Transcript of the QSI Conference Call
Moderator: Louis Silverman
May 23, 2001
12:00 pm EST


Operator: Good afternoon.� My name is Amy and I will be your conference facilitator today.� At this time, I would like to welcome everyone to the Quality Systems Fourth Quarter Fiscal Year 2001 Earnings conference call.� All lines have been placed on mute to prevent any background noise.� After the speakers� remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press the number one on your telephone keypad and questions will be taken in the order that they are received.� If you would like to withdraw your question, press the pound key.

Thank you.� Mr. Silverman, you may begin your conference.

Louis Silverman: Thank you, Amy.� I�d like to welcome everyone to Quality Systems� Fiscal 2001 Fourth Quarter and Year-End conference call.� Joining me on today�s call are Greg Flynn, who�s the Executive Vice President and General Manager of our QSI Division, which for any newcomers to our conference call, includes our Dental business, EDI business and niche Medical business.

Paul Holt, our CFO, is also here with me, and Pat Cline, President of our MicroMed Division, which develops and markets our NextGen product line joins us from Horsham, Pennsylvania.

Before we begin, let me point out that comments made on this call may include statements that are forward-looking within the meaning of the Securities Laws including statements related to anticipated industry trends, the company�s plans and strategies that projected operating results.� Actual results may differ materially from our expectations and projections and you should refer to our SEC Form 10-K and 10-Q for discussions of the risk factors that could impact our actual performance.

Overall, we�re extremely pleased with the company�s performance in the quarter.� To give you a brief overview of some of the key data points, the company generated a record $10.7 million in Q4 revenue, which was a 22% increase over the year prior.�The Q4 performance combined with our strong Q3 - performance pushed us to the $40 million mark in revenue for the fiscal year which is a first for the company.

Our Q4 performance was driven by another record-setting quarter at MicroMed. At $6.3 million for the quarter, the Division was up 57% versus the year prior.� The QSI Division was significantly stronger than in our third quarter, generating about $4.4 million in revenue.

Incorporated within our divisional numbers and certainly contributing to the company�s overall growth was our EDI business segment, which increased 30% year over year.� The $1.4 million in revenues that we generated in our EDI connectivity segment was also a record for the company.

Net income was a record $1.17 million and that was more than double the net income generated in the same quarter prior year.� On an earnings per share basis, the 19 cents we earned in the quarter is again more than double the 9 cents earned in year prior and up from the 16 cents earned in the prior quarter.

For the year, net income was up 40% from the prior year and earnings per share increased 42.5% from 40 cents year prior to 57 cents this year.

On the cash flow and collections front, you�ll note that cash was up to about $18.7 million at quarter end and DSOs decreased from about 141 days to 114 days in the quarter.

Revenue per employee, which is the number we have talked about on past calls, stayed pretty much where it has been in the last couple of quarters at $197,000 per employee annualized.� Paul Holt will give you a bit more texture on the financial data in a couple of minutes.

Notable non-financial developments occurring since our last call include MicroMed�s successful participation in two of our industry key trade shows.� At the HIMSS conference which occurred in New Orleans in February, we introduced a pre-beta version of our NextGen PDA which is our handheld product and certainly the response at the HIMSS show has been extremely positive.

Our NextGen EMR software was two for two in first places both earned at the recent TEPR show in Boston.� So again, we feel we had a very strong showing for our NextGen software suite.� That�s the two key industry shows that�s part of our industry segment.

New releases of our NextGen EPM and NextGen EMR product suites are proceeding on plan and Pat will give you a little more texture on that later on in the call as well.

On the QSI side of our business, a pre-beta release of Phase I of our Sequoia project which is our redesign and rewrite of our Flagship software program was test marketed to User Group meeting attendees and was extremely well received.� The project � Phase one of the project is now set for staged releases to our clients through the summer and early fall.

Our CPS product is moving through the initial stages of reformulation that we discussed on earlier calls.� And though it�s extremely early to talk about trends, we did close a couple of new sales during the quarter and we experienced a measure of increased interest in that product from the marketplace.� People have continued working through our reformulation project but the early returns, and they are early, has been reasonably positive.

