Sep 29, 2009
Executives
Glen E. Tullman - Chief Executive Officer, Director Seth Frank - Investor Relations Lee A.
Shapiro - President William J. Davis - Chief Financial Officer
Analysts
Jamie Stockman - Morgan Keegan Atif Rahim - J.P. Morgan Corey Tobin - William Blair Steve Halper - Thomas Weisel Partners Richard Close - Jefferies & Company George Hill - Leerink Swann Sean Wieland - Piper Jaffray Donald Hooker - UBS Sandy Draper - Raymond James
Operator
Good afternoon. My name is Gina and I will be your conference operator today.
At this time, I would like to welcome everyone to the Allscripts first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to our host, Mr.
Glen Tullman, Chief Executive Officer of Allscripts. Sir, you may begin your conference.
Glen E. Tullman
Thank you. Well, good afternoon and welcome to Allscripts fiscal 2010 first quarter conference call.
This is Glen Tullman, Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer; Lee Shapiro, our President; and Seth Frank, our Vice President of Investor Relations.
Before we get started, I am going to ask Seth to review our Safe Harbor statement. Seth.
Seth Frank
This presentation 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 managements' expectations, beliefs, intentions, 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 systems 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 2009 annual report on Form 10-K available through the website maintained by the Securities and Exchange Commission at www.sec.gov. The company undertakes no obligation up to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
Glen E. Tullman
Thanks, Seth. I am excited to share our Q1 fiscal 2010 results and to provide an update on our current activities in the market.
I want to begin with three key metrics that tell the story -- bookings, revenues, and earnings. These three numbers are the result of a number of very specific initiatives that we have undertaken.
First, a successful merger and the subsequent integration and realization of synergies; second, our focused effort on the operating processes critical to our growth; third, a targeted sales effort putting into place distribution relationships which will help us to manage additional sales opportunities and the demand we expect to come; fourth, realigning our R&D efforts to focus on stimulus related issues like rapid implementation; fifth, the additions we’ve made to strengthen our leadership team; and finally, the extraordinary efforts of our employees, who I believe are more committed to delivering for our clients then employees of any other vendor in this market. Bookings for the quarter were $97.5 million, up 47% year over year.
Some of our competitors are talking about a pause; we’re surely not seeing it. Total non-GAAP revenues were $167.5 million, with approximately 65% generated from recurring revenues.
And I was especially pleased with our non-GAAP earnings for the quarter, which were $22.2 million, or $0.15 per share, demonstrating our ability to both invest in building the business and new products, while at the same time driving operational efficiencies and profits to the bottom line. Back to bookings, overall we saw strong demand across our entire solutions portfolio and across all of our markets from physician practices to hospitals and post-acute providers.
The demand we are seeing is clearly being driven by the excitement around the vision for electronic healthcare created by the President and subsequent funding which will be provided by the American reinvestment and recovery act, a.k.a. the stimulus.
However, we believe that Allscripts is winning because we offer some distinct competitive advantages. For example, healthcare organizations are increasingly looking for one number to call to automate both the administrative and clinical sides of their businesses and we are a leader in both.
They are looking for a safe choice they know will be around and with our footprint of over 160,000 physician clients across all segments of the ambulatory market, from independent one and two physician groups to multi-specialty to the largest academic medical centers, plus more than 800 hospitals and nearly 8,000 post-acute facilities, we fit the bill. And finally, given that meaningful use will change and get tougher each year, clients and prospects alike want a company that they see is both investing and leading in innovation, so they are confident it will invest and innovate to meet and exceed federal, state, and other regulatory environments into the future.
We are fortunate according to independent studies to be the first and the most frequently called when companies and individuals are looking for an electronic health record solution. Our Q1 results reflect a strong start to our 2010 fiscal year and a first step to achieving our business objectives for the year.
It is also important to understand that while healthcare reform is front-page news and the debate continues, the underlying foundation of the healthcare reform plan is electronic health records, because they provide the opportunity for higher quality care, more cost-efficient care, and the ability to use information to understand outcomes. And the federal initiatives and incentives for electronic health record use have already been finalized in the stimulus bill, signed into law in February.
That’s $38 billion already in place to fund this initiative, almost half of which is for ambulatory. The current debt will only serve to further enhance adoption of our solutions, as many of the pending proposals contemplate enhanced pay for quality initiatives, which in turn will lead to even greater need for electronic health records.
As many of you know, the stimulus payments start in January 2011 for providers who purchase certified systems and meet the test from meaningful use. While CMS, the center for Medicaid and Medicare services, must still formalize the certification process and the definition of meaningful use, we are confident of our ability to meet the standards.
In fact, our systems already substantially comply with the proposed regulations and exceed the 2009 CCHIT standards. We are ready and the market, especially larger clients and prospects with more physicians to convert, increasingly understands the time is now.
I mentioned organizations are making strategic decisions now and there is no better example than Northshore Long Island Jewish Healthcare system, the nation’s third-largest non-profit secular healthcare system, under the visionary leadership of Mike Dowling. As a part of our agreement announced yesterday and featured Monday in the New York Times, in addition to purchasing our electronic health record for 1,200 of their employed physicians and for the remainder of their emergency rooms not already using our software, Northshore will subsidize up to 85% of the cost of our enterprise electronic health record for their 7,000 affiliated physicians in the greater New York City metropolitan area.
