Jul 20, 2009
Executives
Glen Tullman - Chief Executive Officer Bill Davis - Chief Financial Officer Lee Shapiro - President
Analysts
George Hill - Leerink Swann Corey Tobin - William Blair Richard Close - Jefferies & Co. Charles Rhyee - Oppenheimer Brett Jones - Brean Murray Michael Churney - Deutsche Bank Sean Wieland - Piper Jaffray
Operator
Good afternoon. My name is Phil and I’ll be your conference operator today.
At this time, I would like to welcome everyone to the Allscripts fiscal fourth quarter and year end 2009 earnings conference call. All phone lines have been muted to prevent any background noise during the call.
At the end of the presentation there will be a question-and-answer session period. (Operator Instructions) At this time, I’d like to turn it over to Mr.
Glen Tullman, Chief Executive Officer of Allscripts.
Glen Tullman
Thank you and good afternoon, and welcome to the Allscripts fiscal 2009 fourth quarter and year end conference call. This is Glen Tullman, Chief Executive Officer of Allscripts.
Joining me on the call today is Bill Davis, our Chief Financial Officer; and Lee Shapiro, our President. Before we get started, I’m going to ask Bill to review our Safe Harbor Statement.
Bill.
Bill Davis
This conference 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 with 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 realize the benefits of the merger with Misys Healthcare. The implementation and speed of acceptance of the electronic record provisions of the health information technology for economic and clinical health act, 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 most recent 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 exciting time for our business and I’m excited to share with you not only our results which we’re proud of, but also our view the industry and key factors investor should be thinking about.
As you know when President Obama signed the American Recovery and Reinvestment Act, it provided a great catalyst for change in the healthcare industry. On our last call I said, we believe the combination of the President’s leadership and vision, the standards already in place through CCHIT and the incentives that already exist today for ePrescribing and pay for quality initiatives would make Electronic Health Records as common as practice management systems in all provider offices.
Today just three months later, I’m pleased to report that this stimulus has in fact created strong interest in Allscripts and we are beginning to see that interest translate into sales. This is especially true for larger organizations as prospects attempt to get ahead of the curve and be in position to take full advantage of the first year of incentive payments.
This interest in the acceleration, we are beginning to see is good news for Allscripts. While, Bill will go into more details on the financials, I want to take a few moments to focus on the highlights from the fourth quarter.
From an overall perspective, we are pleased with our performance. Let’s begin with bookings; we had a great sales quarter.
Bookings for the quarter were $103.2 million, up 25% from last quarter and sales were strong across all of our product line. Total non-GAAP revenue was a $168.8 million with 64% generated from recurring revenues.
We expect our recurring revenues to continue to grow in part due to our software’s and service offerings. We were pleased with non-GAAP earnings for the quarter as well, which came in strong at $0.16 per share, demonstrating how we are able to invest in building the business and new products, while at the same time driving operational efficiencies.
Back to the stimulus; one of the question is, we get ask frequently relates to the concept of meaningful use, the yet to be define standard that physicians must meet in order to receive stimulus payments. Last Thursday July 16, the office of the National Coordinator issued new guidance on meaningful use with final rules expected to be out later this year.
The good news is that based on what we have seen, we are confident that all of our products will meet the standards. Given its importance to our business, we’ve been in active participant in many decision surrounding meaningful use have testified in Washington on more than one occasion, and we’ll continue to help shape the debate with out perspective that the standards must be robust enough to guarantee that the investment tax payers make will deliver on the savings that provide the funding for the stimulus.
With stimulus funding in place and the standards for meaningful use being said, we’re fortunate to be so well positioned that of course was not by accident. The first move we made was actually pretty stimulus with the merger of Allscripts and Misys Healthcare on October.
The merger created the clear leader in innovative software, connectivity and information solutions for the ambulatory healthcare market. As a part of the merger, we met or exceeded every merger target we had, including cost synergies, revenue synergies and in the process created one integrated company.
Our company is more focused than ever on our target market, having divested two of our legacy business during the last few months as well. Once again relative to the stimulus, think of this in simple terms.
We are the solution of choice for over 90,000 physicians who already have our practice management system, but now will be shopping for an electronic health record. They want one solution and in this economy they are unlikely to replace their existing practice management solution, the life blood of their practice if they don’t have to.
This is a significant selling advantage magnified by the tough economy. You may also recall that in our last quarterly call, we consolidated, what were three businesses that focused on sales into a single operating unit focused on delivering solutions for our clients.
Our results in the fourth quarter are even more satisfying given this change and are a clear indication that the change is working.
She was most recently Executive Vice President of Global Sales and Services from Misys plc and she played in especially important role in delivering the Misys turnaround, implementing world class processes and driving the transformation that help to return Misys to a growth company and earlier today, we announced that Diane Adams has joined Allscripts, as our new Executive Vice President of Human Resources. Diane was previously Vice President of Human Resources for Worldwide Sales and International Theaters at Cisco, providing leadership for more than 30,000 employees.
Diane joined Cisco, when they had about the same number of employees as we have today and played a key role in their growth and success. That gives you a sense of how we have been getting our team positioned to win, but what’s more critical is, how we are getting out to the market.
Let me talk about two examples of how we have responded tactically to the stimulus. The first is position outreach and the second is our Distribution Network.
Let me cover our outreach first. On our last call, I talked about our preparations for HEMS and the expectation that it would be a big show for us.
The reality exceeded our expectations. Leerink Swann issued a report during the quarter that commented on electronic health record companies and our performance at HEMS.
According to the report “We have always believe that Allscripts is one of the most sophisticated company with respect to marketing to physician practices. We believe that should in effective marketing has been a driver of Allscripts success, and should allow the company to continue to growth and take share and”.
Just six weeks after HEMS, we launched the EHR stimulus alliance, a correlation of technology, innovation leaders Allscripts, Cisco, Citrix, Dell, Intel, Intuit, Microsoft and Nuance who are partnering to educate 500,000 U.S. physicians about opportunities aligned with the stimulus.
We have 100s of planned virtual and physical events for physicians in various cities across the Unites States. As a part of this program, we also launched an innovative financing program, which allows groups to get started and defer cost out overtime as they begin to get stimulus payments.
The message is that there is no need to wait, the time is now and we’ll bridge you until your stimulus payments arrive. Now, the second area I wanted to highlight was a major move to extend our reach from a sales perspective, the launch of the Allscripts Distribution Network or ADN, which includes more than 85 partners who are out in the field presenting our solutions to practices everyday.
The distribution network significantly extends our market presence with a combined reseller sales force of more than 1600 and leverages trusted physician relationships primarily in the one-to-three physician market. We’ve recognized that you can’t cost effectively or efficiently cover the 169,000 groups in the one-to-three physician space with only a direct sales force.