We announced two partnerships in the quarter - two new partnerships. MicroMed entered a joint marketing agreement with Zeiss Humphrey, who�s arguably the world�s leading ophthalmology equipment vendor. They are increasingly well positioned to increase our reach into this segment; it�s a segment that we�ve been successful in the past.� And we�re hopeful that the Zeiss Humphrey affiliation will enable us to increase our success in that segment.

As a company, QSI was accepted into The Leapfrog Group.� The Leapfrog Group is a group of largely Fortune 500 healthcare �thought leaders� who are working to advance the state of healthcare in the US and we�re optimistic that our expertise in the areas of EMR and EDI will enable us to contribute significantly to this new effort.

We�ve expanded our MicroMed sales staff during the latter part of the March quarter and early part of the June quarter to feed future growth consistent with some of your plans that we have discussed on prior calls.

We�ve also increased staffing in our implementation group on the MicroMed side to allow us to continue to provide good service for our increase in client base and get clients implemented that have bought our software.

On HIPAA and other legislation - as we discussed on our last call, we continue to agree that with the general consensus, the HIPAA regulations and the medical errors legislation that is on the docket in multiple states should eventually help companies in our business.

Our software is currently compliant with many of the known standards now � facilitates compliance would be a better way to talk about it.� And we certainly continue to add some compliance items into our development queue.�� As a company, we absolutely remain committed to staying ahead of any and all mandated guidelines.

That concludes my opening remarks.� At this time, I would like to turn things over to Paul Holt for additional comments on our financial statements.

Paul Holt: Hello everybody.� What a great way to finish off the year with another record quarter.� This past fiscal year has been a really exciting one for Quality Systems, growing revenues by over 10%, ending at just under $40 million and growing profits by over 40% at approximately $3.5 million or 57 cents a share.

During the past year, we worked to reduce expenses in the Dental Division and controlled the growth of expenses in our MicroMed Division, resulting in improved profit margins in SG&A expenses as a percentage of revenue.

Our gross profit margins for the year improved to 56.7% compared to 54.9% last year.� SG&A expenses also declined to 34% of revenue this year compared to 34.8% last year.

Ending the year with $18.7 million in cash, that�s an increase of $2.6 million over the prior year.� This is also - this is impressive given the fact that during the year, we bought back 235,900 of our shares at a cost of approximately $1.9 million.

I�m excited about our continued momentum in our growing revenues and earnings.� We posted our fifth straight increase in earnings this quarter and our fourth straight increase in revenues this quarter.

Our growth in revenue this quarter was driven primarily through continued strong growth in software sales by the MicroMed Division, resulting also in a higher gross margin this quarter.

System sales for the March quarter were approximately $5.5 million, an increase of 6% compared to the prior quarter and 36% compared to the year ago quarter.

The MicroMed Division is continuing to operate at a substantially more profitable pace compared to last year.� MicroMed�s system sales rose to $4.7 million in the fourth quarter. This is a 77% increase compared to the prior year quarter.� Operating income of the MicroMed Division totaled $1,094,000, an increase of 166% compared to the prior year operating income of $412,000.

The QSI Division reported revenue of $4.4 million, an increase of 8% from the prior quarter, but a decrease of� 7% compared to the prior year quarter. The QSI Division has been able to increase its contribution to profits by controlling and reducing expenses. Operating income for the fourth quarter in the QSI Division was at $1,003,000, an increase of 32% for both prior quarter and the year ago quarter.

Gross profit margins in the March quarter came in at 58.5% compared to 56.8% in the prior quarter.� Now as I�ve stated in the past, our gross profit margins are significantly influenced by the level of hardware revenue included in our system sales and as a result, may fluctuate from quarter to quarter.� I don�t want� to create expectations that the gross profit margins in this quarter represent a trend.� We expect to continue to operate within our normal band, which is between 54% and 56%.