In addition to the incentives from Northshore Long Island Jewish, physicians who implement our electronic health record will also be able to qualify for the stimulus incentives and for additional quality payments. To help speed the adoption of our electronic health records to Northshore Long Island Jewish physicians, we are working with Henry Shine, the largest distributor in the country of healthcare products and services to office-based practitioners.
Henry Shine representatives will visit all of the potential buyers as quickly as possible. We believe the Northshore Long Island Jewish decision to invest is just the first of many large hospitals and health systems who will take advantage of the stark relaxation paired with the stimulus to strengthen relationships with physicians in their communities, build lasting bonds, and enhance the quality of care through standards.
As they do, we expect that hospitals will see Allscripts’ footprint in the physician market as an easy and fast way to build a network. The Northshore Long Island Jewish agreement also represents a strong endorsement from an existing client of our ability to deliver world-class customer support and service.
As I referenced above, Northshore currently has our emergency department information system in three of their 13 hospitals, with a roadmap to deploy our solutions system wide. And this health system has implemented our care management solution in six hospitals to date.
One note on bookings -- while we believe Northshore Long Island Jewish, the agreement has a potential value of more than $75 million to Allscripts over time, it currently represents just over $10 million of our bookings this quarter. This provides us with the benefit of a strong recurring revenue stream over the next five years, most of which will begin in 2010.
In addition to Northshore, another hospital system I want to highlight is Baptist Memorial Healthcare, a 15-hospital chain in the mid-South that has selected our electronic health record and practice management solution for their employed physicians and decided to deploy our systems to their more than 3,100 affiliated physicians in a multi-million dollar agreement signed this quarter. We will deliver our EHR and PM solution for Baptist’s affiliated community physicians via the software as a service model, meaning physicians will pay one fixed monthly fee for electronic health record and practice management, including all implementation, web hosting, support, and other costs.
This is a model that makes good sense for Baptist community physicians in small practices and we expect, as does Baptist, that a large number of these community physicians will find our offer attractive. We expect to jointly announce the details of this offering to Baptist’s affiliated physician network soon.
Taken together, Northshore, Baptist, and West Penn Alleghany Health System, which we mentioned last quarter, demonstrate our ability to move this community model forward. In the case of West Penn, as they enhance their capabilities and community strategy, we believe they will be one of the most, if not the most connected group in the Pittsburgh area, along with another one of our great clients, Heritage Valley.
While the market is focused on the growth opportunities in electronic health records, I also want to further highlight the revenue cycle management portion of our business. We currently have 110,000 physicians using our practice management products.
More than 80% of whom depend on us to process their claims, with an annual claims volume that is significant. When we survey our client base, especially given this economy, we see little interest in replacing an existing working practice management system to get the benefits of revenue cycle management.
We view this as a competitive advantage as the market increasingly understands that to optimize value, clinical and billing systems must work seamlessly together, and this is best accomplished through one integrated system. Over the last year, we invested millions of dollars in these systems and the innovations that will showcase the revenue cycle management capabilities of our [pay or pass] ASP offerings are starting to hit the market now.
One example is the partnership that Intuit announced last Thursday to offer Quicken Health bill pay through our practice management clients. Allscripts is the first practice management company to partner with Intuit on this solution, which allows our clients to provide absolutely clear bill presentment to patients 24 by 7 convenience and, and this is really important, fully protected online payments.
This is a strong differentiator for us and allows our clients to help reduce patient confusion while increasing patient satisfaction. Moving on to our acute and post-acute solutions, we experienced strong sales in the quarter.
Southeastern Regional Medical Center in Lumberton, North Carolina signed an agreement with us to implement the complete suite of Allscripts' care management solutions, including our new audit plus module, which helps hospitals manage Medicare’s recovery audit contractor, or RAC audits, a major concern for hospitals across the nation. On the post-acute front, last week we announced an agreement with Golden Living, one of the nation’s largest skilled nursing chains, for our post-acute referral management solution.
This agreement gives us a major presence in three of the top five nursing home chains, following similar agreements with kindred healthcare and Saba. We also have a significant client base in the remaining two top five chains, HCR Manor Care with 95 of their 300-plus skilled nursing facilities nationwide using Allscripts for referral management, and Sunbridge Healthcare Corporation, where 85 of their 225 skilled nursing facilities use Allscripts.
Our agreement with Golden Living will push the total number of post-acute providers using our products to over 8,000. Turning to our operations, we are very pleased as we approach the one-year anniversary of our merger with Misys healthcare.
We are not only focused on our own efficiency but a key objective is to make it easier to install our systems. Eileen McPartland, our Chief Operating Officer, and Jay Khan, one of our six Sigma master black belts, are leading a project called READY -- our acronym for standardized solution packages that lead to faster electronic health record deployments.
I am pleased to report that we are making good progress with our first solution package, Enterprise READY, we were able to achieve the same outcome with a 50% reduction in hours and duration for implementation. We have proven this capability with our first READY client who went live two weeks ago.
