ASP contractual commitments makes up another $63.6 million and support maintenance fees which are expected to be recognize over the next 12 months are $65.7 million and then physicians interactive make up the balance to $17 million bringing our total backlog to $291 million.
Our ending backlog is indicative of our strong revenue growth in the quarter, and the fact that we enjoyed acceleration of backlog take down that was driven by improved deployment cycle times in both our Touchworks and HealthMatics businesses. Our second quarter revenue of $81.5 million represented $11.5 million or 16% increase over the same three month period last year.
It also represents the first time our total revenues exceeded $80 million in the quarter, our clinical software businesses contributed the majority of that increase and represented 25% revenue growth year-over-year and 16% sequential growth. This improvement was in part due to the improvements made in our Touchworks V11.0 deployment cycles.
We are encouraged by the progress being made and believe there is opportunity for further improvement as we move into the second half of this year. Physicians interactive had revenue of $3.8 million in the second quarter and we also saw another solid quarter from our meds business with revenue of $9.5 million.
In terms of revenue mix, our software and related services segment represented approximately 84% of our total revenue in the second quarter. Second quarter revenue by segment is as follows.
Our medication business delivered $9.5 million or 12% of our total, our clinical software business delivered $68.2 million or 84% of our total and again our information services or physicians interactive deliver the balance of $3.8 million for a total of $81.5 million. Looking now to gross margins, overall our gross margin was approximately 50.5% in the second quarter.
The 50 dip improvement over Q1 was due to a positive revenue mix shift offset by slightly lower margins in our meds and our physician interactive businesses. Margins by segment were as follows; our medication’s delivered margins of 17% in the quarter, while our clinical software segment delivered 56%, which is consistent with the first quarter and then information services of PI delivered 34% again for total of 50.5%.
The sequential change in our meds gross margin is attributed to mix of drugs we sold in the quarter. Turning now to expenses; operating expenses excluding amortization of intangibles and stock-based compensation for the quarter were $31.5 million.
This compares to $29.8 million of expenses in the first quarter. The second quarter contemplates the inclusion of approximately $3 million of transaction related expenses and that first quarter included approximately $2.7 million of transaction related expenses.
Taking that into account our normalized operating expenses were approximately $28.5 million in the second quarter and $27.1 million in the first quarter; the increase quarter-on-quarter is primarily due to an increase in incentive compensation and bad debt expense that are commenced with our revenue growth and improved profitability. Both the increases were partially offset by less marketing spend in the quarter.
With regards to capitalized software, we have $2.3 million in the quarter. This amount compares to $2.4 million we capitalized in the first quarter and is reflective of the investment we continued to make in the development of both our TouchWorks and HealthMatics product lines.
Please note, that these capitalized software amounts do not include approximately $1.6 million or $800,000 we spent in Q1 and in Q2 respectively on our Walters core content creation project. Also note that total capitalized software amount will continue to fluctuate from quarter-to-quarter depending on our product development cycle.
Sock based compensation was approximately $1.6 million for the quarter and deal related amortization was approximately $3.4 million; both amounts are relatively consistent with prior quarter. Net income for the quarter was approximately $2.4 million or $0.04 per diluted share, excluding the $3 million of transaction related expenses our net income would have been approximately $4.2 after-tax or $0.07 per diluted share.
The $0.07 per diluted share includes $2.1 million or $0.04 per share of acquisition-related amortization net of tax as well as $1 million or $0.02 per share of stock based compensation also net of tax bringing our non-GAAP adjusted earnings for the quarter to $0.13 per diluted share. Net income for the six months ended June 30, was approximately $2.4 million or $0.04 per share excluding the $5.7 million of transaction related expenses net of tax our net income would have been approximately $5.9 million or $0.10 per diluted share.
Basic shares outstanding for the quarter were $56.8 million and diluted shares were $57.8 million. The $7.3 million shares issuable under our convertible debt offering were not dilutive to our GAAP earnings per share in the second quarter nor were they for the six month ended June 30.