As a percentage of revenue, SG&A expense declined slightly in the quarter to 33.0% compared to 33.4% in the prior quarter.�While we reduced the SG&A expenses in the QSI Division, we incurred an increase in SG&A expenses in the MicroMed Division with the end result being relatively flat overall.

Now I�m going to change gears here and talk about a couple of key items on our balance sheet.� As Lou has already mentioned, we�re very proud of our increase in our cash position.� During the quarter, we generated approximately $3.2 million in cash from operations and invested approximately $350,000 in capitalized software and equipment.

As Lou has already mentioned, the emphasis our company has placed on collections has yielded results.� We�re happy to report our DSOs outstanding improved during the quarter, dropping from 141 days last quarter to 114 days in the March quarter.�We intend to continue to emphasize on improving in this area.

An update on the company�s stock buyback program - during the March quarter, we purchased 3500 shares of our stock at approximately $28,000.� I want to thank you all for being on the call and your interest in our company.

I�m going to now turn things over to Greg Flynn, our Executive Vice President and General Manager of our QSI Dental Division to provide you with an update.

Greg Flynn: Thank you, Paul.� Good day at everyone on the call. As mentioned, QSI revenues for the quarter were slightly more than $4.4 million.� While this revenue performance is less than we would have liked to have seen, it does represent an approximate 8% growth over the prior Q3 2001 quarter.� And also was obtained during a time period when the dental consolidators, a primary QSI target market, remained challenged from a growth perspective.

The quarter once again saw growth in our EDI businesses with� $1.418 million in revenues, up approximately 5% over Q3 2001 and approximately 30% versus Q4 of 2000.

During the quarter, we initiated direct deposit, a lock box and automated patient remittance posting service at our first two live clients. Initial reaction to the service has been extremely positive. We also began to expand the deployment of our patient eligibility services.

In the current quarter, we�re looking to further expand the number of payers participating in our EDI eligibility offering as well as to begin development of this software for our Medical Legacy clients and potentially then in the future, to offer a similar service for our MicroMed clients.� We have also installed our first client user of electronic attachments with training to be conducted with this client in the coming weeks.

Another highlight of the quarter was the expansion of CPS deployment at two of our existing clients.� As Lou said, while too early to signify a trend, we are seeing at this time, an increase interest in CPS.� Additionally, we have begun to experiment with different packaging of the products, for example, software-only offerings.

The quarter also saw successfully beta-test new reporting software for our dental clients that�s part of our Sequoia project.� This product, which we call the DataMiner, will be offered to our full dental client base.� In addition, a sophisticated reporting package utilizing a third-party metrics tool is anticipated to be available for beta offering in the coming quarters.� Also, we are scheduled to develop and offer similar tools to our medical legacy clients.

As I have done on recent calls, I would now like to comment briefly on the progress of our expense initiatives at the QSI Division. Once again, we saw a decrease in our expenses.� Expenses for the quarter were $2.186 million versus $2.356 million in the prior quarter and $2.864 million in Q4 of 2000.

We are proud that we have been able to aggressively address our expense side.� We�re also ambitiously looking to introduce new products to our EDI suite, to our existing practice management clients and to those new clients on the horizon.

At this time, I would like to turn the call over to Pat Cline, President of our MicroMed Division and again Pat, congratulations on another great quarter.

Pat Cline: Thanks, Greg.� Hi, everyone.� I�m very proud of MicroMed�s performance during the last quarter and actually during the year. We set records each and every quarter; we set records for the year, growing revenue over 30% and profit over 50% in the MicroMed Division.

The March quarter we executed 20 new contracts; that was also a record. One of the contracts was with Hoag Hospital in Newport Beach, California.� I mention that because Hoag is a QSI customer and that deal was referred to us by QSI.

We also received another order from the Federal Government and we closed a number of deals within ophthalmology practices; Lou mentioned our relationship with Zeiss Humphrey.� We�re excited about the relationship and the opportunity to work with Zeiss.� We think it�s going to help us continue our success selling into ophthalmology practices.� At this point, we have, what I�d refer to as the who�s who of top ophthalmology practices in the country on our system.