At the same time, we need an on the ground presence that physicians know and trust and we think we found the best of both worlds with our Allscripts Distribution Network. During the quarter, we signed one of our most significant partnerships to-date, with Henry Schein the largest provider of healthcare supplies and services in North America, with a customer base of more than a 100,000 physician practices.
Henry Schein, 600 plus sales people are already trained and provide leads. As physicians move to take advantage of the stimulus incentives, our focus is on successful or better said meaningful use of electronic health records, not simply acquisition.
An ADN members like Henry Schein will be critical with their local expertise and long term relationships with physicians. We also added other major players like Cardinal Health, one of the largest healthcare distributors in the country, who will offer the Allscripts electronic health record to a base of more than 600,000 physician practices and SYNNEX Corporation, a leading business process services company that ranks among the Fortune 500, and just as critical our over 80 other distributors, folks like Etransmedia in New York, who provide world class service and have a very loyal client base that continues to buy Allscripts products.
So, lots of great progress, but the critical part from my perspective is that our action in the field is translating into results. To that end, today we announced a major agreement that features our electronic health record as a key element in the first functioning health information exchange or HIE in Connecticut, called Transforming Healthcare in Connecticut Communities.
The HIE includes virtually all of the states healthcare facilities and it’s being led by our clients Hartford Healthcare Corporation, Saint Francis Medical Center and ProHealth Physicians. The new organization will be implementing an open source platform for exchanging patient information across the states hospitals and physicians practices and HIE’s drive purchases of electronic health records, as demonstrated in part by additional purchases of over $1.5 million in licenses by Hartford Hospital.
Independent physicians and group practices who adopt the Allscripts electronic health record, will also receive all the necessary interfaces to connect them to their existing billing and scheduling software, as well as the information systems of participating hospitals, laboratories and other key healthcare stakeholders across the region. I also wanted to mention another major agreement we signed, that provides inside into how integrated systems will approach the market.
West Penn Allegheny Health System, a key healthcare system in Pittsburgh in an academic organization aligned with Drexel University College of Medicine and Temple University School of Medicine, selected Allscripts as their clinical solutions provider of choice, across their four hospitals and owned physician groups. West Penn will be expanding their deployment of our electronic health record from 165 physicians to all 800 of their physicians, while at the same time implementing our emergency department system in two hospitals.
West Penn has committed to giving first preference to our care management, discharge planning and homecare solutions much like Hartford Healthcare Corporation which currently uses our electronic health record as well as our emergency department and homecare system. West Penn would prefer to work with Allscripts as we have the right solutions and this is important, solutions that physicians like and use for all of their providers in every care center and saving, as opposed to crammed down hospital focused solutions.
We’re also seeing continued strong interest in our solutions that help physicians qualify for existing government incentive programs, such as the ePrescribing incentive provided by Medicare and pay for performance or pay for quality initiatives like the federal physician quality reporting initiative or PQRI program from the centers for Medicare and Medicaid services. West Penn for instance was very focused on the opportunity to generate millions of dollars in PQRI revenue using our solution and will make it a part of their Electronic Health Record deployment.
In fact, we announced recently that a select group of 14 of our clients generated more than $4.5 million in PQRI incentives in 2008 alone so, that’s real money and another very good reason to select Allscripts. Finally, I want to call out the continuing success of our ePrescribing business.
Last week, we announced that the American Medical Association had selected Allscripts as the engine behind their AMA branded ePrescribing solution, which they’ll offer to all of their members at no cost via their new physician web portal beginning next year. This is a significant development, because it means that the hundreds of thousands of members of the nation’s most prestigious physician professional association will be presented the opportunity to use Allscripts as their introduction to the electronic healthcare highway.
Electronic prescribing is the on ramp to that highway, and we are convinced that once physicians start using Allscripts and see how advanced our solutions are, they will turn to us when they go looking for an Electronic Health Record. During the quarter we also announced for the second year in a row that we delivered more electronic scripts across the Sure-Scripps network than any other ePrescribing company.
In fact, we are fast approaching the hundred million mark for ePrescriptions and recently crossed the significant threshold of delivering $1 million pure electronic prescriptions per week. So to summarize, the company continues to be strongly positioned as the leader in ambulatory healthcare IT.
We made solid progress on the merger, we refined our focus to the markets and products that are most promising, and we are well positioned to capitalize on the most expansive market opportunity in our company’s history, the federal stimulus incentives for Electronic Health Record adoption. I now want to ask Bill Davis to provide you with the detail on a very successful financial quarter.
Bill.
She was most recently Executive Vice President of Global Sales and Services from Misys plc and she played in especially important role in delivering the Misys turnaround, implementing world class processes and driving the transformation that help to return Misys to a growth company and earlier today, we announced that Diane Adams has joined Allscripts, as our new Executive Vice President of Human Resources. Diane was previously Vice President of Human Resources for Worldwide Sales and International Theaters at Cisco, providing leadership for more than 30,000 employees.
Diane joined Cisco, when they had about the same number of employees as we have today and played a key role in their growth and success. That gives you a sense of how we have been getting our team positioned to win, but what’s more critical is, how we are getting out to the market.
Let me talk about two examples of how we have responded tactically to the stimulus. The first is position outreach and the second is our Distribution Network.
Let me cover our outreach first. On our last call, I talked about our preparations for HEMS and the expectation that it would be a big show for us.
The reality exceeded our expectations. Leerink Swann issued a report during the quarter that commented on electronic health record companies and our performance at HEMS.
According to the report “We have always believe that Allscripts is one of the most sophisticated company with respect to marketing to physician practices. We believe that should in effective marketing has been a driver of Allscripts success, and should allow the company to continue to growth and take share and”.
Just six weeks after HEMS, we launched the EHR stimulus alliance, a correlation of technology, innovation leaders Allscripts, Cisco, Citrix, Dell, Intel, Intuit, Microsoft and Nuance who are partnering to educate 500,000 U.S. physicians about opportunities aligned with the stimulus.
We have 100s of planned virtual and physical events for physicians in various cities across the Unites States. As a part of this program, we also launched an innovative financing program, which allows groups to get started and defer cost out overtime as they begin to get stimulus payments.
The message is that there is no need to wait, the time is now and we’ll bridge you until your stimulus payments arrive. Now, the second area I wanted to highlight was a major move to extend our reach from a sales perspective, the launch of the Allscripts Distribution Network or ADN, which includes more than 85 partners who are out in the field presenting our solutions to practices everyday.
The distribution network significantly extends our market presence with a combined reseller sales force of more than 1600 and leverages trusted physician relationships primarily in the one-to-three physician market. We’ve recognized that you can’t cost effectively or efficiently cover the 169,000 groups in the one-to-three physician space with only a direct sales force.
At the same time, we need an on the ground presence that physicians know and trust and we think we found the best of both worlds with our Allscripts Distribution Network. During the quarter, we signed one of our most significant partnerships to-date, with Henry Schein the largest provider of healthcare supplies and services in North America, with a customer base of more than a 100,000 physician practices.