Today we took our second client live and two weeks from today, we will conclude our beta phase with a third client. We will be taking the next few weeks to make refinements to the program based on client feedback before moving on to further deployments in the Thanksgiving timeframe, just in time for the stimulus acceleration.
By then, we will have launched a similar READY program for clients of our electronic health record in the small and mid-sized physician space. So while there is more work to be done, we are seeing very promising early signs of success with this important initiative.
Our goal is to keep finding innovative ways to implement our clients faster and with less effort in all market segments so they are able to qualify for meaningful use incentives as quickly as possible and for us, to take maximum advantage of the stimulus by quickly translating sales into revenue. I also wanted to share that we created a new public sector team to deliver on one of the largest opportunities for the company, the growing role of government as a buyer of our solutions at the federal, state, and local level.
Vern Davenport is our group president for the government sector leading the effort. Many of you know Vern from his leadership at Misys healthcare prior to our merger and his post-merger leadership of our professional product suite.
I am happy to report that Vern has already posted his first important win with a partnership that we announced last Thursday to accelerate electronic health record adoption in Vermont. Our new partner is Vermont Information Technology Leaders, or VITL, which is the non-profit contractor funded by the State Legislature to drive the information technology behind Vermont’s highly regard blueprint for health program, which was recently highlighted by health and human services secretary Kathleen [Sebilius].
Together we will be offering Allscripts' electronic health records with an attractive financial model to all of the states physicians, driven by VITL’s broad base of payers, providers, employers, state agencies, and patient stakeholders. So, great news from Vermont to -- as a result of our new government focus and we are confident that we will have more successes to report at the state level in the quarters to come.
Now I’ve provided a lot of information and Bill will give you more. I think you get the sense of excitement around the market and around what Allscripts is doing.
And when you do it right, the numbers follow, so let me ask Bill to make some comments about the numbers. Bill.
William J. Davis
Thanks, Glen and good afternoon, everyone. I would like to start out by providing a quick overview of our results for the quarter ended August 31, 2009, which represents our first quarter for fiscal 2010, and then I will briefly discuss our financial outlook for our fiscal year ending May 31, 2010.
In order to properly understand our results, I do want to remind everyone that we consummated our merger with Misys healthcare in October 2008 and Allscripts was treated as the accounting acquiree in the transaction. As such, our GAAP results for the quarter ended May 31, 2008 reflect only Misys healthcare’s performance while the quarter ended August 31, 2009 reflect the results of our combined operations.
Therefore, we have provided pro forma results for this quarter and the year-ago comparable period, so as to improve comparability for our investors. In addition, it’s important to note that Allscripts consummated the sale of our physicians interactive business in September of 2008 and our medication distribution business in March 2009.
Thus, the pro forma results also reflect the sale of both of these businesses. For these reasons, as well as for the other reasons set forth in our earnings release, we believe pro forma results are meaningful when evaluating and comparing our year-over-year results.
So turning to the quarter and looking first at our bookings, we had a solid quarter with total bookings of $97.5 million in the quarter. This compares to $103.2 million in our seasonally strong fourth quarter of fiscal 2009 and $66.4 million in the first quarter a year ago, which represents a 47% increase over the prior year in acceleration and year-over-year growth from the 26% increase in bookings we saw in the fourth quarter.
The $66.4 million of bookings recorded in the quarter ended August 31, 2008 does in fact reflect legacy Allscripts and legacy Misys healthcare combined. Note that approximately $25.1 million, or 26% of our first quarter bookings, are related to software as a service or SAS transactions that will be recognized as revenue over the next 48 months.
This amount is comparable to the $26.9 million or 26% of fourth quarter bookings derived from SAS related transactions. In contrast, during the first quarter a year ago, we derived $13.9 million, or approximately 21% of our bookings from SAS transactions.
We continue to plan for up to one-third of our bookings to be accounted for at SAS and view this as a positive long-term trend that is likely to continue as physicians seek to align the cost and maintenance of their electronic health records with the federal financial incentives that are available to them. As Glen highlighted, we did sign one of the largest deals in Allscripts' history with Northshore Long Island Jewish medical center in our first quarter.
We are very excited about the potential of this new relationship. As you can see, this new relationship is tremendous in scope, covering up to 8200 physicians, including Northshore’s employed physicians.
We will also be selling our emergency department solution into several additional hospitals. However, it’s important to note that our bookings execution in the first quarter reflects a broader selling effort across the company than just Northshore Long Island, including cross-selling efforts into the legacy Misys installed base.
Taking into account the nature of the Northshore transaction and the minimum commitments assumed in the agreement, our Q1 bookings included just over $10 million related to that particular transaction. Going forward, we will update the market if Northshore represents a material portion of any future quarter booking performance based on further system adoption within Northshore physician network.
I also want to remind those of you who historically have followed Misys PLC stock that Allscripts reported bookings conforms to our established defined -- I’m sorry, defined definition of bookings which does not include transaction fees. In contrast, Misys PLC includes transaction fees and their booking definition and if you were to include those, such transaction fees would add approximately $38.1 million to our quarter’s reported bookings.