Lou also mentioned the TEPR awards.� The MicroMed Division entered just two categories on the EMR side, which we felt were the most important categories and frankly, we were proud that we made the finals in both categories and obviously even more proud when we won first honors in both EMR categories that we entered.

We�ve recently grown the sales force as Lou mentioned.� We�ve grown it by 30%, including one regional sales manager and two new sales reps. And as you know, or most of you know probably, it does take a number of months to get new sales people up-to-speed although we�re encouraged that one of the new sales reps has already signed a contract in the current quarter.

We completed the NextGen EPM or Enterprise Practice Management Version 2.6 and the EMR Version 3.6 and we have other product releases scheduled for this fall.� Also on the product, we�re making good progress on the NextGen PDA product.

We were happy with the reception that we received at HIMSS and at TEPR on the PDA product.� That�s a product that, as you may remember, will help physicians when they�re out at the hospital, their home, or nursing home with medical records, prescriptions, orders, appointments, charge capture, those sorts of things.

And our pipeline stands at about $19 million.� That�s down a little bit but it�s - we�re encouraged by the number of leads that we got at HIMSS and we got at TEPR and we think we�re going to be filling that out nicely.

And before I close and go to questions, because a lot of our employees and managers listen to this call or dial in to replays of this call, I�d like to tell MicroMed�s employees and managers who continue to work so hard to make the company successful, thank you very much and I really appreciate it.� Back to you, Lou.

Louis Silverman: Great.� Operator, we�re ready for questions.

Operator: If you would like to ask a question at this time, press the number one on your telephone keypad.

Your first question comes from Mike Crawford.

Mike Crawford: Hi, guys.� Good morning.� A couple of product-related questions; one on the Clinical Product Suite.� I think Greg mentioned two clients; if you can�t name them specifically, can you talk about what kind of practices or companies these are that are purchasing the product?

Greg Flynn: One of the large multi-location groups on the East Coast don�t have their clearance to specifically discuss numbers but they�re employing all aspects of the product from client education to x-rays, etc., etc., the full breadth of the product.� Another is a smaller group in Texas.

Mike Crawford: Okay.�Thanks, Greg.� And then Pat, on the PDA, I know the pre-beta versions are working nice and you�re talking about progress.� When do you think we�re going to get a beta version on actual, you know, full-fledged product?

Greg Flynn: We�re going to go to beta next month.� We�re hoping earlier than later.� And while we have pretty good visibility on when we put the thing out into the field, when we go to general release is going to depend on how the thing does in its initial wave and the comments that come back with respect to usability and features and how to sort of evolve it to its Version 2.� And as well as if we find any bugs or kinks in the thing will really dictate the actual general release date.

Mike Crawford: Okay.�And then - now this one, I�m not sure if it�s for Paul or Lou, but deferred revenues were down slightly.�Is that a trend or is there any significance to that?

Paul Holt: I wouldn�t put a whole lot of significance to that really. What that says is that as a result of adding a couple of implementation people, we�ve done a little bit better job of working through some of the deferred service hours that we had on the books.

Mike Crawford: Okay.�So it�s not going to have much of a relation to maintenance revenue projections going forward?

Paul Holt: No.� I wouldn�t imply that at all.

Mike Crawford: Okay.�And then I guess the final question I�m going to end now is for Lou, you know, what�s your outlook for next year?� I mean we�re sitting here in the first quarter of �02. Are you looking for any general trends in terms of growth or expectations?

Louis Silverman: Mike, generally we are feeling very good about the feedback we�ve gotten from our products on the MicroMed side, the TEPR awards, the feedback we�ve gotten from the different conventions that we�ve attended,� on our NextGen PDA product, our affiliation with Zeiss Humphrey, our pipeline.� All of those trends are looking very positive on the MicroMed side.