Henry Schein, 600 plus sales people are already trained and provide leads. As physicians move to take advantage of the stimulus incentives, our focus is on successful or better said meaningful use of electronic health records, not simply acquisition.
An ADN members like Henry Schein will be critical with their local expertise and long term relationships with physicians. We also added other major players like Cardinal Health, one of the largest healthcare distributors in the country, who will offer the Allscripts electronic health record to a base of more than 600,000 physician practices and SYNNEX Corporation, a leading business process services company that ranks among the Fortune 500, and just as critical our over 80 other distributors, folks like Etransmedia in New York, who provide world class service and have a very loyal client base that continues to buy Allscripts products.
So, lots of great progress, but the critical part from my perspective is that our action in the field is translating into results. To that end, today we announced a major agreement that features our electronic health record as a key element in the first functioning health information exchange or HIE in Connecticut, called Transforming Healthcare in Connecticut Communities.
The HIE includes virtually all of the states healthcare facilities and it’s being led by our clients Hartford Healthcare Corporation, Saint Francis Medical Center and ProHealth Physicians. The new organization will be implementing an open source platform for exchanging patient information across the states hospitals and physicians practices and HIE’s drive purchases of electronic health records, as demonstrated in part by additional purchases of over $1.5 million in licenses by Hartford Hospital.
Independent physicians and group practices who adopt the Allscripts electronic health record, will also receive all the necessary interfaces to connect them to their existing billing and scheduling software, as well as the information systems of participating hospitals, laboratories and other key healthcare stakeholders across the region. I also wanted to mention another major agreement we signed, that provides inside into how integrated systems will approach the market.
West Penn Allegheny Health System, a key healthcare system in Pittsburgh in an academic organization aligned with Drexel University College of Medicine and Temple University School of Medicine, selected Allscripts as their clinical solutions provider of choice, across their four hospitals and owned physician groups. West Penn will be expanding their deployment of our electronic health record from 165 physicians to all 800 of their physicians, while at the same time implementing our emergency department system in two hospitals.
West Penn has committed to giving first preference to our care management, discharge planning and homecare solutions much like Hartford Healthcare Corporation which currently uses our electronic health record as well as our emergency department and homecare system. West Penn would prefer to work with Allscripts as we have the right solutions and this is important, solutions that physicians like and use for all of their providers in every care center and saving, as opposed to crammed down hospital focused solutions.
We’re also seeing continued strong interest in our solutions that help physicians qualify for existing government incentive programs, such as the ePrescribing incentive provided by Medicare and pay for performance or pay for quality initiatives like the federal physician quality reporting initiative or PQRI program from the centers for Medicare and Medicaid services. West Penn for instance was very focused on the opportunity to generate millions of dollars in PQRI revenue using our solution and will make it a part of their Electronic Health Record deployment.
In fact, we announced recently that a select group of 14 of our clients generated more than $4.5 million in PQRI incentives in 2008 alone so, that’s real money and another very good reason to select Allscripts. Finally, I want to call out the continuing success of our ePrescribing business.
Last week, we announced that the American Medical Association had selected Allscripts as the engine behind their AMA branded ePrescribing solution, which they’ll offer to all of their members at no cost via their new physician web portal beginning next year. This is a significant development, because it means that the hundreds of thousands of members of the nation’s most prestigious physician professional association will be presented the opportunity to use Allscripts as their introduction to the electronic healthcare highway.
Electronic prescribing is the on ramp to that highway, and we are convinced that once physicians start using Allscripts and see how advanced our solutions are, they will turn to us when they go looking for an Electronic Health Record. During the quarter we also announced for the second year in a row that we delivered more electronic scripts across the Sure-Scripps network than any other ePrescribing company.
In fact, we are fast approaching the hundred million mark for ePrescriptions and recently crossed the significant threshold of delivering $1 million pure electronic prescriptions per week. So to summarize, the company continues to be strongly positioned as the leader in ambulatory healthcare IT.
We made solid progress on the merger, we refined our focus to the markets and products that are most promising, and we are well positioned to capitalize on the most expansive market opportunity in our company’s history, the federal stimulus incentives for Electronic Health Record adoption. I now want to ask Bill Davis to provide you with the detail on a very successful financial quarter.
Bill.
Bill Davis
Thanks Glen and good afternoon everyone. I would like to start out by providing a quick overview of our results for the quarter and year ended May 31, 2009 and then will wrap up with an outlook regarding our Fiscal 2010.
Before I get started, I did want to remind everyone that we consummated our merger with Misys Healthcare back in October and Allscripts was treated as the accounting acquire see in the transaction. As such, our GAAP results reflect Misys Healthcare’s performance for all periods presented and Allscripts results from the date of acquisition through May 31.
It’s for that reason that we do provide pro forma results for all periods presented so to improve comparability for investors. It’s also important to note that we consummated the sale of our meds distribution business on March 16.
It’s for that reason that we believe pro forma results focus on clinical software businesses is the most meaningful. Please note that we have updated our pro forma analysis to reflect the sale of our medicines business.
So, turning to the quarter and looking first at bookings, also known as order intake. We had an outstanding quarter with total bookings of $103.2 million in the quarter.
This compares to $84.4 million in the third quarter and $82 million in the fourth quarter a year ago, representing a 26% increase over the prior year. The $82 million in the fourth quarter of fiscal 2008 reflects both legacy Allscripts and legacy Misys Healthcare combined.
Also worth noting is that approximately $26.9 million or 26% of our fourth quarter bookings related to software as a service transactions that will be recognized as revenue over approximately the next 48 months. This compares to $38.7 million or 46% of our third quarter bookings and $8.1 million or approximately 10% in the fourth quarter of last year.
As I commented last quarter, we continue to plan for approximately one third of our bookings as software’s of service and view this is a positive long term trend that is likely to continue as more physicians attempt to align their costs and care of their electronic health records with the incentives that are available to them. Total bookings for the year ended May 31, 2009 were $334.7 million and compares to $317.6 million for the same 12 month period a year ago, but it’s important to take into account rather that the Columbia University transaction, we consummated in August 2007 for comparability purposes.
As Glenn indicated, we also continue to see success in our cross-selling efforts. 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 $39.6 million and approximately $150.9 million for our three month and annual bookings respectively. I highlight this to assist those of you, who historically have followed Misys plc stock.
We ended the quarter with approximately $673 million of total backlog. Our backlog consists of approximately $158 million of clinical software and related services fees; approximately $137 million of subscription in ASP fees; approximately $230 million of annual maintenance fees, which we expect to recognize over the next 12 months; and approximately $148 million of transaction fees, which principally consists of EDI transaction fees and again are expect it to be recognized over the next 12 months.
Total GAAP revenue in the quarter was approximately $166.2 million and approximately $167.6 million of pro forma clinical revenue in the fourth quarter which compares to $155.4 million in the third quarter of this year. This represents approximately 8% sequential growth.
