Apr 2, 2009
Executives
Glen Tullman - Chief Executive Officer Bill Davis - Chief Financial Officer Lee Shapiro - President & Chief Operating Officer Mike Lawrie - Executive Chairman of the Board
Analysts
Corey Tobin - William Blair & Company Richard Close - Jeffries & Company Charles Rhyee - Oppenheimer Sandy Draper - Raymond James Atif Rahim - JP Morgan Sean Wieland - Piper Michael Cherney - Deutsche Bank
Operator
Good afternoon. My name is Abigail and I will be your conference operator today.
At this time, I would like to welcome everyone to the Allscripts fiscal third quarter, 2009 earnings conference call. All phone lines have been muted to prevent any background noise during the call.
(Operator Instructions) At this time, I’d like to turn the call over to Mr. Glen Tullman, Chief Executive Officer of Allscripts.
Glen Tullman
Thank you. Good afternoon and welcome to the Allscripts fiscal 2009 third quarter conference call.
This is Glen Tullman, Chief Executive Officer of Allscripts and joining me on the call today is Bill Davis, our Chief Financial Officer; Lee Shapiro, our President and Chief Operating Officer, and I’m also pleased to welcome Mike Lawrie, the Executive Chairman of our Board who’s with us today. Before we get started, I’m going to ask Bill Davis to review our Safe Harbor Statement; Bill.
Bill Davis
Today’s call will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events, developments, the company’s future performance, as well as management’s expectations, believes, intensions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.
These forward-looking statements are subject to a number of risks and uncertainties, including the volume and timing of system sales and installations, our ability to integrate acquisitions and realization of the benefits of the merger with Misys Healthcare, as well as the implementation and speed of acceptance of the electronic record provisions of the American Recovery and Reinvestment Act of 2009, and other factors outlined from time-to-time in our reports filed with the Securities and Exchange Commission to which you should refer, including our 2007 Annual Report on Form 10-K, available through the website maintained by the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.
Glen.
Glen Tullman
Thanks Bill. This is an unprecedented time for our company and for healthcare.
When President Obama signed the American Recovery and Reinvestment Act of 2009 on February 17, which for the first time provides significant financial incentives to physicians who adopt and use Electronic Health Records, everything in this industry changed. We believe the combination of the President’s leadership and vision, the standards provided by CCHIT and the incentives that exist today for e-prescribing and pay for quality initiatives will quickly make Electronic Health Records as common as practice management systems in all provider offices.
The stimulus will be the single biggest driver of healthcare IT adoption in our industries history since the requirement of electronic claims submissions. I will go into more detail on the stimulus in just a moment, but first let’s briefly review the top line numbers for the quarter.
While bookings for the quarter were $84.4 million, up sequentially from last quarter, we did see some softness due to groups waiting for the details related to the stimulus payments. Total revenue of $163.8 million and revenue from software and related services of $155.3 million was less than we had been looking to achieve and reflects a mix in bookings that has moved towards recurring subscription revenue as opposed to licensing, a change that happened more quickly than we expected and while beneficial longer-term impacts our quarterly numbers.
As you are aware, we generate 61% of our revenues on a recurring basis and we expect this trend to continue to provide greater predictability to our earnings. We were pleased with the earnings for the quarter which came in strong at $0.15 per share.
Note that we are continuing to deliver the cost savings from our merger directly to our bottom line and Bill will have more on all of the numbers in just a few minutes. For now let’s turn to the most important development during the quarter, the High-Tech act, which is the relevant portion of the stimulus legislation that President Obama signed and provides between $44,000 and $64,000 in incentives for physicians who implement and use an Electronic Health Record.
Payments will take place over five years with penalties for those who don’t use an Electronic Health Record by 2015 and the payments are heavily frontloaded into the first two years with, a payment of $18,000 in year one and $12,000 in year two and as we’ve learned from the CMS e-prescribing initiatives, which went into effect on January 1 of this year and provide between $3000 and $5000 per physician, incentives work and incentives change behavior. We’ve seen our own e-prescribing transactions grow over 300% year-over-year, and like the High-Tech act, the CMS e-prescribing program also contains penalties for non-adoption.
The good news about the stimulus is that virtually all physicians are aware of the incentives. In fact a recent Allscripts survey of just under 2000 healthcare professionals show that 98% of the physician practices would take advantage of the incentives, or would be closely evaluating the opportunity.
So, the message we are sending to our sales and marketing efforts is that to optimize the stimulus payments, the time is now to begin with an Electronic Health Record. While there’s been some discussion on when groups will actually start to adopt, it’s critical to understand that there is no reason to wait as there are already incentives in place.
I’ve just mentioned the CMS program for e-prescribing. In addition to CMS, also sponsors a program called PQRI or the Physician Quality Reporting Initiative, which rewards physicians who electronically transmit required data on clinical procedures to CMS.
Taken together the existing e-prescribing and PQRI incentives provide an additional impact of $6,000 to $10,000 per physician per year. So to clarify, even without the recent stimulus incentives physicians today can make up to $10,000 a year to offset the cost of implementing an Electronic Health Record, right now.
That’s real money and it’s making a real difference in the interest and the adoption of these systems. Also, I should mention that the return on investment for an Electronic Health Record is already well documented and significant.
Our client have consistently generated a rapid return on investment and that return comes from eliminating transcription for more accurate coating levels and from eliminating chart pulls, supplies and space. Many groups breakeven on their investment in less than a year, and see an ongoing positive impact of over $20,000 per physician per year and there have been some questions about financing.
Financing packages are available for groups concerned about the initial capital outlay, Allscripts has financing available that allows these groups to begin now, but pay overtime. This is another way to help bridge the time between the stimulus payments when they kick in and today.
Now the smartest physician groups clearly get it and they are already moving. Relative to the stimulus, I think the metric that all eyes will be ultimately focused on is bookings.
So, let me run through some highlights for the quarter for three different types of agreements that we see in the market right now. The Professional market, which we think of as four to 25 physicians, primarily in primary care, the Enterprise market 25 physicians and above, both multi-specialty and larger groups, and the community market where hospitals and integrated delivery networks are supporting broader community rollouts, generally through Stark and other programs.
Finally our reseller channel, which we haven’t spoken a lot about, but I plan to discuss today and that’s focused on solutions in the one to three physician market. So, let me begin with the Professional market.