Therefore the 7.3 million shares are excluded in both our GAAP and non-GAAP adjusted earnings diluted per share computation for such period. With regard to overall headcount we ended the quarter with approximately 1,149 employees which compares to the 1,157 employees we reported in the first quarter.
Turning now to our balance sheet, we ended quarter with $66.1 million in cash and marketable securities which is reflective of us generating approximately $7.4 million in cash from operations in the quarter. The strong cash flows from operations were supplemented by $1.4 million of additional proceeds from option exercises and contributions to our employee stock purchase plan.
Cash inflows were offset by approximately $3.6 million of capital expenditures and capitalized software. Accounts receivable at June 30, were approximately $83.8 million, which includes approximately $7 million of receivables related to Easton.
Day sales outstanding improved to 93 days in the quarter. I would like to close by making a few comments regarding our pending merger with Misys Healthcare.
I have received several questions as well as the fact that there appears to be some confusion regarding certain deal related considerations that I wanted to try to address and clear up to today. First we previously commented that we anticipate the combined pro forma model for 2008 to be total revenue in excess of $700 million and adjusted earnings of approximately $85 million to $90 million.
We wanted to confirm that such projections are in fact based on U.S. GAAP results from Misys Healthcare and reconciling differences between the segment information provided by Misys Plc and Misys Healthcares U.S.
GAAP results were in fact contemplated in such pro forma perspective. We filed an 8-K last week to provide you with the reconciliation between the two publicly reported numbers.
You should anticipate similar adjustments to Misys Healthcare’s 2008 financial results when we filed their carve-out financial statements for the year ended May 31 2008 later this month. With that said, we have consistently thought about the Misys Healthcare business as one that is capable of generating at least $380 million of revenue and 15% to 16% operating margin on a U.S.
GAAP basis, which is consistent with their current run rate as evidenced by their recently completed fourth quarter. I also wanted to confirm that the $85 million to $90 million of non-GAAP pro forma adjusted earnings for 2008 contemplates $15 million to $20 million of pre-tax cost synergies.
While we intend to provide further color on synergy at the time we closed the transaction, we continue to be comfortable with our first year cost savings estimate. Please note that the $85 million to $90 million of non-GAAP pro forma adjusted earnings for 2008 do not take into account the anticipated deferred revenue adjustment we expect to record as we revalue Allscripts balance sheet on the date of consummation nor do such results take into account any onetime transaction fee associated with consummating the transaction or cost associated with implementing cost synergies.
Again we intend to provide more color on both as the consummation drives the year. We encourage people to think about our opening cash balance to be in the range of $30 million to $35 million, once you take into account such onetime expenses.
With regard to the timing of the close as I mentioned earlier, we continue to work towards the consummation of the merger by the end of September. The ultimate timing is heavily dependent on the completion of the SEC review process and our requirement to file audited financial statements for Misys Healthcare for the year ended May 31 2008 as well as our Form 10-Q for this recently completed second quarter.
Finally, we have received a lot of questions regarding our convertible debt holders and what they are likely to do when the merger is consummated i.e. are they likely to convert, hold or put the securities back to the company.
The reality is that each convert holder will make their own investment decision and therefore there is no way to be certain what they will do. We do encourage you to refer to our Proxy statement in which we outline the range of possible outcomes related to the convertible shares and resulting impact on our expected share count as well as the dividend amount.
In closing, I wanted to acknowledge the great efforts of our employees as well as our clients. We are very encouraged by the progress we made in the second quarter and look forward to our momentum continuing in the second half of 2008.
With that I’d like to turn it back over to Glen for some closing remarks.
Glen Tullman
Thanks, Bill. I thought I would just add two comments relative to the pending Misys transaction.
As Bill noted, we expect to close the transaction in September to the extent its appropriate our integration planning for day one is proceeding well and my perspective is the more I learn about this transaction, the more excited I get about the prospects for our combined company. With that said, let me close by giving you a thought; for years we’ve talked about the market for clinical software connectivity and information services focused on the ambulatory market and driven through physicians.