It’s important to note that our pro forma clinical revenue relates to our clinical software businesses and again excludes revenue related to our medication business which we sold on March 16. GAAP revenue for the fiscal year was $548.4 million and approximately $650.9 million on a similar pro forma clinical revenue basis, approximately $420 million or 64% of our pro forma clinical revenue was reoccurring in nature.
Our GAAP revenue for the three months and year ended May 31, 2009 contemplate a $2.6 million and $7.8 million reduction respectively related to our revaluing of Allscripts deferred revenue balance at the time we consummated the merger. We’ve added such amounts back to our pro forma revenue for disclosure purposes.
Pro forma gross margin percentage for the quarter was 56.4% and compares to 54.5% in our third quarter. Gross margin improvement was driven by positive product mix shift towards more license revenue in the quarter.
GAAP operating expenses were $68.5 million for the quarter and include $7.2 million of transaction related expenses. Pro forma operating expenses before stock-based compensation, deal related amortization and transaction related expenses were approximately $55.9 million.
This compares to $51.9 million in the third quarter of this year. Consistent with what we discussed last quarter, our pro forma operating expenses for the quarter were higher than third quarter due to timing of certain marketing expenses and incentive compensation programs.
As Glenn indicated, we continue to feel very good about our commitment to projected cost synergies of approximately $25 million to $30 million in this upcoming fiscal year. Transaction related expenses in the quarter were approximately $7.2 million, such expenses included legal, integration, severance costs as well as the small loss related to the disposition of our medication business and a carrying value of one of our equity investments.
Capitalized software in the quarter was approximately $6 million. Please note that this was higher than previously communicated because we did make the decision to accelerate approximately $2 million of incremental development effort related to our Allscripts, MyWay product in the quarter that directly impacted our level of capitalization in the quarter.
Our decision to accelerate such MyWay developments spend is to further our preparedness for stimulus motivated activity in the independent physician practice market, typically one to three physician size groups. Regarding taxes, we ended the year with an overall effective tax rate of approximately 41%.
The higher than expected rate was primarily due to increase in certain states that we operate in. We will continue to work to reduce our rate, but believe 39% to 40% is still appropriate estimate for fiscal 2010 and beyond.
GAAP net income for the quarter was $13.4 million and $26 million for the year. Non-GAAP net income was $23.5 million for the quarter and $76.7 million for the full year.
This compares to $17.4 million for the fourth quarter in fiscal ‘08 and $59.3 million for the full year in 2008. The quarter growth when compared on a non-GAAP basis to last year represents 35% growth.
We view this to be significant and reflective of the success of our merger. Our non-GAAP net income contemplates the add back effect of Allscripts pre-merger results, as well as our non-cash deferred revenue adjustment, deal related amortization, stock based compensation, transaction cost and again the elimination results related to our medication business, all of which are on an after tax basis.
Our diluted earnings per share for the quarter was $0.09 and was $.16 per share on a non-GAAP net income basis. As I mentioned last quarter, approximately $2.5 million shares underlying the remaining $19.7 million of convertible debt we have outstanding.
Such shares were dilutive in our fiscal fourth quarter as well as fiscal 2009 for EPS purposes. Please note that Allscripts recently exercised its right to call the remaining $19.7 million of convertible debt.
We intend to fund such call with cash reserves or available credit under our existing credit facility. With that said, we do anticipate most bondholders who will exercise their right to convert their debentures given the fact that such debentures are in the money by a meaningful amount.
Our diluted share count for the quarter was approximately 148.2 million shares. Our share takes into account that we have successfully purchased approximately 5.4 million shares for $51.5 million under our 150 million authorized share buyback program, which we announced earlier this year in February.
Our share purchases have been funded through our available cash and we will continue to be opportunistic as we evaluate future buyback opportunities. With regard to overall headcount, we ended the quarter with approximately 2,392 employees, which compares to 2,444 employees at the end of the third quarter when you deduct the 62 individuals related to our medications business.
Turning now to the company’s balance sheet, we ended the quarter with $73.5 million in cash and marketable securities. This contemplates the fact that we paid nearly $3 million in transaction cost as well as the previously mentioned share buyback program during the quarter, all of which was funded again out of our cash reserves.
Both outflows were offset by approximately $31 million, which we generated through our operations. With regards to accounts receivable, we ended the quarter with approximately $155.1 million outstanding and represents Day Sales Outstanding of 83 days.
Our reduction of approximately four days since last quarter in evidence of the focus our team has had in this area. Total debt at the end of the quarter was approximately $64.5 million, $44.5 million of which is under our credit facility and again, approximately $19.7 million related to our convertible debt.
As I mentioned previously, we expect a reduction in our total debt in our first quarter related to the anticipated conversion of some or all of our remaining convertible debt. Turning now to our outlook for Allscripts in fiscal 2010; our longer term outlook for Allscripts continues to be positive and is reinforced by the opportunity from the High Tech Act program of the American Recovery Act stimulus law.
As Glenn mentioned, we believe Allscripts is uniquely positioned to capitalize on stimulus motivated purchasing, due to our industry leading products and unrelenting commitment to customer utilization of the products we sell. We are also encouraged by the success we have had in effectively integrating Allscripts and Misys Healthcare and producing the significant cost synergies we have today.
With that said, we anticipate stimulus motivated sales to have a greater effect on our business towards the end of this calendar year, in the beginning of next calendar year. It is for that reason, why we anticipate fiscal 2010 revenue to be in the range of $680 million to $700 million and non-GAAP net income of approximately $88 million to $92 million.
We anticipate a majority of the $3 million pretax deferred revenue adjustment that remains to be recognized; will actually be recognized in the first half of fiscal 2010. Our non-GAAP net income guidance contemplates approximately $14 million of acquisition related amortization, as well as approximately $11 million of stock based compensation, both amounts are on a net of tax basis.
We also expect some amount of acquisition related expenses to be recognized in the first half of fiscal 2010, related to actions the company has already committed to that are not contemplated in the non-GAAP net income guidance. We estimate an annual effective tax rate again of approximately 40% and total diluted shares of approximately $150 million, which will translate into non-GAAP earnings of approximately $0.59 to $0.61 per diluted share.
So in closing, I would like to applaud the excellent work of the entire Allscripts team and their relentless pursuit to bring these two great organizations together. We believe again we are uniquely positioned to capitalize on a great market opportunity and look forward to a very strong fiscal 2010.
With that, I’d like to turn it back over to Glenn.
Glen Tullman
Thanks Bill. So let me conclude the call by thanking our clients for their continued support and enthusiasm.
I’m excited to say that over 2000 of our clients will be at our users conference next week, a great opportunity for us to connect, to educate them on the stimulus, and for EHRs, as well as to share our new solutions that can help them not just survive, but thrive as we move into a new stage in healthcare. While the stimulus payments begin in 2011, the activity is happening today and we’re in the right place at the right time and this is a time of almost unimaginable change in healthcare and that has translated into a very significant opportunity for us to connect healthcare and to bring healthcare providers the information they want and need, and to deliver higher quality care in a safer, more cost effective way.