As I’d mentioned that includes groups of physicians between four and 25 principally in primary care, one of my favorite examples here is the sale from the third quarter of diagnostic center of medicine in Las Vegas, who selected our Professional Electronic Health Record and Practice Management Solution for 19 providers. The Groups Chief Operating Officer, Shawn Foley said “some people initially took a wait and see approach to the incentives, but we knew that we needed to get the implementation underway now if we wanted to really maximize the opportunity.”
Again smart physician groups like diagnostic center of medicine are also moving now, because they want to take advantage of the financial incentives the Federal Government already has in place. If we move to the Enterprise market, groups of 25 or more physicians and focused in the multi-specialty area we see those stretching all the way up to the largest groups in the country, the academic medical centers and a like.
Earlier today, we announced that Scripts Health, one of the most prestigious groups in the country, a $2 billion non-profit community health system in San Diego with over 2,600 affiliated physicians, four acute care hospitals and 550 employed physicians will implement our Enterprise Electronic Health Record for all of their employed physicians. The Electronic Health Record is one of the few capital projects that Scripts approved this year and the main reason is that they understood a clear path to millions of dollars this year and next year from existing CMS incentives for PQRI and e-prescribing.
Those dollars are enough to offset the full costs of our systems and again that’s before including the stimulus incentives that scripts will realize beginning in 2011. So here’s an example of one of the largest, most respected groups in the country deciding that there’s no reason to wait for the stimulus incentives to kick in, because the time is now to implement Electronic Health Records.
Let me talk a little bit about the community market where hospitals and large integrated delivering networks are supporting community based rollouts. If you read Time Magazine last week, you may have seen another program that we initiated in response to the federal stimulus funding.
PaperFree Tampa Bay is a public private partnership between Allscripts, University of South Florida and their USF Health Group and the Tampa Bay Community that was designed to make the vision of President Obama a reality. The program will deploy more than 100 electronic healthcare ambassadors, employed by USF with a goal to convert all 10,000 physicians in the Tampa Bay Area to electronic prescribing, as a first step toward the full implementation of Electronic Health Records.
Congresswoman Kathy Caster lead-off the news conference announcing the program late last month. She indicated that the partnership is well positioned to receive funding from a portion of the $2 billion in discretionary funds available to the Secretary of Health and Human Services under the high-tech act.
USF Health and Allscripts are already launching the first phase of the PaperFree Tampa Bay program, which targets Hillsboro County 3,200 physicians. Once stimulus dollars become available, the program will be expanded to the entire 10 county Tampa Bay region and beyond.
We already have begun discussions with clients and communities in Connecticut, Pennsylvania, Iowa and California, to launch similar community based initiatives focused on electronic prescribing, Electronic Health Records and connecting communities, including hospitals, pharmacies, labs, extended care facilities, home care facilities and even our competitors. Finally, let me mention a few words about our reseller channel, which offers solutions to the one to three markets.
Now, here we have a very different perspective on the moves made by some of our competitors in the market recently. Our perspective and the bottom line is that you can’t adequately cover the 169,000 groups in this market space with a direct sales force.
At the same time, however you need an on the ground presence, so over the past year we’ve been very focused on developing what we call the Allscripts distribution network and I’m pleased to say that the Allscripts distribution network is now the largest reseller network in the country with over 75 partners who are out in the field presenting our MyWay solution to physician practices every day. With the stimulus in place, the need for this type of local presence is critical as they already provide a range of services to smaller independent practices and the network continues to grow.
We expect major additions to the network in the near future and look for some announcement at HIMSS relative to that. Now to let you know a little more about our stimulus program, I want to just briefly give you some highlights from our business units and because the stimulus is such an important part of this call I’ll keep this section much shorter than in the past.
To start off with our enterprise business, we have made clear progress with Version 11.0, as we’ve told you about on earlier calls. Specifically, 1/3 of our enterprise clients now have been upgraded and have adopted, and are using Version 11.0.
We are pleased with their continuing progress and we have seen strength in new releases and more conversions to our base. We also see that some of the leading institutions in the country, like scripts are stepping up and buying this product, and in fact just this week we went live on Version 11.0 in Albany Medical Center in Albany, New York.
Many of you know George Hickman, their CIO, who’s the former President of HIMSS. Albany has one of the most sophisticated implementations we have seen to-date and just this morning they’ve called to say the upgrade went off without a hitch or I should say the new implementation of V11.0 went off without a hitch and of course scripts is just another example of how strong this product is going to be in the market and continues to be.
So, when one of the largest and most prestigious integrated delivery Health Systems in the country chooses you, after a very extensive process that included all of the usual suspects sends the market a definitive message, Allscripts is the choice. I also want to add that we are accelerating our investment in Version 11.0 to address open issues and build new services, to realize the promise of not just making physicians more effective, but providing them with real-time information at the point of care that allows them to deliver higher quality care and get paid more for it, and also connect to the entire community of care.
Let me switch to our Professional business. During the quarter, we announced that our Professional Electronic Health Record had received 2008 C-chip certification, another major milestone that confirms the value of our solution.
The latest version of Professional received certification for Child Health and for CCHIT’s updated interoperability requirements. A capability that we think is likely to satisfy the stimulus requirements for interoperability as well.
Turning now to our Health Systems group, which includes all of our hospital solutions, this business is demonstrating excellent execution in sales based on a solid return on investment. Much of what our Health Systems group sells is on a monthly recurring revenue ASP model, so the up front cost for our clients are less and can generally be finance through savings.
As a result, we’re seeing solid success positioning our web-based care Management product as a recession-proof solution that delivers significant return on investment with very little up front investment, rapid 90 day implementation and best of all you don’t pay for it unless you use it. Finally, Allscripts continues to be the innovation leader in the industry.
You’ll see this demonstrated in very clear fashion at HIMSS in Chicago next week, where we’ll introduce a new innovation everyday from across all of our business units. I don’t want to steel the thunder from our own announcements, but I did want to inform you since I’ve talked about it before, that our Allscripts remote product for the iPhone is now live on the iTunes application store and available for download.
This is a major achievement from our development team and one we think will prove to be very popular with physicians who want portable access to the Electronic Health Record on a device they keep closest, their phone. Let me switch gears and talk a bit about the merger.
I want to briefly discuss what is a critical difference between Allscripts and the rest of the market and that is our client base. Specifically, the legacy Misys practice management client base of 110,000 physicians.
We’re now almost six months into the new Allscripts and I’m pleased to report that we’ve made excellent progress in selling into that base and we see a strong emphasis towards cross-selling. In addition, we are bringing the businesses together.