We believe that market is here today and Allscripts is the best physician to capitalize on the opportunity through our broad and industry leading product suite, our committed people and our ability to deliver for our clients. Our record performance this quarter is indicative of our persistence and drive to transform healthcare through the simple act of focusing on our clients and ensuring they have the support they need to transform their own businesses.
One client at a time we’re fulfilling our shared vision of a connected healthcare system that provides higher quality care, more cost effectively. So I want to thank you for your time today and for all of your continued support and at this point, Bill and I are pleased to take your questions.
Operator
(Operator instructions) And your first question comes from Sean Wieland with Piper Jaffray.
Sean Wieland – Piper Jaffray
I’m going to ask question I’ve asked already, but maybe you’re in a better position to answer now. Is there any update on the products strategy as you’re working on the integration plan with Misys?
Glen Tullman
With that said I can assure you that we will have a very tight product strategy on day one, that we won’t have multiple and we’ll continue to go forward with this strategy that is focused on having electronic health record, that is geared toward larger, more complex practices with significant integration and communication needs and an easier to install, lower to mid level electronic health record in integrated Practice Management system. So we’re looking very closely at it, but at this point we really can't comment further.
Sean Wieland – Piper Jaffray
Okay that’s fine. What are the prospects saying and what do you think the bookings trends would be in front you consummating the merger; do you get the sense that the pipeline is waiting for that to happen and to get more clarity on that or do you see your sales moving forward at normal speeds.
Glen Tullman
We have been very encouraged that both on Misys side as you heard them report a very strong quarter especially in healthcare and similarly with our result. I think it speaks to the strength of the market, the demand for high quality products and the reputation that Allscripts has earned because we have not seen despite issues that have surfaced along the way with V-11, despite the announcement of the merger, despite typically week first quarter and a little bit for the second quarter results none of that has really impacted our ability to sell product out in the market and we expect that will actually continue to accelerate as we bring the companies together.
So, we have not seen any slowdown and the clients basically understand why this makes sense and I think they’re assured by the fact that we have the size and scope now that they know we’re going to be here where some of the other competitors in the market may not.
Sean Wieland – Piper Jaffray
Okay and then one other quick question for Bill, at what EPS level does the convert become dilutive and we got to add those shares back in?
Bill Davis
So Sean, on a standalone basis what we historically talk about is our GAAP results are in and around $0.07, that’s when they work their way back in, but by virtue of us expensing as much as we are in way of transaction costs our GAAP results will continue to be depressed by virtue of that.
Sean Wieland – Piper Jaffray
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Corey Tobin with William Blair.
Corey Tobin – William Blair
Hi, guys. Congrats and a nice quarter.
Bill Davis
Thanks Corey.
Corey Tobin – William Blair
Glen Tullman
Corey, I think the only data we’ve given out is to say that the NEPSI program, I think it was two quarters ago past 10,000 standalone ePrescribers that had signed up for the program and again sometime ago we crossed into the millions of prescriptions in that program. Other than that we’ve not given separate guidance on the number of prescribers or the like.
Independently SureScripts has reported that we continue to be the number one submitter of electronic transaction that they route to their pharmacy numbers.
Corey Tobin – William Blair
Glen Tullman
Yes, consistent with what I’ve said in prior quarters. Clinical transaction fees originating or driven off of our electronic health records as well as ePrescribing standalone continues to represent about 1% to 2% of our clinical software revenues and while we continue to see that improve its not subsidiary to move the needle in the last couple of quarters.
So it’s been in that general range.
Corey Tobin – William Blair
Okay, great. Sure thank you.
Glen you mentioned in your prepared remarks; I think you said Allscripts study manager if I heard that correctly?
Glen Tullman
Corey Tobin – William Blair
Could you just give us a few more details in exactly what that is and also how that integrates with I believe the product action before was called Action, the Allscripts clinical trials network?