That’s our vision and everyday it’s getting closer to becoming a reality. So, I want to thank the people on the call for your support and we’re now ready to take your questions.
Operator
(Operator Instructions) Your first question comes from George Hill - Leerink Swann. Mr.
Hill, your line is open.
George Hill - Leerink Swann
Thanks for taking the question. One question Bill; I don’t think I missed this, but you guys did not give bookings guidance for fiscal 2010, did you?
Bill Davis
We have not George. We have not been giving bookings guidance out for some period of time and have chosen to continue to follow that practice.
George Hill - Leerink Swann
Okay, just checking on that. I’ve been away a while.
Second, with respect to the Misys transaction I was wondering, could you give us some color around current booking sales into the Misys space; I guess percent EMR penetration into the Misys space and what the bookings were into the Misys space?
Bill Davis
George, we’ve talked about a couple things to your questions. One, penetration within the Misys space, we estimate to be about 20% of the 110,000 physicians have made an electronic health record decision, leaving close to about 90,000 physicians yet to make a buying decision.
We set reasonable goals for ourselves in 2009. As Glen indicated, we exceeded those expectations, so we feel good about that.
It is suffice it to say, a clear focus of the business as we move into 2010 and one that we would intend to continue to give some color around, although I would be hesitant to give any sort of specific quantitative views on it.
Glen Tullman
George, I’d just add that in a time where the economy is tough, that works for us; because the likelihood that physicians are going to take out a working practice management system, which is really as I said in my comments kind of the life blood of their practice, just to try something new and they don’t have to; and remember there’s no stimulus funding for practice management. So, it’s much more likely that those 90,000 physicians when they go shopping are going to talk to us first.
They want to make sure that the electronic health record they purchase, works, integrates and connects with the practice management system they have and they’ve been using for some period of time. Generally the smaller practices like to say they want one throat to choke.
They don’t want to call three or four different vendors, they don’t want them fighting with each other; they want one number to call to say “Make sure my practice management system, which does all my billing works very closely with my electronic health records.” So, we think we have a real advantage selling into that market.
George Hill - Leerink Swann
Okay. I’m sorry if I wasn’t clear, I guess the analog that I’m thinking about is, you guys have demonstrated an ability to be successful with this strategy before when you guys were selling Touchworks into the IDX space?
Will you guys be giving us regular metrics to measure this? I see this as a critically first measure, the output of the Misys transaction.
Will we be getting, I guess concrete numbers going forward to evaluate that?
Glen Tullman
I think what you can expect is we’ll be giving you a general view of what’s happening. I don’t think we want to get into the habit of reporting quarter-to-quarter.
As you recall, when we did this and this is in fact the same strategy that we used successfully with IDX; that was the high end, this is the low to mid range in the market, but as we started giving concrete numbers, any quarter that our number was the lease put off of the prior quarter we get hammered for it. The fact was every quarter we kept growing, and today we enjoy a very strong share in that marketplace.
So while we’ll give general direction there and I think you’ll see the success from some of our examples, I don’t think we’re going to be giving concrete metrics each quarter.
George Hill - Leerink Swann
One more quick question and I’ll hop back on. You mentioned the 85 partners that you have now and the 1600 reps that they have out in the field.
So what’s the breaking it down now, I guess direct reps versus partner reps; and can you give us some color around what bookings revenue into the channel looks like on the [VAR reps] versus the direct reps?
Glen Tullman
In terms of the specifics, what’s relative to what’s going through the channel versus not going through the channel, we don’t do that in part because there’s a lot of overlap. So from that perspective, again, as we sign a large hospital deal, they may say we want you to help build our network, we may do that using some of these distributors and vice versa.
So from that perspective we look at one sales team that got one leader and that’s where the leverage gets created. So we don’t really look at it as a few separate channels.
Operator
Your next question comes from Corey Tobin – William Blair
Corey Tobin - William Blair
Let me start with bookings if I could. A couple of quarters ago there was some stagnant bookings in the larger enterprise deal space, and Glenn based on your comments it sounds like this has rebounded a bit.
Can you give us some metrics please on growth, specifically in the larger enterprise space segment, and what percentage of bookings came from that segment here this quarter?
Glen Tullman
Yes, I’ll just say, and I’ll ask Bill if he wants to give more color to it, that we see the enterprise market as rebounding very strongly. As I mention Corey, what’s happened is, the bigger organization, when you’re West Penn and you have to get 800 physicians implemented, you can’t start the day before the stimulus payments begin.
The larger organizations are also starting to understand that to get the best people for any vendor, the sooner you get tied in, the better off you are. So there’s been a tremendous amount of interest.
Last but not least, I think the Stark idea of connecting these large integrated health networks to a variety of owned and unaffiliated physicians is really taking hold in many markets. So the markets are starting to understand that they need to be connected to the folks who refer to them and they want to be easy to do business with.
So I guess my view back is we’re seeing good strength in the mid to high end of the markets.
Glen Tullman
Now Corey, we’re not prepared to give any sort of quantitative break down of bookings. I would just echo Glenn’s sentiments on saying that in terms of overall performance, we saw relative strengthen in all three sub segments that we talk about; the largest of physician practices medium and small and so we see again all aspects to the market moving forward with the buying decisions which we view as a huge positive.
Corey Tobin - William Blair
Okay great, and then just shifting gears for a second, thinking about the AMA deal and some other things regarding the ePrescribing product, could you give us a little more feeling please of some numbers around. How many docs today are on the free prescribing platform, either through [Nepsy] or the other programs that you put into place?
What’s been the success rate at converting those physician groups up, to full EMR clients? Thanks.
Glen Tullman
Yes Corey, in terms of the free product, you’ve got more than 35,000 users of the free product today, and that continues to grow. We had reported in prior quarters a growth rate of upwards of 30% per month.
That’s tailed off just a little bit recently as we see some of those groups now starting to strongly consider whether they ought to go directly to an electronic health record, but net-net, we see that as a driver in a number of ways. We’ve also talked about some of the big success stories; Heritage Valley outside of Pittsburg getting $600,000 for their ePrescribing efforts, again all on our systems and we see that repeated across the country where physician practices, especially the multi-specialty groups and the like are starting to see real dollars come in from a variety of the programs, not only government programs, but some of the PBM programs and payer programs.
So we see it as an increasingly important component of our business. We also see that as an information delivery tool.
So as we start to deliver more of the care Management and the like and messaging, that’s going to become an important platform as well.
Corey Tobin - William Blair
Is it safe to assume that the 35,000 physicians, a vast majority of those do not have an EMR product to that?
Glen Tullman
I think that it’s safe to assume that the bulk of those physicians don’t. There’s a subset that do, and that is we have funded -- an organization locally comes in and says, we want to brand to this product, but by and large most of those are the equivalent to people using Google; there’s no group reporting or anything else, they are small practices or individuals.