Turning to backlog, we ended the first quarter with approximately $707 million in reported backlog. The makeup of our backlog is approximately $177 million of clinical software and related services fees, approximately $150 million of subscription and ASP fees, approximately $232 million of annual maintenance fees that are expected to be recognized over the next 12 months, and approximately $148 million of transaction fees, which principally consist of EDI transaction fees and again are expected to be recognized over the next 12 months.
Total GAAP revenue in the quarter was approximately $164.9 million, and approximately $167.5 million on a pro forma basis. Q1 pro forma revenue was flat sequentially versus the fourth quarter of fiscal 2009.
This result is as expected and reflects seasonality in our business during the summer months and the fact that a large percentage of our current quarter bookings relate to SAS transaction as well as enterprise product bookings from larger physician practices, both of which take longer to convert into revenue. Our GAAP revenue for the three months ended August 31, 2009 includes a $2.6 million reduction related to our revaluating of Allscripts' deferred revenue balance at the time of the merger with Misys.
We have added this amount back to calculate pro forma revenue. Finally, in terms of adjustments, our pro forma relates to our ongoing businesses only and again excludes revenue in the year-ago quarter related to Allscripts' medication and physician interactive businesses, as I discussed earlier.
Turning to margins and expenses, pro forma gross margin percentage for the first quarter was 54.7% and compares to 56.4% in our fourth quarter and 53.9% in the first quarter a year ago. Gross margin change sequentially was impacted by the expected lower mix of add-on sales of additional software licenses to existing customers.
GAAP operating expenses were $67.5 million for the quarter, included $3.9 million in pretax transaction related expenses. Pro forma operating expenses before stock-based compensation, deal related amortization, and transaction expenses were approximately $57.8 million, which compares to $55.9 million in the fourth quarter of fiscal 2009.
Our pro forma operating expenses in the first quarter were slightly higher due to sequential increases in our sales and marketing programs, which included our annual sales meeting and our annual users conference. We continue to be comfortable with both our planned cost synergies from the Misys transaction of $25 million to $30 million in the current fiscal year while achieving our investment objectives for marketing and R&D.
As we approach the one-year anniversary of the Misys merger, we do in fact continue to incur transaction related expenses but at a significantly lower level. As indicated before, transaction costs totaled $3.9 million in the first quarter, a marked decline from $7.2 million in the fourth quarter.
Of the $3.9 million, approximately $2 million was attributed to our previously disclosed settlement with [Aprima] Medical Software. The balance of one-time costs includes the wind-down of integration and severance costs associated with the Misys transaction.
We expect Q2 2010 to be the last quarter in which we have transaction related costs from the Misys merger. Capitalized software in the quarter was approximately $3.5 million, a decline from approximately $6 million recorded in the fourth quarter.
As we discussed last quarter, fourth quarter capitalization level was impacted by the decision to accelerate certain incremental development efforts related to Allscripts My Way product ahead of anticipated stimulus activity. We anticipate our capitalized software expense to fluctuate somewhat on a quarter to quarter basis based on our product development schedule.
Our GAAP tax rate in the quarter was approximately 38.6%, a decline from our overall effective tax rate of approximately 41% in fiscal 2009. We anticipate a full-year tax rate in the range of 39% to 40%, in keeping with what we’ve communicated previously and thus have used the lower end of such range for our pro forma presentation.
GAAP net income for the quarter was $12.9 million. After adjustments, non-GAAP net income was $22.2 million compared to $14.8 million in the first quarter of last year.
This quarter, non-GAAP net income grew 50%, which is an acceleration from the 35% growth rate we recorded in the fourth quarter, reflecting the continued financial success associated with our merger. Non-GAAP net income includes the add-back effect of Allscripts' pre-merger results, our non-cash deferred revenue adjustment, as well as deal-related amortization, stock-based compensation, transaction costs, and again the elimination of our results related to the medications and physician interactive businesses in the year-ago period, all of which are on an after-tax basis.
Our diluted earnings per share was $0.09 per share on a reported basis and $0.15 per share on a non-GAAP net income basis. Regarding shares outstanding, Allscripts did in fact exercise this right to call the remaining $19.7 million principal amount of our convertible debt and as expected, the bond holders exercised their right to convert the debentures into approximately 2.5 million shares in the first quarter.
Contemplating such conversion, our diluted share count in the quarter was approximately $148 million shares. In terms of stock repurchase, we did not repurchase any shares in the first quarter, given the relative strength associated with our stock performance.
As mentioned last quarter, we have purchased approximately 5.4 million shares for $51.5 million under our $150 million authorized share buy-back program announced back in February. We do intend to fund any future share repurchases through available cash and we will be opportunistic when evaluating future buy-back opportunities.
With regard to overall headcount, we ended the quarter with approximately 2,404 employees which compares to 2,392 at the end of our fourth quarter. Turning to our balance sheet and capital structure, Allscripts ended the quarter with $86.9 million in cash and marketable securities, a net increase of $13.4 million from the $73.5 million in the fourth quarter.
The increase in cash was primarily due to us generating approximately $21.3 million in cash from operations with offsetting use of cash for capital expenditures and capitalized software, as well as a $4 million pay-down of our credit facility. As you can see from our results this quarter, an important feature of our high re-occurring revenue model is strong operating cash flow.