In response to the stimulus and my own view though that we could do better, I recently reorganized our sales and solution management efforts asking Jeff Surges, previously President of Our successful Health Systems group and someone I’ve worked with for over 20 years to take ownership of all sales across the company. The goal here is to make it easier for our clients to buy, and basically we want to sell them what they want, when they want it and where they want it.
So, for the first time we’re enabling all of our sales executives to sell whatever products the clients want best. So, we’re excited about this and given the opportunity the stimulus presents, I consider Jeff’s role to be one of the most important in the company and now he’s up to the job.
Now, good companies keep getting better. So while we’ve made changes, we also continue to have solid successes to show.
For example, today we announced Ottawa Regional Hospital and Healthcare Center selected a broad suite of Allscripts solutions to electronically connect its providers for a coordinated healthcare across all settings, from the emergency room to physician offices, to home care agencies outside the hospital. In addition to implementing the Allscripts ED emergency department information system and Allscripts homecare, Ottawa is replacing their legacy Misys practice management system with our Professional solution, while adding our Electronic Health Record.
Ottawa is just one example out of many dozens of cross-sales closed during the quarter in both our Professional and Enterprise business units. This is exactly why we did the merger and it’s working, which is great news.
Every merger also includes cost synergies and as I said last quarter, we continue to feel confident about realizing cost synergies of $20 million on an annualized basis. So to summarize, the company continues to be well positioned as the leader in ambulatory healthcare IT.
We made solid progress on the merger, we narrowed our focus down to the markets and products that are most promising and we are well positioned to capitalize on the biggest market opportunity in our company’s history, the federal stimulus incentives for electronic healthcare adoption. I now want to ask Bill Davis, to provide you with detail on the financial aspects of the quarter.
Bill.
Bill Davis
Thanks, Glen and hello everyone. I would like to start out by providing a quick overview of our results for the quarter as well as the nine months ended February 28, and then I’ll wrap up with a few comments regarding our outlook for the balance of fiscal 2009.
Before I get started, I wanted to remind everyone that we did consummate our merger with Misys Healthcare back in October and Allscripts was in fact treated as the accounting acquire in the transaction. As such our GAAP results reflect Misys Healthcare performance for all periods presented and Allscripts results from October 10 through February 28.
It is for that reason, we provided pro forma results for all periods presented, so to improve comparability for investors. It’s also important to note that we did consummate the sale of our meds distribution business on March 18 for total consideration of $26 million.
It’s for that reason that the meds business is included in our results for the entire quarter and I’ll talk about the future impact of the med sale later in my remarks. So with that being said, we continue to be encouraged by the success we had in integrating our two businesses and the progress we’ve made with regards to realization of our cost synergies.
Please note that we did see some pause in the market as Glen mentioned, especially in the months of January and February, related to the finalization of the American Recovery and Reinvestment Act of 2009 that had an impact on our near term bookings and revenue performance. We are encouraged by the fact that we’ve already started to see some buying behavior pickup post signing of the legislation into law just a few weeks ago.
So turning to the quarter and looking first at bookings or also what is known as order intake; we did have total bookings of $84.4 million in the quarter. This compares to $80.7 million in the second quarter and $77.4 million in the third quarter a year ago, which represents a 9% increase over the prior year.
Both historical periods reflect; both legacy Allscripts and legacy Misys Healthcare combined. Please note that approximately $38 million or 45% of our third quarter bookings related to software as service transactions that will be recognized as revenue over the next 48 months.
This compares to approximately $21 million or 25% of our second quarter bookings and again is reflective of the trend that both Glen and I’ve highlighted. We view this as a positive longer term trend that is likely to continue as more physicians attempt to align the cost and care of their Electronic Health Records with the incentives that are available to them.
Total bookings for the nine months ended February 28, were $231.5 million and we’re comparable to the same period a year ago. It is important to take into account the fact that Columbia University transaction was consummated in the prior year’s comparable period.
As Glen indicated, we also continue to see success on our cross-selling efforts and continue to feel comfortable with both the bookings and revenue expectations that we set for ourselves in this year related to the cross-sale I should say. We would also like to point out that our bookings reflect Allscripts established definition of bookings.
Misys plc includes transaction fees in their bookings definition and if you were to include those, such transaction fees would add approximately $36.6 million and approximately $111.4 million to our three-month and nine month bookings respectively. I highlight this to assist those of you who have historically followed the Misys plc stock.
We ended the quarter with approximately $630 million of sold backlog. This is up from $600 million at the end of the second quarter.
Our backlog consists of approximately $141 million of clinical software and related services, as well as approximately $122 million of subscription and ASP fees, which is up, close to 20% from the second quarter, as well as approximately $222 million of annual maintenance fees that are expected to be recognized over the next 12 months; and then finally $145 million of transaction fees, which principally consists of EDI transaction fees and again are expected to be recognized over the next 12 months. With regards to revenue, we had total GAAP revenue in the quarter of approximately $160.7 million and had $163.8 million on a pro forma basis.
Revenue was lower than expected in the quarter for two reasons. First, it relates to the impact from our booking mix shift and the fact more of our bookings came in the form of soft wares or service transactions.
Again, this is a trend that we expect to continue, but also represents an opportunity to further grow our reoccurring revenue base. The second reason was that our initial license fee and hardware revenue was in fact adversely impacted by our sales performance in January and February, due to the pause in the market we saw, caused by the physicians waiting to understand the final stimulus legislation.
Again, we are starting to see physicians move based on their desire to take advantage of such stimulus benefits. GAAP revenue for the nine months ended February 28 were $382.2 million and approximately $511.7 million on a pro forma basis.
Pro forma clinical revenue for the first nine months of Fiscal ‘09 were approximately $483.3 million, representing a 5% increase when compared to the same nine month period a year ago. Approximately $312 million or 61% of our pro forma nine month revenue was in fact reoccurring in nature.
Our GAAP revenue for the three and nine month periods ended February 2009, does in fact contemplate a $3.1 million and a $5.2 million reduction respectively, related to our revaluing of Allscripts deferred revenue balance at the time we did the merger back in the second quarter. As we talked about last quarter, we have added such amounts back for pro forma revenue purposes.
Pro forma gross margin percentage for the quarter was 52.7% and compares to 52.9% in our second quarter. Gross margin continues to be driven by approximately 54.5% gross margin in our clinical software businesses.
Our gross margin and clinical software businesses is reflective of our ongoing investment in our V11 deployment efforts, as well as our investment in incremental deployment capacity. Margins in our meds distribution business were approximately 20% in the quarter.