Glen Tullman
Yes, basically Study Manager, really the name is descriptive. What it’s doing is helping these practices manage clinical trial studies that they are involved in and it does integrate with our electronic health record.
So, it reduces the need to re-enter data, it helps them to organize the data for submission in the clinical trial relative to action or ACTN, the Allscripts Clinical Trials Network, that is a separate group of our clients who have agreed to allow us to use their patient to identify data as a part of studies that we conduct and we essentially become their partner in remarketing that data to large Pharma. So, once again the Study Manager program integrates and it is very helpful in that.
So, we already have a significant number of our clients using Study Manager. We expect to see that continue as practitioners look for new and alternate revenue sources.
Corey Tobin – William Blair
And then just a round off on this; I’m assuming – do you receive a fee for the sale of the Study Manager module as well as per study type fee or what is the revenue contribution to Allscripts? Thanks.
Glen Tullman
Study Manager is a separate module, so that is paid for separately, that’s correct and then as for individual studies those are compensated separately. So what might happen is the pharma might come to us and might say we want to do this study; first tell us whether you’re capable of doing it, and we survey our base and say, we know that we have X number of patients that are on that medication or have that particular diagnoses and then we actually go out into the network.
They may say we want similar data from 10 practices, some large, some small in all different areas of the country. We want it all in the same format and we want it next week.
We can go into our database with the permission of those clients, pull that information submit it, patiently identify it and we typically split the revenues that we get with our clients.
Corey Tobin – William Blair
Excellent, thanks
Operator
Your next question comes from the line of Sandy Draper, with Raymond James.
Sandy Draper – Raymond James
Thanks; a couple of quick questions; Bill can you provide an organic growth number to sort of give a sense of the contribution from ECIN?
Bill Davis
From a bookings perspective organic growth when comparing kind of year-over-year was around 10% or there about so, the incremental would have been ECIN contribution and then on the revenue side, I don’t have that at my finger tips.
Sandy Draper – Raymond James
Okay I’ll maybe follow up again on the bookings. On the backlog you did a better job pulling through with version 11.0 which is certainly nice to see.
Do you think Bill, did you get any acceleration sort of a bonus this quarter and then it sort of tails off or we sort it at the beginning of a several quarter step up levels that catch up on the version 11.0 revenue.
Bill Davis
No there was no kind of pin-up effect if you will in the quarter. Clearly, what we saw in the quarter from a project plan perspective was relative stabilization which we’ve been talking about now for a couple of quarters and anticipating that we would start to see it not only in Q2, but even more fulsomely as we move into the latter half of this year.
So, everything we saw in the quarter is consistent with our expectations and it really sort of is the beginning of what we would expect to be positive results coming out of that business.
Sandy Draper – Raymond James
Okay great and one last one and this may seem like sort of like a negative spend on what was a good quarter. Just I was a little bit surprised with the strength of the revenue in clinical software.
I guess I would have expected gross margin; 50 basis points is nice; I guess I would have thought a little bit more. Was there anything in there that limited that or if as we keep going to that we have to keep going up; just trying to understand the relationship with that bit of a growth in clinical software or was that maybe a little bit more growth in the gross margin side?
Glen Tullman
And that’s fair. There’s two things that I would point out; one was we did see an increased level of software amortization.
Again as we continue to make investment and further in V11 in the fact that that is in a GA state, the capitalization is occurring immediately, so we had some of that and then the relative mix of what we sowed in associated third party cost if you will in terms of data licenses in the light that we recognize, the mix was another relevant considerations. So, we absolutely believe that again as we continue to work our way through the backlog installations and what not, that utilization and relative productivity of those installation resources will only improve, which will serve as opportunity for gross margin expansion.
So those are the two primary drivers that I’d point you to.
Sandy Draper – Raymond James
Great, thank you very much.
Operator
(Operator instructions) your next question comes from the line of Richard Close with Jefferies.
Richard Close – Jefferies & Co.