We continue to expect solid cash flow generation going forward. Accounts receivable declined in the quarter to $150.3 million, resulting in a one-day decline in day sales outstanding to 82 days versus the 83 days in the fourth quarter, and again we will continue to focus on improvements in this area.
As mentioned previously, long-term debt was approximately $40 million at quarter end and reflects a reduction in light of the previously mentioned conversion of our convertible debt, as well as the $4 million pay-down in principal. In summary, we are pleased with Allscripts' performance in the quarter.
Our pipeline is robust and we are experiencing a solid level of interest in the market of our portfolio solutions, particularly as Glen indicated, among the larger healthcare systems committed to strategic rollouts of electronic medical records to their employed and affiliated community physicians. In terms of our cost structure, we are also pleased with our continued integration success in bringing together Allscripts and Misys healthcare and delivering on the significant cost synergies we planned.
Our business is healthy and we are optimistic about our future. So looking ahead, many of you have asked about our expectations around the rate of growth, particularly in light of the potential impact of federal stimulus program.
We continue to see a growth trajectory characterized by a long tail where one might expect a strong, high-reoccurring revenue business. We currently have a significant mix of reoccurring revenue and as Glen indicated, approximately 65% of which is annuity in nature from our maintenance revenue as well as our SAS license agreements and in our EDI business, which together yield a mid-single-digit organic growth rate.
In addition, as I’ve referenced in the past, we are currently adding to our backlog revenue with larger customer commitments that will take time to roll out. These relatively complex implementations are notable for their lead times of up to 18 months.
As we’ve noted in the past, Allscripts has a conservative approach to our revenue recognition on these enterprise license deals, recognizing revenue on a percentage of completion basis over the course of the implementation period. In terms of stimulus driven buying, we are seeing meaningful interest and anticipate a more stimulus led buying environment, particularly amongst the lower penetrated small group practice market starting in calendar 2010, which represents the end of our fiscal 2010.
In addition, our anticipated shift to an increasingly higher mix of SAS revenue through increased adoption of electronic health records amongst small physician practices will also impact our revenue growth. We have planned accordingly in advance of this mix change and are staffed in anticipation of the increased implementation load.
Based on these factors, we affirm our financial guidance for fiscal 2010, including revenue, non-GAAP net income, and EPS. We anticipate revenue will in fact be in the range of $680 million to $700 million, and we anticipate GAAP net income of $61 million to $65 million, and non-GAAP net income of approximately $88 million to $92 million, which equates to EPS of $0.59 to $0.61 per diluted share.
Our non-GAAP net income guidance contemplates approximately $13.5 million of acquisition related amortization and approximately $11 million of stock-based compensation, both of which are on net of tax basis. So in closing, we are very proud of the hard work and results from our entire Allscripts team as we continue to position the company for continued success and to ensure we achieve our corporate vision of excellence and focus on exceeding our clients’ as well as our investors’ expectations.
With that, I would like to turn it back over to Glen.
Glen E. Tullman
Thanks, Bill. Over the next three years, we will see the government invest almost 70% of the $38 billion allocated to automate and connect our healthcare system.
During that time, as we watch the fastest transformation of a major sector of our economy in the country’s history, we will see care managed proactively and where necessary, provided cost effectively through a connected system of health, based real time and through an aggregated information network on best practices and comparative effectiveness. Allscripts expects to play a leading role in that long awaited transformation and we expect our shareholders and our employees will benefit, both as healthcare consumers and investors.
Many of you have been with us on this journey for some time, including many of our best clients, our employees, and investors who believed in the vision. I want to thank all of you for your confidence in us, thank our clients and employees for their dedication, and commit to all of you that we will continue to work hard to earn your confidence and deliver on this opportunity we’ve been given.
So thanks for joining us this afternoon on the call and at this point, Operator, we are prepared to take questions.
Operator
(Operator Instructions) Your first question comes from the line of Jamie [Stockman] with Morgan Keegan.
Jamie Stockman - Morgan Keegan
Off the top of your head, do you know how many physicians you are currently targeting with some sort of a stark exclusion type deal?
Glen E. Tullman
We don’t break it out that way. You know, that said, I think what we are seeing -- and I mentioned three of the larger systems, but in many hospitals you are seeing these physicians being aggregated by large networks in many of our markets.
The hospitals have become the aggregators, so we are seeing that trend. At the low end, we are also seeing pressure by some of the pharmacy chains and the like to push the primary care diagnoses, so there is an emphasis to use Stark if you are a hospital; if you are not a hospital, there’s a lot of targeting going on with special offers to bridge the gap until the stimulus dollars arrive.
So we feel like we are touching at all levels of the market, the smallest physician groups, mid-sized multi-specialty and the largest networks, that we are touching all of those.
Jamie Stockman - Morgan Keegan
And just a follow-up question on that -- when you do a stark deal like the couple that you have announced today, is there any sort of geographic exclusivity related to those deals where you are involved with that hospital system and you would get involved with another in the same area?
Glen E. Tullman
Well, I think there’s a practical impact. You know, we don’t have geographic exclusivity.