GAAP operating expenses were $60.5 million for the quarter and include $3.5 million of transaction related expenses. Pro forma operating expenses before stock-based compensation, deal related amortization and transaction related expenses were approximately $51.9 million.
This compares to $64.5 million in the second quarter of fiscal 2009. It’s important to note that our pro forma operating expenses for the quarter, were lower than our normalized run rate of approximately $57 million to $58 million, due to timing of certain capitalized software, marketing spend, and incentive compensation programs.
As such and as Glen indicated, we continue to feel very good about our projected cost synergies of $20 plus million in our first year of combined operations. Our transaction related expenses were again approximately $3.5 million in the quarter.
Such expenses included legal, integration and severance cost. I expect some amount of transaction related expenses to continue into the fourth quarter.
Capitalized software in the quarter was approximately $4.5 million and that compares to $2.5 million on a pro forma basis back in the second quarter. With regards to taxes, we continue to do more detailed work on our expected effective tax rate for the year and now believe that it will be closer to 39.5%.
The slight change in this year’s effective rate is a result of us doing more work on our NOL limits and results in production credits. We will continue to work to reduce our rate, but also believe that as you look out into fiscal 2010, that 39% is still an appropriate estimate.
GAAP net income for the quarter was $13.2 million and $12.7 million for the first nine months. Non-GAAP net income was $22.3 million for the quarter and $54.5 million for the first nine months of fiscal 09.
This compares to $16.2 million in the third quarter of last fiscal year and $43.5 million for the first nine months of last fiscal year. The quarter growth when compared to last year represents 38% growth.
We view this to be significant and reflective of our success in bringing these two organizations together. Our non-GAAP net income contemplates again, the add back effect of Allscripts pre-merger results, our non-cash deferred revenue adjustment, deal related amortization, stock comp and transaction cost, all on an after tax basis.
Our diluted earnings per share for the quarter was $0.09 and was $0.15 per share on a non-GAAP net income basis. As I mentioned last quarter, approximately $2.5 million shares still remain outstanding and underlie our remaining $19.7 million of convertible debt that we have outstanding.
Such shares were in fact dilutive to our fiscal third quarter results, but continue to be anti-dilutive for our first nine months results for fiscal ‘09 for EPS purposes. Just to breakdown our diluted share count for the quarter of 151.1 million shares, you should take into account the share that we issued to Misys of some 82.9 million; Allscripts shares that ultimately were outstanding through the merger of 63 million; the dilutive effect of options and unvested restricted shares of 2.7 million and then again the convertible debt of 2.5 million, bringing our total diluted shares to 151.1 million.
With regard to overall headcount, we ended the quarter with approximately 2,506 employees, which compares to 2,520 at the end of the second quarter. You should note this includes 62 employees in the meds distribution business, which again we sold in March.
As we announced in February, our Board authorized us to pursue $150 million open market share buyback program. I’m excited to announce we have purchased 3.7 million shares for $32.8 million, out of our cash reserves through March 31.
$24.9 million of such purchases were in fact completed in the month of March. We will continue to be opportunistic as we evaluate future buyback opportunities.
We’ve also made some further refinements to preliminary purchase price allocation and amortization periods. We now anticipate approximately $21.2 million of deal related amortization for this full year, versus the $18.6 million that we previously communicated.
It’s important to note that $8.7 million of such amount will in fact be recorded in cost of sales related to acquire software, and both of those amounts are on a pretax basis. Stock-based compensation is expected to be a little bit lower than we previously expected and we now estimate it to be closer to $9 million for the year; again, also on a pretax basis amount.
Turning now to the company’s combined balance sheet; we ended the quarter with $77.5 million in cash and marketable securities. This contemplates the fact that we paid nearly $12.6 million in transaction costs, as well as the previously mentioned share buyback program that we launched in the third month of the quarter; all of which again was funded out of our cash reserves.
Both out flows were offset by approximately $20 million generated in cash flows from operations. With regards to our receivables, we ended the quarter with approximately $168 million outstanding and represent day sales outstanding of 87 days.
Please note, the increase was primarily driven by annual maintenance billings that occurred in the quarter that also resulted in a corresponding increase in deferred revenue of some $24.9 million. Total debt at the end of the quarter went down slightly to a total of $67 million, made up of the $47 million we still have outstanding under our credit facility, and again approximately $20 million that underlies our convertible debt.
As I mentioned earlier, we were successful in selling our meds distribution business in early March. We sold the business for a total of $26 million and the consideration will come in the form of $8 million here in the fourth quarter, with the balance being delivered over the next five years on a ratable basis tied to a joint marketing agreement between the two companies that will allow us the opportunity to continue to sell the dispensing solution into our Allscripts customer base.
This divestiture also affords us the opportunity to further focus on our core operations and improve the overall margin profile of our business. Turning now to our outlook for Allscripts, our longer term outlook for Allscripts continues to be very positive and is reinforced by the largest opportunity this industry has ever faced by virtue of the stimulus package recently passed.
As Glen mentioned, we believe Allscripts is uniquely positioned to capitalize on the stimulus motivated opportunity, to our industry leading products and unrelenting commitment to our customers’ utilization of the products we sell. We are also encouraged by the success we have had in effectively integrating these two businesses and capitalizing on the significant cost synergy opportunities that we have.
It is for that reason why we continue to remain comfortable with the non-GAAP net income guidance we had previously provided. Such earnings guidance takes into account the pretax profit contribution from the meds business, through the first nine months of the year, at approximately $4 million.
In light of the revenue performance though, we had in the third quarter, we do in fact foresee 2009 pro forma revenue to be more within the range of $675 million to $680 million. This contemplates approximately $40 million of revenue contribution from the meds business or $635 million to $640 million if one were to exclude the meds business.
We certainly see some upside to such projections based on the level of activity that we’re seeing in our pipeline, but believe it is prudent to manage expectation to what we have clear visibility to as of today. I also wanted to comment on the tax treatment for the dividend we paid to our Allscripts shareholders back in October.
We are nearly complete with our 2008 tax returns and estimate that approximately 10% of the dividend will in fact be taxable, which is a little bit better than what we had previously communicated to the market. We hope to finalize such returns over the next few days and process revised 1099’s to our shareholders at the same time.
In closing, I would like to applaud the excellent work of the entire Allscripts team and the relentless pursuit to bring these two great organizations together, and while we are not immune to the broader economic environment, we continue to believe that we are uniquely positioned to capitalize on what we view to be a fantastic market opportunity. So with that, I’d like to turn the call back over to Glen.
Glen Tullman
Thanks, Bill. Well let me make some concluding comments as well.