Yes just really quickly on this backlog conversion and looks as though on a basis point improvement from the first quarter to the second quarter I think by my calculations goes like a 150 basis points on that conversion on clinical; should we assume similar improvements in 3Q and 4Q. You probably have different numbers, but should the improvements be on par with what happened in the second quarter?
Glen Tullman
I appreciate the perspective of the attempt in terms of leveraging that for a perspective on Q3, Q4. I really am hesitant to give that level of detail in terms of providing that level of guidance at this point.
So, I would just simply say more qualitatively that again we’re encouraged by the progress that was made in the first quarter. We’ve really think that we’re in early stages in terms of demonstrating that improvement, which is what we’ve indicated to the market now for the last couple of quarters in terms of what we would expect to occur, but in terms of attempting to try to quantify that or leveraging Q2 as a parameter for Q3, Q4, I would be hesitant to do that.
Richard Close – Jefferies & Co.
Okay and then when we think about TouchWorks obviously that’s different that the HealthMatics and we assume the HealthMatics is more relying with the Misys on a go forward basis once you consummate the deal, but when we think about TouchWorks are we seeing anything different from the market in terms of competition on the larger group practice; how do you feel you’re competing in the marketplace and with respect to the implementations, varying improvement, is that knowledge getting out into the market where people are saying V11 isn’t essentially a risk anymore?
Glen Tullman
Yes, this is Glen. I think there’s two different questions.
One as you analyze the Misys Practice Management base it turns out that there actually a significant number of clients that are using both Vision and Tiger. They are two other Practice Management Systems that fall into the higher end and those clients will actually be sold by our TouchWorks unit.
So, we see a significant opportunity both on the lower end and the higher end relative to the Misys space, so that’s number one. Number two, in terms of the competitive positioning what’s really interesting and I applaud both clients and prospects for understanding this.
They have really seen what V 11 offers and what it offers is significant upgraded capability compared to other products in the higher end space. So, earlier in the call we talked about for example clinical trials, some of the functionality that we have there which generates new revenues for practices, those are the kinds of things that you get out of V 11 and I think the market has been both very interested in that and willing to understand that the undertaking was a big one, that we’ve worked through many of the issues and as Bill said we’re continuing now on a nice uptrend in terms of our ability to install it more quickly and render value sooner to our clients.
So I think competitively we’re well positioned at the high end and the Misys space includes both opportunities for TouchWorks as well as HealthMatics.
Bill Davis
If I could amplify on that point in terms of operational focus, again both Glen and I said in our prepared remarks, we’re very encouraged by the progress that we have made during the second quarter, but its important to note that we do feel we’ve got more work to do there and quite frankly we think it’s a great opportunity in terms of demonstrating further financial improvement as we move into the latter half of the year, but I do think it’s appropriate to emphasis that we do still have some more work to do, but feel that we got a very good handle on it and very clear action plan around it that we’re focus on executing against.
Richard Close – Jefferies & Co.
Okay and one final question Glen; how would you gauge morale at your company currently in the midst of this merger?
Glen Tullman
I think it’s very high. Well anytime we do a merger there is going to be some trepidation about what happens and who or where the leadership is going to be.
I think at that high level we’ve made that very clear up front when we announced to the market and we’re now working through those decisions throughout the organization.
We’ve really had very little in terms of attrition in the base and we see this is adding together two groups of very good people to come out with a stronger company. So I think it’s pretty high.
Richard Close – Jefferies & Co.
All right thank you.
Operator
Your next question comes from Charles Rhyee with Oppenheimer.
Charles Rhyee – Oppenheimer & Co.
Yes, thanks for taking my questions. First on the margins; in the software I know you guys give it in the Q, but can you give us a sense of what the operating margin before corporate costs were for software in this quarter.
I know it looked like it was about 25.5% in the first quarter?
Bill Davis
Yes, I don’t have that segment information with me down to the operating income line. The expectations is to we’re going to get our Q on file later this week, so you’ll have that disclosure as we normally provide in the Q.