That said, when you look at some of the players we are working with, by definition we are going to focus our energy and attention working directly with them to roll out these programs as quickly as possible. Again, to the extent that there’s -- you know, there are multiple providers who are clients of ours, we are happy to work with all of those providers in order to automate all the physicians and I think you will see that in certain areas but our view is we are happy to offer as many choices to physicians as possible and each of these large integrated delivery networks, academic medical centers and the like, are in a rush to build their relationships with physicians, so I think Northshore, some of the other deals we mentioned, are going to have every board of an integrated delivery network and an academic medical center talking about how they create that direct link with their physicians because that’s where the referrals come from -- that’s what we are really seeing happen.
Jamie Stockman - Morgan Keegan
Okay and just my last question, is there any way to quantify what kind of an impact the distribution agreements with Cardinal and Henry Shine had during the quarter? I mean, are you seeing a material number of deals close through those channels yet?
Glen E. Tullman
Well, the first step was to get all their sales executives and relationship managers trained. We’ve done that.
We have seen a significant number of leads already being driven and we have seen sales -- we’re not going to report on sales by channel and by provider separately but I can tell you that we have seen meaningful progress from both Henry Shine and from the Cardinal organizations.
Jamie Stockman - Morgan Keegan
Okay. Thanks, guys.
Operator
Your next question comes from the line of Atif Rahim with J.P. Morgan.
Atif Rahim - J.P. Morgan
Another follow-up on the [LIJDO], could you elaborate and tell us perhaps how much of those bookings are from SAS versus traditional license? And then in the future as we look at -- I think the announcement from [inaudible] yesterday mentioned that the system is supposed to be operational by November, so is that just a start and will you go on from there, or should we expect the balance of [inaudible] going to be kind of loaded up in this quarter?
Glen E. Tullman
Well, I would say a few things -- one, the Northshore deal includes a number of different components that both Bill and I tried to touch on but just in review, first they are automating their employed physicians, which is in excess of 1,000 physicians. Second, they are automating the remainder of their emergency departments, which will provide the connectivity and a lot of patient safety benefits, and then finally they are going out into the community to offer a very substantial funding through Stark, up to 85% if you follow their quality standards, a very significant part of the deal.
The initial bookings that we are recognizing this quarter all relate to license fees that we will be getting from Northshore. We expect and Bill mentioned over time we will provide updates that as the community based initiatives roll out, that those software as a service revenues will be recognized to the extent they come in in any individual quarter.
So that’s the way that will work, relative to the community programs, we have in excess of 100 high volume Northshore clients already enrolled in the program as the first tranche that we wanted to -- and we wanted to balance how many you enroll initially with working the kinks out of the system and going public with the program too soon. So we are comfortable with the first group of over 100 practices that are ready to go as soon as we are ready to go and that’s a real-time initiative.
Operator
Corey Tobin - William Blair
-- the large enterprise agreements, it’s good news for you guys. Just wanted to hit on the bookings number a little bit -- Bill, you mentioned some commentary related to cross-sell within the base.
Is there anymore color you can give us with respect to some of the progress you’ve made targeting those 110,000 -- I think it was 80,000 that don’t have any HR. How far -- you know, kind of how far along that process you get and whether you are hitting internal goals and what not?
William J. Davis
As indicated on the last quarter call, we are not intending to quantify that cross-sell, just so we don’t repeat history in terms of creating the dependency in the market as we did back several years ago with IBX. With that being said, very comfortable in communicating that we continue to make good progress and actually are performing slightly better than our own internal plan, so we are pleased with our performance, we continue to have a lot of good expectations in terms of our ability to cross-sell into that base and obviously it continues to be a key focus for us.
Glen E. Tullman
Corey, when we get halfway, we’ll tell you.
Operator
Your next question comes from the line of Steve Halper with Thomas Weisel Partners.
Steve Halper - Thomas Weisel Partners
Could you just give us the level of your CapEx and R&D and just so that we can get to a free cash flow number for the quarter?
Glen E. Tullman
Sure. R&D I disclosed -- capitalization of R&D was $3.5 million that I think I commented on in my script and then our capital expenditures was just under $2 million -- I think it was close to about $1.5 million.
Steve Halper - Thomas Weisel Partners
Okay, and then just as a follow-up on the Northshore deal, the $75 million number that you put out there, that’s an estimate of the full potential of what you could conceivably get at some time in the future -- is that correct?
Glen E. Tullman
Yeah, that’s -- it’s in excess of $75 million, I think, is what we said and that is simply taking what is a meaningful percentage of those 7,000 who we believe will convert paired with the internal spending that has already been committed and when you put that together, that’s how you reach that number. It’s not 100% but it is a significant percentage.
We believe that a significant percentage of that group will convert for a few reasons -- one, they get up to 85% funding from Northshore; two, they qualify for the federal subsidies; three, there are additional quality programs under consideration; and four, they get full connectivity with all of the Northshore hospitals, emergency departments, and eventually long-term care facilities as well, so they can have an eye into their patients. Now this is what makes this program so unique, given Northshore’s penetration, as well as the connectivity that they are going to have and finally their essential promotion of care standards across the network that makes for a very compelling reason to move now.
Operator
Your next question comes from the line of Richard Close with Jefferies & Company.