For over 10 years I’ve worked hard to help transform our healthcare system. To take it from a paper-based, inefficient and disconnected system that failed to provide safe, cost effective or quality care; to an efficient, interoperable, electronic system of health, that provides real-time information physicians can use, to provide safer, more cost effective and higher quality care to their patients; that time has come.
The government has provided the vision through President Obama’s leadership, the standards through CCHIT and now the incentives through the stimulus package; the three ingredients necessary to drive change. So, once again, the time has come.
The time for change is now and I believe the industry will be transformed. Allscripts is especially well-positioned to capitalize on that change and we plan to continue to organize for success, to invest aggressively in the right products and to deliver for our clients.
We’ll do that with the continued commitment of our employees who are the best in the industry, the strong partnerships we built with our clients and the support of our shareholders. So once again I want to thank you for joining us this afternoon and we’re now ready to take your questions.
Operator
(Operator Instruction) Your first question comes from Corey Tobin - William Blair & Company.
Corey Tobin - William Blair & Company
One quick house-keeping thing and then a question on one of the opportunities you talked about. Bill can you just give us a little bit of color as to why the cap software increased so much sequentially and what should we expect in terms of a run rate level going forward?
Bill Davis
Yes Corey, we had in both our professional business and our enterprise business, development activity in part motivated by preparing ourselves for stimulus activity that saw a little bit of an up-tick in capitalization in again both those businesses. As I called out in the operating expense kind of baseline expectation, I think that the quarter was a little bit higher than I would characterize as normal run rate.
So at $4.5 million I would back-off probably $1 million, $1.5 million in terms of what I’d realistically expect going forward into the fourth quarter.
Corey Tobin - William Blair & Company
So thinking about $3 million or so?
Bill Davis
Yes, that’s right; $3 million, $3.5 million.
Corey Tobin - William Blair & Company
Then finally on the scripts deal announced this morning, congratulations on that; can you give us a little bit of color as to what the opportunity is with respect to I believe you said Glen it was 2,600 affiliated doctors. Did I hear that correctly?
Do you have a sort of standard template contract in place that you can now use to go and sell to those groups or would it still be something you’d have to go out and sell to them individually going forward? I guess, I’m asking is there any opportunity, do you guys have any leg up or additional opportunity to reach into that base, given the agreement struck today?
Thanks.
Glen Tullman
Yes Corey, first of all again we couldn’t be more pleased with the scripts agreement. I mean, their status as being one of the leading healthcare organizations in the world is significant, relative to their selection of Version 11.
Relative to the non-owned physicians, there is an opportunity, both through Stark and the interest of these organizations to connect to all the referring Docs in their communities. So you’re going see more and more of this as hospitals and hospital-based organizations want to make sure that they’re easy to do business with and consequently, they’re going to want to be connected to their highest referring Docs.
So we’re seeing that there, we’re seeing that in the USF example about how they want to connect their communities and you’ll hear a lot more from us about connected communities and that strategy. It’s also important to note that part of the strength of Allscripts in our product suite is this connectivity and the idea of connecting the health is one major differentiator between us and many of the other people offering Electronic Health Records in the market.
Corey Tobin - William Blair & Company
So it sounds like not necessarily a formal agreement in place, but having the endorsement of scripts is certainly going to help with expecting a leg up in the competition to those providers?
Glen Tullman
Yes, I think you can assume that that’s an issue that’s been discussed and there’s strong interest there. I’d also mention that we happen to have another large player in the San Diego market and that’s Sharp; and between the two of them I think there’s something like 70% plus share of the greater San Diego market.
So the big players in the big markets are increasingly selecting Allscripts.
Operator
Your next question comes from Richard Close - Jeffries & Company.
Richard Close – Jeffries & Company
Yes, Bill I was wondering on the bookings if you are breaking out what is TouchWorks, Healthmatics and then what is the Misys; coming from Misys?
Bill Davis
Yes Richard, we have not provided that in the past and we’re not intending to do that going forward. So it’s really in a consistent manner we’ve done in the prior quarters.
Lee Shapiro
Let me jump in and just say why. Increasingly what we’re seeing is, we used to see three very differentiated markets, and today what we might see is the large health system made by our enterprise product for their owned physicians.
They may want to go out in the market and provide some of those physicians with professional; they may want other physicians to have an option of buying our MyWay offering. So we’re seeing that organizations are saying, what is the best product to provide to physicians to get them to use it.
Also, I want to make another important point about the stimulus and that is, we know there’s going to be a group of physicians out there who simply say give me a product that is easy to use and easy to implement, so I can take advantage of the stimulus and get the $44,000 and there, again, we want to make sure we have offerings that are easy to implement and easy to use, so you’re going to see a lot of that in the market; but that’s why breaking them out is really artificial today.
Richard Close – Jeffries & Company
Okay, how about if we look at the bookings for the quarter, is there anyway you can help us out in terms of the percentage or what was the percentage that was sold into Misys existing customers?
Bill Davis
Yes, again we’re really not prepared to get into that level of granularity Richard. I guess maybe to directionally point you what I’d do is, I’d refer you back to the fact that we did introduce, the fact that some 45% of our quarters bookings were in the form of software as service transactions, comfortable telling you that a large percentage of those were towards the smaller end of the market, so you can get a general sense of mix from that respect, but going further we’re just not prepared to do that.
Lee Shapiro
Bill may shoot me, but I’ll say one thing, and that is when we first did the transaction, we talked about the fact that one strong reason for the transaction was that Misys, of their 110,000 physicians, 90,000 did not have an electronic health record; and at that time we gave some basic guidance of cross-sell activity and I can tell you that we are in excess of that cross sell activity today. That said, we’re going see that accelerate dramatically, because we look at those 90,000 clients; they’ve been clients for a long time; we send them a bill every month and that is a very big focus of ours, to make it easy for them, to step up to a full electronic health record.
Let me also mention that in this economy, the idea that someone is going to go and rip out a working practice management system to put in a brand new one to try it, doesn’t make a lot of sense. What our customers in that base are saying to us is make it easy and we’ll upgrade to that offering.
So that’s where we’re going to see a lot of this acceleration in the stimulus take place.
Richard Close – Jeffries & Company
Bill what was that number again, you said with the services and those were focused on small groups?
Bill Davis
I indicated 45% of our total booking amount came in the form as software service transactions or subscription type transactions, and a large percentage of those again were oriented towards the smaller physician practices.
Richard Close – Jeffries & Company
Okay and then just two final questions. I guess Glen; you talked about the sales force change.