On the QSI side, we continue to be impacted by the difficulties that the general consolidator segment is facing.� We are working through those, however, by emphasizing new product developments in our EDI product area as well as continuing to work aggressively on reformulating the CPS product and seeing where that will take us.

Overall, our outlook for the future is very positive.� We�re feeling, again, increasingly good about the products that we have, the business fundamentals that we�re seeing as a company.� And again, it�s a very positive environment that we have company-wide—a very positive feeling and outlook on the future that we have company-wide.

Mike Crawford: I mean what - so would you be happy to see growth in double-digits next year?� Or would you just be happy to see growth equal - I mean revenues come in at the $40 million that you did this past year?

Louis Silverman: I think we would all be very disappointed if we did not experience revenue growth and I think double-digits certainly is a good target.� I�m short of giving guidance on what exact percentage I�d like to see in the future or what I predict in the future.

But certainly, given that we had 10% growth overall as a company year over year and did that with continued strength in our MicroMed Division and with some challenges in our QSI Division suggests to me that double-digit growth on into the future is certainly something that we would expect to see.

Mike Crawford: Okay.�Thank you.

Louis Silverman: Thanks, Mike.

Operator: Your next question comes from Neal Bradsher.

Neal Bradsher: Yeah.�Congratulations on the quarter, guys.

Unknown: Thanks, Neal.

Neal Bradsher: Good numbers - before I ask my questions I just want to mention that I�m calling in on a payphone from my lunch break during jury duty.� So I haven�t heard everything you�ve said and I may get interrupted at any time.

My first question is really following-up on Crawford�s question regarding guidance.� I take it that the company is still under restrictions from the Board with respect to guidance.� And I�m curious as to whether there is any indication when that may end?

Louis Silverman: I think we�ve decided as a company that we will not be giving out specific guidance for the foreseeable future. I can�t tell you that it�s on the docket for reconsideration at any specific point into the future.� We�re continuing to give very general guidance in terms of our sales pipelines.� You can see our deferred revenue numbers.� Many of the rest of our numbers continue to track in a fairly narrow and predictable band.

But yes, you�re right, we are not at a place where we have decided that we�re� going to be beginning a process of giving out specific guidance at this point in time.

Neal Bradsher: Okay.�That�s at this point and no indication as to when that might start or if it will start?

Louis Silverman: I don�t - that is correct.� And I don�t want to give the impression that that�s likely to change in the foreseeable future.

Neal Bradsher: Okay.�Has your visibility, Lou, improved to a point where you feel you could provide guidance if you were able to that would be as accurate as the average of other companies that provide guidance?�Or is it still the case that the nature of your business, the lumpiness and so forth, is such that it would be very difficult to provide accurate guidance anyway?

Louis Silverman: That�s the challenge, Neal, is that we continue to be at a place where one deal here or there per quarter makes a very significant difference in our results which is also the case even for a rolling 12-month period.� A couple of deals here or there do make a very large difference for us.

We continue to work extremely hard to close as many deals as we can each quarter.� But feel that and experience that our ability to predict with extreme precision, which deals come in when is limited. And so it�s really, in my opinion, largely a function of size that we are very dependent on each incremental deal to impact our numbers one way or another.� That�s our challenge.

Neal Bradsher: Okay.�And then you mentioned things like pipeline and deferred revenue and picking up on that, you kind of mentioned that pipeline was down a little bit.� In an earlier question, you responded on the issue of deferred revenues being down a little bit.� I take it from that then that - well, you�re obviously limited in guidance - comments that, you know, seasonality does still play a significant role and we should keep that in mind.

Louis Silverman: I think that we have - on seasonality, we were - we�ve been talking about this as a management team.� And we have I�d say some intersecting trend lines.� We have a lot of very good momentum coming from our showings at TEPR and HIMSS, a lot of very good qualified leads that we�re working through there to get them into the pipeline.

It is true that historically the June quarter has been relatively softer for the company.� Where those trend lines intersect and whether - and what they mean we�ll be able to look back and tell you.� But it�s very hard to predict right now.� We feel like we have some countermanding trends that make it very difficult to have a sense of exactly where we�re going to end up in the quarter.