Richard Close - Jefferies & Company
With respect to the employee count, Bill, it seems to have stayed relatively stable, no real huge up-ticks there. And then, I was curious how that relates to the -- I think you -- Glen, you called it the READY program for implementations.
Can you go into a little bit of that? And are you using outside consultants in some of these larger deals you just announced for implementations?
How should we think about that on a go-forward basis?
Glen E. Tullman
Sure. First of all what I would say is we are hiring across the company at multiple sites -- all of that is within the budgeted numbers.
When you talk about the READY program, you talk about two components -- the first is process redesign. In some cases, as we are having a team of people, many of those people Bill has mentioned in prior quarters, we were stockpiling some people.
For those people who we were stockpiling were focused on how do we reengineer and redesign these processes to take steps out, make it more efficient, deliver a product that’s closer to ready-to-go, et cetera. So all of that work is underway and that’s using existing people.
You know, I mentioned some of our black belts and some of our process people who are focused on that. The second piece of that is software redesign and when we contemplated our budget this year, the good news is that we knew we were going to focus a significant portion of our R&D dollars on stimulus type initiatives.
One of those initiatives is if you’ve got a lot of people, you are going to sell a lot, you got to figure out how to implement a lot and how to do it more quickly with less resources and that’s what the READY program was designed to do. This wasn’t created yesterday -- you heard us talk about it as long as three quarters ago and we’ve been working at it and the good news is now the first clients we are seeing the impact it can have.
I would also caution you, as Bill would as well, that this isn’t an overnight thing. We’ve just come out of pilot, we’ve had great success.
We are going to finetune it now and then we will launch it so all new implementations going forward post-Thanksgiving, probably post January 1, will be READY implementations. We will also extend READY from just enterprise to our professional and My Way markets but that will take some time as well.
The good news is all of that drops to the bottom line as we are successful doing it but it won't happen overnight.
Operator
Your next question comes from the line of George Hill with Leerink Swann.
George Hill - Leerink Swann
Good afternoon. Bill, a quick question -- I know that you guys don’t give bookings guidance but you highlighted during your comments the accelerating pace of bookings growth in this quarter.
Is it safe to assume that we should not expect that level of bookings growth acceleration to kind of continue through the next couple of quarters?
William J. Davis
To your point, George, we aren’t prepared to provide detailed guidance on the bookings. I will make two observations though in that regard -- I really was encouraged by our first quarter bookings performance by virtue of the fact that it encapsulated June, July and August, which arguably is the softest months in the year, given vacation schedules and the like, and yet we were able to perform at the level we were by virtue of that.
A counter-balance to that though is a recognition of Northshore’s contribution to our bookings performance in the quarter. As we’ve talked about in the past, those large enterprise deals tend to involve much longer sales cycles and thus kind of their repeatability or predictability tends to be less reliable.
So I think both serve to kind of counterbalance one another and I think the general remark that we are encouraged by increased level of interest in the marketplace is really the message we want to leave the market with at this point.
George Hill - Leerink Swann
Okay and following up briefly on that comment, were the 400 additional licenses that are part of the west, the expansion of the West Penn deal, were they included in the quarter?
Glen E. Tullman
The West Penn deal, actually we commented on that in the fourth quarter and so that transaction was actually captured in our fourth quarter results, I think for the most part. There might have been a small portion that was in the first quarter but a vast majority of it was in the fourth quarter.
George Hill - Leerink Swann
Okay, thanks for the clarification there and just I guess one more brief point is that with the guidance staying consistent for the year, I would have expected to see seasonal strength in the upcoming November quarter and the February quarter, and then maybe some weakness in the May quarter. From a seasonal perspective, is that the right way to think about things?
And I guess we are kind of looking at it from a non-GAAP earnings perspective, almost a flat year as we roll through the end of the year -- is that how you guys are thinking about things?
William J. Davis
I think there’s a couple of dynamics there that I want to call out. From a revenue perspective, I just -- we really emphasized both Glen and I did the dynamic of these large enterprise deals, as well as the mix of SAS transactions, both of which have longer term takedowns and therefore are going to delay what would otherwise be a logical transition of this booking growth into revenue.
So we are cautioning people to just think about the mix of our bookings and thus the impact it will have on revenue and thus why we are staying pat with our previously stated guidance, number one. From a market adoption perspective, the other point that I made was we quite frankly are seeing a high degree of urgency in large enterprise buying situations.
I’ve commented in many of the conferences that we’ve been at in the last couple of months that there seems to be a high correlation to the lead time that is required to be deployed and ready to go come January 1, 2011 when the funding occurs versus their urgency, or compared to their urgency or willingness to move. The point being is that when you move into the smaller position practices, that urgency isn’t quite there yet and our expectation is that that will continue to mount as we move into calendar 2010, which represents the back end of our fiscal period.
So I would just take both those into consideration as we think about the guidance and why we are remaining firm on our previously state guidance, even in spite of maybe arguably a little bit better than expected bookings performance.
George Hill - Leerink Swann
Okay, and I’m sorry, one last point -- Glen, I thought you had touched on this briefly that you had said that you saw gross margin deterioration because of add-on sales into the client base. I thought historically that incremental sales to installed customers, the gross margins tend to be higher.