Why make those changes now? Did anyone leave so the changes more specific on the changes there.
Then do you guys feel that you have the bench, enough people to take advantage of the stimulus?
Glen Tullman
Well I think your questions are related. Why make the change now?
It’s exactly that, to take advantage of the stimulus. What we wanted to make certain of, is that we were easy to do business with; that our sales force, we had one sales force that wasn’t in fact broken out by artificial barriers in terms of one saying “we really want to sell you the enterprise product” and another group saying, “we really want to sell you professional” and yet a third group through our distribution network saying, “we want you to buy through our distribution network.”
Today we have a group of people who say buy anything from us, buy what fits and make sure we make it easy for you to spend money and use our products and that’s why we did the reorganization right now. I’m always looking for more efficiency, you’ve watched me do this over the years, that we’re always looking to take out the bottom 10% of our sales force, but this is really about getting ready for the stimulus and getting everybody in the company focused on what we call true North, which is $19 billion of incentive and even more.
I want to also mention that people talk about fiscal 2011 as when it starts, the reality is that the Secretary has over almost $2 billion today that she can release for direct rents, that she can release for connected community programs; there is also money sitting in the agriculture department; there is also money in a variety of other areas; we’ve heard about dollars over $1 billion dollars for federally qualified health centers. So, the money is flowing right now, people are learning about that and again, we’re going to start to see that acceleration come I believe sooner than most people imagine.
Richard Close - Jeffries & Company
So do you have a target on your professional services group growing in terms of a number of employees over the next year? Is there any numbers that you can throw out?
Glen Tullman
I think what I would say is number one, we plan to see growth in that area, but I also want to reemphasize, we talked about this distribution network that we’ve been quietly building over the last year and people look at this and they say “Gosh, the merger seemed pretty well timed, that you now have the largest base in the industry a few months before the stimulus.” Similarly, this distribution network didn’t happen overnight.
We’ve been building it; will continue to build it and enhance it. Part of the reason for that is, given the number of sites that you got to get to, you can’t do that just by building an internal sales force.
You got to partner up and as I mentioned in my comments, we have a different perspective. Physicians don’t go out to a store and spend $25,000 to buy a package and bring it home.
It’s not the way it’s done. It’s the hard work of having partners out there who have been working for years, who sell them products, who can do the care and feeding, you do the implementation.
That’s how the market will be won and that’s how the fight will be fought and we have the largest network out there of people who are going to do just that. So again, the best distribution that anyone has in the industry with 90,000 physicians installed with a PM system, that’s what we’re focused on.
Bill Davis
Let me just make two follow on comments. One is, the major benefit in terms of the trend that we’re seeing, in terms of movement of soft wares or service, is again the ease of deploy ability.
So, we are encouraged by that because we see efficiency gains coming from that avenue, number one. Number two, as Glen talked about in his prepared remarks, an initiative we’ve been working on for sometime, and that’s enterprise ready.
This is all about driving major efficiency into our more complex deployments and as a consequent of that, we are going to build capacity by virtue of realization of those efficiency gains. So, we feel good about our ability to prepare for and absorb kind of the demand that is forthcoming, both internally but also leveraging what Glen described from a distribution capacity.
Glen Tullman
I think there’s a major difference. You see some organizations are not showing up at HIMSS; others are canceling their user groups; others are cutting investment, and we’re doing just the opposite.
We’re preparing to take advantage of this continue to lead in light of the stimulus.
Operator
Your next question comes from Charles Rhyee - Oppenheimer.
Charles Rhyee - Oppenheimer
A couple of questions here; first, Bill talking about the bookings mix of soft wares of service, can you talk to us; where do you think that percentage goes to as a percentage of total bookings and as we think about a 48 month recognition period, whereas prior our book-to-bill was running sort of underneath one? Does that mean we should expect sort of tougher revenue comps over the next two year timeframe?
Glen Tullman
Yes, Charles I really would like the benefit of a couple more quarters experience. I mean I think the market should be prepared for that, to not necessarily be a consistent percentage over the next couple of quarters, but I think as we build that history here over the next two quarters by virtue of having kind of four, I think we’ll be in a better position to kind of own in on a more realistic trend there.
But it would be very clear, in terms of what we’re seeing coming through our pipeline there is absolutely increased interest in an ASP or software of service solution. So I definitely think that what you’re witnessing here in the second quarter, while the percentage may not be exactly right going forward as a trend, it will definitely be heading that way.
Charles Rhyee - Oppenheimer
Is that because this SAS model, what are you taking up-front from clients here? I mean is it a situation where they just don’t have cash and this offers them the ability to get the software and you don’t have to put much upfront cost?
Glen Tullman
Yes, I think it’s a combination of two factors. I certainly think that there’s some economic influence here and in the environment that we’re in, their desire to avoid the upfront capital requirement and align their obligations to where the incentives come in I think is obviously a motivating factor.
Second is, I think they are very, very interested ease of deploy ability, in the repeatable process, that an ASP solution offers you in that regard, because keep in mind the stimulus package requires meaningful utilization of an HER; so leveraging that way is very important. The final point I would make is that, one of the great benefits of the merger itself is our preparedness to offer this capability.
One of the things that is driving our cost synergy realization is actually data center consolidation and optimization and that is actually improving our capacity and capability to support this increase in demand. So we feel very fortunate about it just from a peer capability point of view.
Charles Rhyee - Oppenheimer
So, what you’re suggesting is that our revenues get compressed though, as the revenue recognition period lengthens for the SAS revenues, we’re not going to necessarily see the same sort of margin compression?
Glen Tullman
I totally agree with that, because again the cost of delivery is lower and so again, we’re not seeing a near term kind of degradation in margin by virtue of that shift; so we do feel comfortable with that.
Charles Rhyee - Oppenheimer
And are you offering Touchworks on this software and service model or is this mostly health Matics and the misys product?
Glen Tullman
Yes, this is mostly professional in the MyWay solution.
Charles Rhyee - Oppenheimer
Okay, so when you go to MyWay, Touchworks, still pretty much people are buying to perpetual license?
Glen Tullman
Yes, this is Glen, that’s true. Although I would tell you that Touchworks has a number of hosted environments as well.
So hospital will host Touchworks and it will push it out, but I think what you’re going to see is you’re going to see that there are a number of different solutions required and that’s why again, the breadth and scope of our product offering is critical. Some people want a pick up-truck, some people want a sports car, and some people want a basic vehicle to drive and you got to know, you got to have all of those offerings.