Operator
Your next question comes from Richard Close - Jefferies & Co.
Richard Close - Jefferies & Co.
Glenn, I was wondering if you could talk to us a little bit about this Connecticut deal that you announced this morning. What are the economics on the healthcare information exchange?
How do you guys get paid there? Then I think you mentioned $1.5 million in license sales to Hartford Hospital as part of that?
Do they just buy those license and sit on them and turn people on eventually or a little bit on the timing of that relationship?
Glen Tullman
Let me comment on it. First of all, I think it’s important to note that we have a variety of different solutions depending on the organization, how they want to deploy connectivity and where they want to deploy it.
So in this case we’re using an open source solution. We are benefiting from both the open source technology and some of the services around it, so there are some fees related to that.
Really where this comes in is, the organizations like Hartford and others are using many of these licenses for community based programs, to equip both the affiliated, but especially unaffiliated physicians and physician groups which makes them easier to do business with. That said, what started off as a smaller group of Allscripts customers in the Hartford area, has really bloomed into a statewide initiative that may include the entire state, again based on the fact that Allscripts has very substantial penetration in that area.
That is driving sales of our electronic health record. That said, I want to be clear; their intention, which we are fully supportive of, is that any of the competitive systems will be enabled to connect into this healthcare information exchange.
So to simplify, you’ve got more EHR licenses, you’ve got services related to the healthcare information exchange and you’ve got more Allscripts solutions, things like emergency department care management, etc. So that’s the reason these exchanges work in a big way for us.
Richard Close - Jefferies & Co.
So now, are you guys able to go out and sell additional physicians or is that just the responsibility of the groups here?
Glen Tullman
Absolutely no. This is a collaborative effort and you will see more of these, but they are out pushing it.
It’s in their best interest. We have our sales teams out there.
In many cases, these are subsidized; Stark kinds of subsidies that are being provided. So in addition to the existing current subsidies that are out there, CMS or e-Prescribing, PQRI, then on top of that, you layer the new stimulus dollars and then finally on top of that you have hospitals who are giving up to 85% in some cases.
So net-net, you’ve got our people selling, you’ve got the Allscripts Distribution Network selling, you’ve got the hospital promoting it and you can see what starts to happen. You get a real network effect.
Richard Close - Jefferies & Co.
A follow-up on the question with respect to the channel and the direct; is there any type of target, like 60% from your direct, 40% from the channel or anything like that you can give us details on if your not going to give us the direct numbers or the specific numbers?
Glen Tullman
Richard we’re not prepared to go with that level of detail as of yet. As we gain more experience through the distribution network, we might be prepared to do so, but we won’t allow that to build for some time before we commit to that.
Richard Close - Jefferies & Co.
Final question here would be on the transaction related costs. I believe in the last conference call you talked that there could be some transaction costs; $4.1 million I think is an increase from the third quarter if I’m not mistaken.
How should we think about that going forward; when do those costs finally tail off for you guys?
Glen Tullman
As you know, under U.S. GAAP, certain committed costs and actions, we effectively have to recognize as their incurred like retention bonuses or what have you.
So the reality is that we will have some costs that carry through the anniversary date of the merger, so effectively into the first month or month and a half of our second quarter, you should realistically expect. Relative to the fourth quarter; again, I made reference to it.
The reason why it was higher than the third quarter was primarily due to the fact that our meds disposition, given the allocation of certain intangibles to that business and the proceeds that we received from that, actually yielded in a couple million dollar loss in the quarter. Then secondarily is, we had a small equity investment, that given the audit period we wanted to go ahead and clean up and so that was just under $1 million itself.
So those two factors are really driving the differential that you saw in the quarter.
Richard Close - Jefferies & Co.
Okay, so those two factors add up to about $3 million, is that what you’re saying?
Glen Tullman
That’s right; and are truly one-time. Obviously with the meds disposition being done, it won’t repeat itself.
Operator
Your next question comes from Charles Rhyee - Oppenheimer.
Charles Rhyee – Oppenheimer
Just a couple of quick questions if I could. First Bill, you talked about the Cap software in the quarter that you accelerated some stuff.
Does that mean that Cap software rate should drop in the next quarter because you’ve now expensed it or you’ve capitalized it now or what should we think about the Cap software rate going forward, particularly in fiscal 10?
Glen Tullman
Yes, fiscal 2010 Charles we’re pegging somewhere closer to 20% to 25% of our gross spend in terms of a capitalization rate, so by virtue of that I would expect it to come down slightly. Again we had an opportunity in the fourth quarter by virtue of relative strength of the business, but also in terms of priorities of our development group to accelerate some specific efforts in and around the MyWay solution, which as we’ve talked about preparedness for stimulus, we felt it was a prudent thing for us to do.
So again, we felt that the dollar values we could manage through as we’ve demonstrated and again was a bright thing in terms of the preparedness as we move into 2010.
Charles Rhyee – Oppenheimer
How much was the total capitalized software in the quarter?
Glen Tullman
Total Cap software was just around $6 million.
Charles Rhyee – Oppenheimer
Just around $6 million?
Glen Tullman
Yes.
Charles Rhyee – Oppenheimer
Of which two was accelerated?
Glen Tullman
That’s right.
Charles Rhyee – Oppenheimer
Then maybe a question for Glenn. You talked about the opportunity as we think about stimulus going forward, can you give it a sense on the standards meeting last week; it sounds like CCHIT is not necessarily the defining body now for certification going forward and it seems to be breaking up into sort of two groups a little bit, does that concern you.
Then also around -- people convene the 2011 in the pay group; I guess the incentive group or 2011 but not necessarily adopt right away, there seems to be a lot of moving parts even while they’re trying to set some concrete numbers around it. Does it concern you that the complexity of this as we move forward could confuse some providers?
Glen Tullman
First of all I think one, we have a period, people are getting comfortable with the fact that at minimum, the initial concern was the standards would be so tough, where people would not be able to qualify or meet the standards. I think now it’s almost gone the other way and people are saying, “You probably have a broader group.”
We are very comfortable having studied these, that all of our products today will effectively meet the standards that we’ve seen. Now, we don’t know what they’ll end up to be.
That said, my sense is, this is going to take a little time, but it will get cleaned up and we’ll have very clear guidance in terms of what those standards will be. I don’t expect that there will be payments.
My own view is that you will have to adopt and you’ll have to be using this to get the payments and I think there’s going to be increasing pressure to make sure the standards are aggressive and that utilization is measured in order to get paid. Both of those things are very good for Allscripts, because our products are more sophisticated.
So the harder the standards, the better for us. To the extent the standards aren’t as difficult, that’s okay too, because we have the biggest footprint in the industry and we have in a sense with that base of 90,000 physicians that already use practice management, we have a leg up on selling to them.