William J. Davis
That was actually my comment and actually the point was that in our fourth quarter, which is fairly common, we actually had a higher concentration of add-on sales to existing customers, thus why fourth quarter margin was slightly higher.
George Hill - Leerink Swann
Okay, all right. Thank you.
Operator
Your next question comes from the line of Sean Wieland with Piper Jaffray.
Sean Wieland - Piper Jaffray
Glen and Bill, you both commented about the increasing sense of urgency in this enterprise segment. Can you give us some sense as to why this is happening now and tow what degree is this a trend going forward?
Glen E. Tullman
I’ll take a shot at that. I think there’s two issues -- one, as Bill mentioned, it takes if you are an enterprise and you have a thousand employed physicians and you have lots of other folks, you may have other big projects underway so it takes just a lot longer to contemplate training, rolling out, putting into place the infrastructure for a thousand physicians and if you are a two doc practice that says hey we can shut down two weeks from now and spend a few days and get this system up and operating, or at least that’s the viewpoint of a lot of those smaller practices.
In addition, some of the big enterprises are using this as a way to contemplate how do they connect with their markets, how do they build essentially a connected community and the like, so all of that is one reason. A second reason is that as different organizations see agreements like the Northshore agreement, they say to themselves hey look, there’s only one chance to put a system in a physician’s office.
They are not going to wait and say to a physician well, I know you adopted the Northshore model -- now would you like us, we have a little different model, would you put our system in as well, the physician would say look, I just need one system and so there is a bit of a land grab going on where the largest groups are saying how do we capture not only our own physicians, which we have, but our affiliated physicians and become easy to do business with in this new electronic age. So two reasons -- one is again the sheer kind of efficiency model and two is what their competitors are doing.
So that’s the urgency we see. We expect it to increase when people see that Northshore is willing to step up and invest their own dollars, not just wait for the federal dollars.
Operator
Your next question comes from the line of Donald Hooker with UBS.
Donald Hooker - UBS
Maybe looking into your bookings number, is there any way to sort of qualify how much of that is replacement versus greenfield?
William J. Davis
We’ve not commented on that in the past. I would say generally speaking, most of what we are seeing is greenfield and there is a mounting pipeline in terms of prospect of replacement, especially as clarity around standards and meaningful use come to the forefront but I would suggest to you in the context of our Q1 bookings, most of that was greenfield.
Glen E. Tullman
And let me just add on -- the challenging economy, the challenges in the healthcare system actually helped people with large footprints, so as I mentioned in my comments, a lot of practices we mentioned out of the 110,000 Misys legacy clients, 90,000 don’t have an electronic health record, but those 90,000 do have a practiced management system. The likelihood of them ripping that system out to put a new system in when the system they have is working fine and when a new system wouldn’t be funded by stimulus dollars, as opposed to going straight to hey what works with the practice management system I have, you know, it’s much greater.
So we do see a building replacement market but our expectation is everyone who can is going to first make sure they qualify for the stimulus dollars, then they are going to come back and to the extent it’s warranted, replace their existing practice management systems with systems that are new. That said, the people who have the electronic health record will have a significant advantage on that upcoming replacement market.
Why don’t we take one more question and then we’ll -- we appreciate everyone’s time and we’ll call it a day after that, but why don’t we go ahead and take one more?
Operator
Your last question comes from the line of Sandy Draper with Raymond James.
Sandy Draper - Raymond James
I have a couple of questions, hopefully they will be pretty quick -- one, Bill, just maybe you can re-paraphrase your comments around revenue and guidance. If I look at the range of $680 million to $700 million, is it fair to say then the difference between the low-end and the high-end is less about how much business you’ve signed this year versus the mix of the business?
And so if you get more one-time license, it could be higher; you get more SAS deals, it’s going to be lower? Is that a fair assessment?
William J. Davis
I think it’s very fair in the context of mix. It’s not only the mix between SAS versus traditional initial license fee structure but it’s also quite frankly mix in terms of size of practices that we are selling into because there is a possibility we are going to see increased momentum in medium to smaller sized practices which naturally are able to convert quicker into revenue because the deployment cycles are shorter.
So I think you are thinking about it the right way, that it’s primarily a mix consideration with a couple of different dimensions.
Sandy Draper - Raymond James
Okay, great. And then just as a reminder, the SAS revenue, does that show up in system sales or does that actually show up down in support and maintenance?
William J. Davis
No, it’s actually neither. It’s a great question and I appreciate you calling it out.
Our SAS revenue is actually tracked down in transaction and other and so at some point the company will have to evaluate breaking that out but it’s not at a material enough level at this point to warrant its own line item, so it’s down in actually transaction and other.
Operator
There are no further questions. Do you have any closing remarks?
Glen E. Tullman
Let me just close by saying again, I think we have a very unique opportunity in the market today. It’s a combination of the stimulus, the focus on healthcare being driven today, and last but not least, the ability of our management team to execute and deliver quality products that satisfy the needs of our client.
So again, we appreciate everyone joining. We are looking forward to updating you next quarter and again, thanks for joining us today.
Operator
This concludes today’s conference call. You may now disconnect.