Charles Rhyee – Oppenheimer & Co.
Okay I guess related to that though, I know in the past over the last few quarters, on of the problems that was impacting the margins was the revenue recognition adjustment you’d have to make as a project the lines got longer under percentage of the completion and my sense here is based on your results you had a nice tick up on the odd margins and software. Is it safe to say that, a lot of those prior period adjustments you’ve kind of work through at this point or were the results still indicative that you’re still having some of that, but the performance was more than enough to compensate for that?
Bill Davis
No and so to your point, the last couple of quarters I’ve talked about cumulative adjustments which is a direct result of project plan expansions or whatnot in the order of magnitude of $2 million to $2.5 million each quarter and we did see a pretty meaningful decline in that cumulative adjustment in the quarter. It actually was less than $1 million in the second quarter and again that is indicative of the fact that we started to see relative stabilization, of those project plans and as resulted in the positive financial performance.
So, we did have some of that, but in appreciably lower levels than what we’d experienced in the last couple of quarters.
Charles Rhyee – Oppenheimer & Co.
And an as you look forward here obviously the complexion of the company changes once the deal is completed, but at least as we think about the third quarter to this point you see that number sort of similar to where you were in second quarter or do you think that could even improve?
Bill Davis
I don’t think that number quite frankly ever goes to zero, but at the same time I think there is probably some area for improvement off of the amount that we incurred in the second quarter. So, I’m not troubled by the prospect that if we did the same level in the third and fourth quarter, I think we’d still be okay, but I think there’s opportunity to potentially see slight improvement off of what we did.
Charles Rhyee – Oppenheimer & Co.
Okay, quickly I know earlier you talked about the fact that when you’re expensing these transaction costs its going to impact your GAAP EPS numbers which effects how you determine your share count. I mean is it fair to think that the third quarter will again have similar amount of transaction related expenses that we should consider when thinking about the share count.
Bill Davis
Yes I would think that that’s a reasonable assumption. Again just to give you a little bit of flavor, it’s falling in three principle categories of cost.
As we’ve mentioned before we have engaged third party to help us in the integration planning efforts which is going very, very well and yet that’s a costly endeavor if you will, so that’s number one. Ongoing legal fees associated with the Proxy process and consummation activities, and then third, third-party assistance especially on the accounting side with things like international accounting reconciliations and the like.
So, all of those given second quarter level, I really don’t see it being materially different in the third quarter.
Charles Rhyee – Oppenheimer & Co.
So, I mean in a sense if we were to model this out we could try to make an estimation if our third quarter whatever number we come out to less what we make an estimation or transaction what you’re saying is going to be similar to the second quarter. If we’re hitting the $0.07 threshold, then we’re still sort of without the converts.
Bill Davis
That’s correct, that’s correct.
Charles Rhyee – Oppenheimer & Co.
Okay, great. Thanks a lot guys.
Bill Davis
Well go ahead and take two more questions.
Operator
Your next question comes from the line of Atif Rahim, with JP Morgan.
Atif Rahim – JP Morgan
I know its tough talking about standalone guidance, but could you perhaps reiterate what you said in the past about your revenue and EPS goals for the company as standalone; is that still intact?
Bill Davis
Yes again, I would put it in the context of what we said in prior quarters. While I’m very encouraged by the revenue progress that we made in the second quarter I would still hold up kind of the cautionary language that I brought forward on Q1 in terms of the required ramp on revenue to get to 20% to 25% growth.
I think the business is capable of doing that, but again we’d caution people in terms of the prospect of that occurring in 2008, if at all the reason, the Q1 performance specifically. Relative to earnings, again we’re talking about earnings expansion north of 40.
I think the second quarter is once again a positive indicator in terms of progress that we are making, but with that said, we also acknowledge in the first quarter the fact that it’s heavily dependent on the latter half of the year’s specific performance. So, I think the company is very well positioned and in terms of delivering on what we talked about last quarter, but at that the same time there is a fair amount of work still to be done in last six months of the year.