So if say a hospital is hosting Touchworks and they are deploying it, well, some practices don’t want that or they may deal with multiple hospitals. So they say ‘I want my own,’ but they want it hosted.
Other practices want to own it, they want it on site, but the good news is we have whatever they want to buy.
Charles Rhyee - Oppenheimer
But in terms of your bookings, if a hospital is hosting, they still bought the perpetual license from you though right?
Glen Tullman
That’s correct; and each time they hosted a new site they buy more licenses, which is great from a revenue recognition standpoint.
Charles Rhyee - Oppenheimer
Okay, last question if I could. Glen mentioned; you and Bill, that you did see some softness as people were sort of delaying maybe some purchasing decisions waiting for a final clarification on the stimulus, but when you look at the language, there’s really no difference in the incentives between adopting in year one and year two.
Why do we need to buy today if we still have some more time to capture the full level of the incentive payments?
Glen Tullman
Well first of all as I mentioned, everyday that they wait they’re losing money, because every physician qualifies for between $3,000 and $5,000 of electronic prescribing payments, they qualify for PQRI payments. We just had one of our clients in Pittsburg get a $600,000 check from their Blue Cross, Blue Shield organization in Pennsylvania for using our e-prescribing product.
So, there are substantial dollars available today and more and more people are understanding that; they understand what’s coming in the future. Second thing is, remember that the Secretary has been charged as a part of the stimulus and I’ll put that in quotes “program to actually begin spending money in advance of the utilization credits for rural physicians, for primary care physicians, for inner city underserved physicians.”
So again, there you’re seeing dollars that are flowing today Finally, remember that especially as an organization grows larger, you don’t go in and implement this in a week. Bill talked about meaningful use and effective day one when you want to get paid, you’ve got to be using this and all your physicians have to be using this and that doesn’t happen overnight.
So, the one final point I’ll make is that in 2011, penalties begin if you’re not using electronic prescribing. So 2011; think about where we are today and think about getting all your physicians, every physician in the country using electronic prescribing by 2011.
A lot of our clients are saying “Look, if we got to get them a device and they got to use electronic prescribing, we might as well just start planning for the entire electronic health record.” So there is also, and I want to be careful and saying that, but we’ve clearly heard some rumors coming out of Washington that there is some sense that they may actually accelerate some of these incentives.
The bill was put together pretty quickly. I don’t think you should be surprised if you see a minimum debate about that, but we’re hopeful and supportive of the actual acceleration of that.
So there’s a lot of good reasons to do it today. The best reason is real simple; it’s money.
Operator
Your next question comes from Sandy Draper - Raymond James.
Sandy Draper - Raymond James
Bill if I sort of back into your fourth quarter guidance for revenue excluding the meds, looks like it would be about 152 to 157. I just think of that conceptually on the lower end as being down sequentially.
What would be the key drivers; would it be the system sales dropping off because there is the higher mix of SAS bookings or what would cause the revenues to go down sequentially?
Bill Davis
I think you’re backing off maybe a little bit more than you should from a meds distribution perspective Sandy. I think our guidance if you do it on an ex-meds basis, it would actually be flat to up the $5 million, is effectively how we’re looking at it, just to clarify it, but what would prompt the flat quarter.
Effectively what we are seeing as buying behavior starts to resume or pickup. It does kind of skew or lend itself a little bit towards the middle and higher end near term and kind of gets back to Glen’s earlier point that, I think physicians are generally looking at kind of how quickly they need to move to be prepared and obviously the larger more complex practices.
I think there’s even a greater sense of urgency there and as I think you know, by virtue of how we recognize revenue in those larger deals, the near term impact of that is going to be far or less in the fourth quarter. So I’m kind of anticipating that to occur.
With that being said, I think the upside opportunity really resides within the professional unit and our opportunity to drive more license sales in the quarter, which is a lot of activity from a pipeline perspective as I suggested in my prepared remarks, and quite frankly, could represent some meaningful upside, but I thought again it was prudent to call the year based on what we have clear visibility on as of today.
Sandy Draper - Raymond James
On the SAS bookings, are you putting the whole four years into a discount rate? You may have said this last quarter, but I can’t recall; how are you comparing that or how are you bundling in a SAS contract versus traditional, in terms of putting in bookings?
Glen Tullman
Yes, we don’t attempt to discount it for bookings definition. Our clear baseline for booking credit is minimum contractual commitment from our customer and so if you took a four year SAS agreement and a monthly fee X, it would be 48 months times whatever that X is.
Now to be very clear, if there are out causes for whatever reasons, certain entities that take on government funding are required a one year out clause, we will only count that one year, we would not go beyond whatever again, the minimum contractual commitment might be, but that in fact is what we’re contemplating.
Sandy Draper - Raymond James
Okay and at the end of that, is it true SAS where if they don’t renew they don’t have the product or is it just spreading out the perpetual license over four years?
Glen Tullman
These are true SAS agreements where they effectively are leased and they have nothing at the term.
Sandy Draper - Raymond James
Then one last question; professional services, it looks like effectively had a negative margin the last two quarters. I’m just trying to understand, is there some funky accounting thing in there that’s causing that or what would cause a professional services margin to be basically no margin or negative?
Bill Davis
Yes, no there’s nothing funky other than the fact we’re comparing capacity and again, I made a specific comment on that, that may have gotten lost in a lot of the information I was sharing, but there’s two reasons and I’ve been very forthright about this fact. We are carrying incremental capacity today to continue to support the V11 deployments and specifically upgrades of existing customers, we just as a practical matter, those are effectively breakeven operations for us.
We’re not making much of any money on those and a lot of service resources are directed there. Second is and it kind of goes back to an earlier question asked from a capacity perspective; we’re very focused on retaining capacity, because we foresee the demand coming and so in some respects, one could argue we’re carrying higher level of capacity than we would technically need for the near term performance requirements, but believe it’s appropriate to do again to anticipate what’s forthcoming.
Operator
Your next question comes from Atif Rahim - JP Morgan.
Atif Rahim - JP Morgan
Regarding the booking softness this quarter it looks like with the 45% contribution from SAS, the weakness was mainly driven by the larger groups. Would there be anything that you feel would have affected those guys in slowing their decisions more so than the small Docs?
Glen Tullman
I’m sorry, I’m not sure, say it again?
Atif Rahim - JP Morgan
It looks like the bookings contribution from the large physician groups was essentially much slower than from the small Docs. Would there be anything in the stimulus package that would have made those guys postpone or hold back on their decisions more so than the smaller Docs?