So, we don’t see standards, we see it only as an opportunity. We’re strongly supportive of aggressive tough standards.
We think that’s good for the industry; it’s good for taxpayers, and ultimately I think it remains to be seen. As far as CCHIT, I believe that CCHIT should play a very strong role and it’s a likely candidate to play a strong role.
Recreating a new standards body is going to waste time and money, so CCHIT will likely set the baseline, but there maybe other organizations that play a role in approving as well. Just to clarify, for the EHR stimulus, this is the law.
The timeline is set, the dollars are in place, and the time really is now for our people to start adopting and that’s what we’re seeing. A lot of people are confusing the broader healthcare debate that is underway, with the fact that our piece of the legislation is done; it’s law and that’s not up for debate or discussion, only the interpretation.
Either way from that standpoint, our customers and our prospects are a winner, because they adopt now and they know that this is our business, we have to meet the standards, we will and we have more resources to do that.
Charles Rhyee – Oppenheimer
If I could just ask one follow-up. Obviously the initial standards look like they’re fairly in the low end; making it kind of easy for people to start, but the expectation sounds like those standards will increase over time, increasingly get harder.
What kind of challenges does that set for a practice that installs now? What sort of resources are available to some of these providers as we think about the out years as the percentage of orders going electronically, the percentage of the information that they’re submitting to CMS?
What do you think some of those hurdles are and what sort of resources do you think providers have available to them from their vendors?
Glen Tullman
Well, remember what happened with the CCHIT standard. CCHIT said, you only needed CCHIT approval.
In essence, the CCHIT approval was good for three years, but immediately what happened was, people said, “Well I’m not going to buy a product, unless it has the most current CCHIT approval. Why would I buy a product that was one or two years old?
I wanted to have the most current.” So the minute the standards are published, what’s going to happen is, smart customers are going to say, “I’m going to go with the product that meets the 2012 or 2013 standards; and there will be a race to push the products as far as they can go.
So from that perspective, again, that works for Allscripts. If it’s easier to qualify day one, that’s great, you can get them a system, but we’ll be in there saying, “Why in the world would you take a system that hasn’t already met and exceeded the future standards if one’s available.”
So again, that works very well for us. It actually makes early installations easier, and the flip side of that is longer term gives us a competitive advantage.
So it’s better for us looking for the proven and safe choice, and remember our place in the market. We have relationships with 150,000; actually 160,000 today physicians, who are using one or more of our products and that’s one out of every three physicians in the United States.
Again, I think you’re going to see products that come out from us, you’re going to see what we call the surround strategy. I mean when people go in, they say “Hey, can I use your product?”
and “Can I use the iPhone?” the answer is, yes.
“Can I use a Microsoft Windows platform?” the answer will soon be, yes.
“Can I use a BlackBerry?” the answer is, yes.
“Do you have a kiosk?” and the answer is yes; and “Do you have a portal?”
and the answer is, yes. It’s going to be increasingly hard for other products to say yes to all of that; to have all of that surround; to have all the management reporting; to have all of the lab interfaces; to have PQRI and CMS; and we’re going to have all of it for our customers.
So again, that’s the position that we’re taking and we think that the minute the standards come out, people will migrate to making sure their products have the most. I mean if there’s a law that comes out that says every car needs passenger side airbags, are you going to go out and buy one?
If this year you buy a new car that doesn’t have that, when you know next year it needs it? Of course not; so you’re going to migrate to the toughest standards.
So again, that’s what we see happening.
Operator
Your next question comes from Brett Jones - Brean Murray.
Brett Jones - Brean Murray
If I could piggyback off of Charles’s questions, I was a little confused I guess Glen when you were talking about how people wouldn’t buy a CCHIT ‘07 certified product, and I guess why I’m a little lost is, why wouldn’t we see a lack of certifying body sort of freeze the purchasing decision? Why wouldn’t they just wait until that’s settled before going out and buying now?
Glen Tullman
Well first of all, there’s certifications out there, there’s good products out there. There’s no question that some physicians, especially some of the smaller groups may say “Hey, we should wait,” but the midsized groups, the larger groups, they understand that this is the new way to do business.
You can’t run a bank without a computer system, nobody thinks you can. You can’t trade without Bloomberg or some equivalent technology.
I mean this is becoming kind of table stakes for the sophisticated practices who have to compete in the market and they understand that. So they’re going to make sure, they’re going to use it as a base; is it CCHIT certified, and then they’re going to build upon there.
What other features and functionality do you have? I’ve had more people ask me, “How much are you investing in research and development than I’ve ever had before.”
Why? Because they understand these standards are going to come, they’re going to change, they’re going to get tougher, and what does that mean?
You want a company that’s going to be around, that has the resources to invest. This industry is going to consolidate.
Most recently CCHIT had 62 CCHIT approved Electronic Health Records. There’s no other major industry in this country that has 62 competitors that has any scale or size, and consequently we’re going to see that start to consolidate, and I think we’re a winner in that competitive environment.
So one, there will always be and that’s kind of a good thing for us. If everybody tomorrow wanted to buy an Electronic Health Record, frankly we couldn’t even manage it and none of our competitors could as well.
So the fact that we have stages and we’ve talked about the stage gates, you have a number of people buying right now. Then you’ll have another group as we get the next update on meaningful use that’ll say, “Okay, it’s far enough along.
We don’t have to wait for the final sign off.” Then after December, that time frame, when we get meaningful use locked down we’ll see another pop.
Then finally as you start to get near 2011, people will start to scramble to say, “Oh my gosh, we got to get this in.” So we’re going to see that market continue to build at a nice pace that gives us an opportunity to continue to build our resources while the market builds.
Brett Jones - Brean Murray
I guess, can you talk about why you feel so comfortable that CCHIT would be the base, and to that degree, do you feel like you’ll have to change any of the direction your development work is going. If they move away from CCHIT certification in terms of CCHIT’s always been based really on functionality?
Glen Tullman
Well I think number one, there are certain elements of this that, you can’t have an Electronic Health Record without electronic prescribing, without electronic submission. You need lab connectivity.
Increasingly there’s a strong push to say you have to be connected to a portal, so patients can be a part of the electronic healthcare highway; you need an on-ramp for patients. So whether that’s Microsoft Health or Google Health or having your own portal through an organization like a Med Fusion who is a leader out there in terms of portals, any of those kinds of organizations.
Well guess what? We’re connected to all of them already.
So from our standpoint, we know that’s going to happen. You’re going to need integration.
You’re going to need disease registries. Well we have a big initiative underway for disease management, disease registries.
We’re investing millions of dollars right now in products that are going to be ready to come out. So from that perspective again, we see it as primarily as an opportunity to the extent that standards get tougher.
It’s a good opportunity for us. We have the resources and part of our budgeting this year was to say, “We’ve got to leave some resources that can be easily switched off to something else, should something happen that surprises us and our competitors in terms of a requirement, we have the resources that we can easily shift.”