Atif Rahim – JP Morgan
Okay understood and then question for Glen; perhaps Glen you said BCBS North Carolina purchased the e-prescription system for physicians in that area, but I kind of forgot given NEPSI’s fee ePrescription availability, what drives some of the buyer to purchase the standalone ePrescription model from you versus telling physicians that there is a free download available or free e-prescription system available?
Glen Tullman
I think that now each of the systems is used differently. NEPSI is really designed to allow individual physicians to access and use ePrescribing system, but it doesn’t really have the ability to rollup and manage that in a comprehensive fashion, which is what a big Managed Care Plan or a payer or even employer or might be interested in doing.
So, number one they get a lot more functionality in terms of providing it, a lot more control; we work much more cooperatively with them as opposed to think of NEPSI almost as a Google like transaction were individuals go out and hit this, but there is no way to aggregate all that and analyze it for an individual. If you said to someone you can go out and Google this, but then you wanted to understand what each of those people are Googling and how they were using it, you wouldn’t be able to do that, so you would then go and get some kind of more comprehensive solution, so that’s really the difference.
I think that Blue Cross, Blue Shield in North Carolina has a very good program. They are backing it up with advertising and support and as I mentioned if you go to their site there’s actually a way to order prescription software, electronic prescribing software, but it also has a separate line that says click here for free Allscripts electronic prescribing software.
Atif Rahim – JP Morgan
Okay that’s great. Thank you.
Glen Tullman
Why don’t we take our last question?
Operator
Your next question comes from Richard Davis with Needham & Company.
Richard Davis – Needham & Co.
Thanks. With regard to you guys have a pretty good reputation with deployments and successful deployments frankly compared to some of your competitors; how are you managing the staff deployments, kind of the balance of both margins and service delivery, because again you’ve done a pretty good job and I just want to make sure and know how you think about that?
Glen Tullman
With that being said we manage all these projects very closely from a resource perspective, management of the expectations with our clients and as I’ve often said in the past quite frankly, we’re prepared to move often times at even faster pace than our clients recognizing that you are fundamentally changing the way these practices are practicing medicine and therefore they tend to be the ones that are setting the records of pace, but it’s an area where we’re committed to over investing to make sure that we get it right and we demonstrate a commitment to these customers as we were work through this transition period and we sincerely believe its paid us dividends in terms of their support of us and ultimately translating into positive indications out to the marketplace as a whole. Let me just add that we really believe that increasingly people are going to focus more on invest whatever it takes to get the software used because of the benefits in the software.
So as Bill said we see opportunity here, but we also see customers understanding how important it is to have well trained implementation and deployment resources available to allow them to successfully deploy the software because it’s not just about the software, its about the entire process and that bodes well for some of the low price competitors we have because what we’ve seen is those systems either are not being used or are being de-installed, whereas we’re willing to step up to make the commitments to get the systems used.
Richard Davis – Needham & Co.
Got it. Okay thanks.
Glen Tullman
Thank you.
Bill Davis
And Glen, before you wrap, if I could respond to Sandy’s question on organic revenue growth because I commented both on year-over-year growth as well as the sequential growth and the year-over-year 25% growth, about 60% of that growth was organic, the balance would have been acquisition related and almost 100% of the sequential growth was organic from Q1 to Q2.
Glen Tullman
Great, Bill thanks for following-up on that. So, again I just want to include in a way where we began.
We remain very excited about where the company position, we’re very proud of our people having worked their way through a tough period, kept focused on what’s important and we kept investing in the right things and so, we think it was a great quarter, it’s a building quarter, one we can use as a springboard going forward into the rest of the year. We’re also very excited about the pending merger with Misys and are looking forward to the consummation of that.
So with that said, very strong market, well positioned company and great people to make it happen. So I want to thank all of you for your confidence and we look forward the talking with you next quarter.
Thanks very much.
Operator
This does conclude today’s second quarter 2008 earnings conference call. You may now disconnect.