Glen Tullman
Well, I think what you see is when a larger organization, they gear up to make one of these decisions, Bill mentioned that for a part of the quarter no one knew exactly what the stimulus was going to look like, so that got slowed down and it just takes a little longer to get it geared back up, that’s number one. Number two, and this is part of the significance of a decision like Scripts, is that I don’t think it’s any secret that virtually all of those larger hospital groups and integrated delivery networks because of the economic challenges have put their decisions on hold.
The one good exception to that has been, well we’ll invest in things that bring in business or bring in dollars and that happens to be Electronic Health Records. We bring in business because we connect them to their referring customers, to their referring physicians and we bring in dollars now because they can get real measurable dollars as I mentioned earlier from programs that exist today, like electronic prescribing and the quality programs.
So I think again, we saw a little bit of that delay in the quarter. It takes a little longer to get those ramps back up and we saw those impact some of the revenue, but we’re very comfortable that those groups as Bill mentioned are going to be the first to jump onboard and get going.
Atif Rahim - JP Morgan
Okay and then the second question in terms of the cost of deploying these systems; I think there’s some confusion in the market. I think a consulting company came out and said that cost of deployment was north of 100,000 per physician in some cases.
What do you feel is the average cost per deployment and do you think the 44,000 more than covers the cost to a physician for an EMR?
Bill Davis
Yes, we think that $44,000 covers more than the cost, but remember and I keep having to emphasize this, it’s not just $44,000, it’s $44,000 plus $10,000 a year for e-prescribing and PQRI, plus incentives provided by folks like WellPoint and Aetna and Blue Cross, Blue Shield who have separate programs. Remember that some portion of these physicians get 85% of their systems subsidized by their local hospital through Stark.
So, there is an enormous upside opportunity here that we’re looking at. I think what’s happened is a few of the consultants have looked at some of the Monolithic first generation systems that are out there; there’s some great examples of people who have spent hundreds of millions of dollars trying to get these systems.
Those are the old kind of that’s the old news, but our systems are very cost effective, they have a very strong return on investment and we’re going to see them deploy very rapidly. So, we don’t see that as an issue.
Operator
Your next question comes from Sean Wieland with Piper.
Sean Wieland – Piper
The subscription bookings or the software’s of service bookings, were those inclusive of software license maintenance and can you give kind of an apples-to-apples comparison versus the traditional license deal?
Glen Tullman
Again Sean, they are inclusive in the sense that it’s a monthly fee that effectively bundles the cost of the licenses, the service and the results and support. So in that respect, it is difficult to kind of break it out in terms of an apples-to-apples comparison, but it’s for that reason why I’m trying to give you guys some visibility as to what relative contribution it has had in terms of our overall bookings performance.
So, hopefully from that point of view, you can create some apples-to-apples comparison, but we haven’t gone a step further, to effectively break that out further in terms of what component is maintenance. I will tell you in terms of how our software’s of service models are built, as I trust many are, the support component where we typically talk about 18% to 20%, it’s not materially different in an ASP type of structure, compared to that of an ILF structure.
So, there’s nothing going on there that would cause support to be disproportionately higher or anything like that.
Sean Wieland – Piper
Okay. So just remind me, when you do a license deal, how much of the maintenance goes into the bookings?
Glen Tullman
So on a license deal, the short answer is zero; but again back to my definitional comment earlier, on an ILF transaction, our clients technically have the right to cancel from a maintenance perspective. Hence for that reason, conversely in an ASP offering they are contractually committed for that contractual term, call it four to five years, and again they don’t have the right to strip out maintenance or what have you, it’s all-inclusive and that’s why we’re calling it out the way we are.
Operator
Your final question comes from Michael Cherney - Deutsche Bank.
Michael Cherney - Deutsche Bank
I just had one more question around the stimulus and I know this was beaten to death, but obviously it’s a pretty hot button issue. So, if you hear about obviously the savings that are going to be generated in the Medicare/Medicaid incentives and all the other stuff, but then the counterargument surrounds the need to develop true standards in order to create interoperability.
Have you seen any type of issues in terms of delays relating to those standards and what those could mean for the overall kind of up-tick in sales due to stimulus?
Glen Tullman
Yes, this is Glen. We have not seen that and we’ve had questions about it, but let me start off by saying that the Certification Commission on Healthcare Information Technology, where I’m fortunate to be one of the trustees, has done a really solid job of creating an open forum that includes trustees and commissioners to allow the industry to start to regulate itself.
It’s a great example of the government starting something a few years back and each year those standards get tougher. What we’ve heard from the administration is they are going to build on the success of CCHIT and focus specifically on interoperability and focus on privacy as two of the hot button areas, but the Secretary only has a limited amount of time to issue the first sets of standard.
So really, the idea of starting from scratch is almost inconceivable based on the timeframes given and frankly, all of the same folks who have been involved in this process are the ones who are making these decisions. So, I think the general feeling is CCHIT has a process underway.
The government clearly has said that they want more focus on interoperability and you’re going to see that in fact next week at HIMSS; you’re going to see this on display at the interoperability exchange. The government has said, “What we don’t want to do is invest all this money and go from paper silos to software silos.
We want an interconnected healthcare system” and that’s what they are going to get from the existing standards. Those standards are going to get tougher and we believe at Allscripts that tougher standards help us.
Why? Because we’re investing upwards over $60 million a year in R&D; so tougher standards are things that we have the capability to meet, not everyone does.
So I think you’ll see consolidation, based on these standards. The standards are going to get tougher every year and you’re going to see more functionality, but you’re going to see interoperability, you’re going to see privacy standards and that’s a good thing for us.
So I don’t think standards are going to be a hindrance to the process and as I mentioned earlier, I think it’s likely you’ll see an accelerated schedule for pushing this forward as opposed to the alternative, because at the end of the day, this is something unlike the challenges in banking and other parts of the economy. Healthcare is one area where there is a clear defined path to success, the administration can demonstrate that this investment is leading to success and that’s what they are going to increasingly look for.
So, we see them accelerating in this area and we think there’s good leadership there today. Well, again let me close the call by just thanking everyone for joining us today.
We do believe this is a unique moment in the industry. It’s a unique moment for Allscripts.
We think we’re going to see an industry that gets transformed in a reasonably short period of time and we’re looking forward to helping to lead that transformation with a client base that is second to none; with a suite of products that work together and that meet the needs of all of our clients. So again, thanks very much for joining us.
We’ll look forward to seeing some of you at HIMSS and then finally to updating you as to continued success next quarter. Thanks a lot.
Operator
This concludes your conference call for today. You may now disconnect.