So from that standpoint, that’s what we think. That said, all of the current indications are, that CCHIT is going to have a continued important role, and even if that were to change, we’re comfortable that we can meet any of the new standards that are going to come out.
Brett Jones - Brean Murray
Then Bill, if I could just get you to give us the operating cash flow and free cash flow numbers for the quarter?
Bill Davis
I indicated operating cash flow in the quarter is about $31 million and I don’t have the free cash flow number in my fingertips, but it did provide I think the components in terms of capitalization and software and whatnot, that CapEx was just I think less than a couple million dollars, so I apologize for not having that at my finger tips.
Glen Tullman
Why don’t we take two more questions and then we’ll wrap it up. We don’t want to keep you too long, but we know there’s a lot of questions, a lot of interest.
Operator
Your next question comes from Michael Churney - Deutsche Bank.
Michael Churney - Deutsche Bank
So just a quick question; I know that the stimulus is something that’s going to get beaten over the head a little bit, but as you formulated your guidance and talked about how you see a bigger impact in the back half of calendar 2009 into the beginning of calendar 2010, how exactly did you go about putting the stimulus into your numbers? Without giving us numbers can you just talk to the methodology?
Bill Davis
Yes, it really speaks to the point that Glen just made, and that is, as we look at the buying behavior in the marketplace we don’t see it coming all in one swell swoop, rather we see it coming in logical stages. So quite frankly, we’re not banking on a major influx of demand.
Really our point was that we would expect demand to start to pick up in that time period, but again our guidance is not heavily dependent on that stimulus demand. I think obviously it will appear in our results first and foremost from a bookings perspective, our order intake and then we’ll be able to communicate to the market as it does in terms of its results and impact on our P&L.
So I’ve characterized our overall 2010 guidance as having some stimulus influence, but not an inordinate amount.
Michael Churney - Deutsche Bank
Then just quickly, can you also talk about any type of SG&A ramp you guys would expect as the stimulus starts to play itself out?
Bill Davis
Yes, we have talked in the past. The area of capacity hits us in two respects; on the sales front and then on the deployment front.
We feel like we’ve done a lot of good things in building out the Allscripts distribution network; as well as quite frankly continue to carry excess capacity within our own salesforce that we have today. So to the earlier point we feel we’ll have a lot of good visibility and an ability to react to the demand as it comes on, so to not get caught flat footed on the sales front, number one.
On the service side, and keeping with what I said in the third quarter, we continue to carry some excess capacity there. Today that excess capacity is focused on helping us prepare in terms of the ease of our deployment and initiatives like our ready programs which is all around; how do we drive efficiency into our deployment cycles, and as the demand ramps up, we’re going to be able to redirect that capacity to deployment efforts.
So again on the deployment side, we expect to be able to leverage that excess capacity first and then have visibility as to what we need to add incrementally. The third point that I would make is in the area of R&D.
We’ve already talked about the fact that our expectations for 2010 has close to $70 million of gross R&D spend contemplated in it, so we think we’ve adequately provisioned for what we need to do, not only to move our products forward, but also attend to a lot of the discussion we’ve been having today on standards and compliance efforts. That has been what we believe to be adequately provisioned for in our R&D plan.
Glen Tullman
So why don’t we take one more question, and again we’ll conclude the call.
Operator
Your final question comes from Sean Wieland – Piper Jaffray.
Sean Wieland - Piper Jaffray
Just a quick one; on MyWay, what had to be done to the product that cost $2 million?
Glen Tullman
Sean, basically as we’re up-scaling the product, what we found is from the initial product we inherited, we needed to make sure that it worked with all of our surround strategies as an example. We wanted to make sure that it was more robust in terms of the more it’s being used, because it’s a hosted ASP product.
There were other kinds of changes that we wanted to make to substantially enhance that, make it multi-entity. So, just a number of different changes that relate, most important as an example, connect, making sure that it works within our system and it’s going to connect to all of our other products.
So those were the kind of changes. I don’t think there was anything that was out of the ordinary, but I think what is out of the ordinary is we said “We don’t want to wait for a standard time frame.
We want to make sure that we are ready to go from a stimulus perspective.” The last thing is, a lot of our spend is not going toward functionality and the good news is, I’ve seen some people say, “Well, Allscripts has more functionality,” but a lot of our spending now is going to more rapid implementation and useability.
Why? Because we think that’s going to be increasingly important to make it easy to demo, easy to learn, easy to use, so that’s where you see a lot of spend, so some of that spending was going there as well.
Sean Wieland - Piper Jaffray
Was the spending done by your own R&D people or did you contract that out?
Glen Tullman
No. It’s our own people.
Bill Davis
Actually it’s a combination of both.
Glen Tullman
I think there was some initial consultants that were used. When we started, we brought in a little bit of that expertise back in to help us transition it, to make sure we had it, but fundamentally I mean all of our development is our development, either done here or done at our Bangalore facility.
Sean Wieland - Piper Jaffray
How is the sales force re-org doing and how are you managing channel conflict?
Glen Tullman
Well, the sales force re-org is going very well. We tend to make these changes very rapidly and don’t spend a lot of time discussing them, so I think it’s going very well from that perspective.
Channel conflict goes away because one, in the past what would happen is you had three different sales forces; a professional sales force, an enterprise sales force and a hospital solution sales force. In a lot of cases what we were finding was people were trying to push their products from their group as opposed to the right solution.
Now, in their respective territories, they’ll get paid independent of which solution is going in there and even if they’re cooperating in certain areas with our local distributors, they are going to get paid. So we don’t want our direct reps going in and trying to sell a three doc practice.
So they get paid if they refer that successfully to one of our resellers. Consequently our resellers can make more if they are truly leading a larger deal and they can bring us that deal.
Now if they bring it to us, they’ll actually do better for a variety of reasons than if they did it themselves. So we’ve built in a lot of collaboration.
Sean Wieland - Piper Jaffray
And just last one Bill, did you give a GAAP guidance number for fiscal 2010?
Bill Davis
Sean, we will be putting it on file tomorrow, a reconciliation that we’ll have that. I mean as we move into the course of the year, the differential will be virtually non-existent, but I did call out the fact that we will have a small amount of deferred revenue in the first half of the year.
Then I’ve outlined for you the acquisition-related amortization and stock-based compensation, and then the only final reconciling item is the transaction piece which will have a little bit of tail in Q1 and in the early part of Q2. We’ll have that on file tomorrow.
Sean Wieland - Piper Jaffray
Is it possible to just give us a number?
Bill Davis
I don’t have that number in front of me, I’m sorry.
Glen Tullman
Okay, thank you all again. I want to thank everyone who joined the call today.
We appreciate your continued support. This really is a unique opportunity in this market and we think we’re very uniquely positioned, so I appreciate your support.
We’ll look forward to our call next quarter. Thanks very much.
Operator
This concludes today’s conference call. You may now disconnect