Neal Bradsher: Okay.�Thank you.� Let me just ask a couple of other questions and then I�ll jump off.� One is your DSO came down a very large amount sequentially; I think that was from 141 to 114. And that�s despite the rise in revenues, which mathematically makes that difficult.� Can you just talk about what you�ve been doing on the collection side and whether there was anything sort of one-time that caused that sharp a decline?

Louis Silverman: Let me take your questions in reverse order.� In terms of any one-timers, I think it�s fair to say that the way collection came in in the March quarter and relatedly in the December quarter, we have some efforts that we initiated during the December quarter that didn�t quite come in in the December quarter.� And thereby, artificially inflating our DSO number for the December quarter.� And in some ways, inflating the amount of progress we made in the March quarter.

Overall, we are where we are; we�ve made tremendous progress.� I think that we made more progress in the December quarter than we showed and then made the rest of the progress to get us down to 114 in the March quarter, if that helps at all.� So that�s - if there is a one-timer, it�s sort of a timing issue on some payments that came in early in the March quarter.

In terms of on a going-forward basis what we are doing to continue to keep our diligence and attention on the AR, we have expanded our collection staff modestly.� We have put some better management processes in place.� And we are just doing the blocking and tackling that is required to collect money.� It�s as simple as that.� It�s easy to say; perhaps a little less easy to do but it is basic blocking and tackling.

Neal Bradsher: Have you needed to change terms or anything like that or was it just purely making sure you make the calls?

Louis Silverman: I think that we have increased the visibility of our AR and our AR efforts company-wide.� So I think there�s a lot of attention being paid to - on the sales side - to making sure that the terms that we agreed to are appropriate; the operations staff to make sure that we are delivering and implementing on a timely basis and the collection staff being diligent in following-up on any obligations that our customers have to us.

Neal Bradsher: Do you have a target zone for DSO and a rough time period to achieve that?

Louis Silverman: We have an informal target zone that�s not way far off of where we are right now.� I think that if we�re in - just looking at some of our peers and their ranges go all over the place and looking at what the market looks like, I think somewhere in the 110-day range is probably a reasonable near-term target.

As Paul referenced in his comments, I think this number is going to bounce around a little bit; that is to say our DSO numbers are going to bounce around a little bit.� So I think that we�re shooting for 110 at least an interim next goal, whether we get there next quarter or the quarter after that is - time will tell.

Neal Bradsher: Okay.�Thank you for letting me ask so many questions. Again, I�m on a payphone and jury duty.� Let me just ask one more - what was the highest price at which you bought back stock at any point during the buyback?

Paul Holt: Well, we bought some shares early this quarter and about the - let me see - one minute, I want to double check before I give it out to you.

Neal Bradsher: When you say early in this quarter, do you mean early in the March quarter or early in the current quarter?

Paul Holt: Early in the March quarter.

Louis Silverman: Early in March quarter.� Paul�s just going through his schedule now.

Neal Bradsher: It sounds like it�s around eight bucks.

Paul Holt: Yeah.� That�s correct.

Neal Bradsher: So somewhere in the eight range?

Paul Holt: Uh-huh.

Neal Bradsher: And that�s the highest you�ve done.

Paul Holt: Yeah.

Neal Bradsher: Okay.�Thank you.

Louis Silverman: Thanks, Neal.

Neal Bradsher: Congratulations on the quarter.

Louis Silverman: Thank you.

Operator: Your next question comes from Tom Kickus.

Tom Kickus: Hi.� Congratulations on the quarter.� Just a follow-up on sort of a general sort of question, you know, you�ve developed some momentum over the last few quarters that�s very commendable and it�s the most momentum, quite frankly, I have seen in the five years that I�ve been following the company.

But can you discuss a little bit what the corporate strategy is at this point?� I mean the shares have moved up slightly; you�ve not paid more than eight roughly for share buybacks.� Do you want to grow it organically?� Do you hope to do acquisitions?� Can you talk really sort of how you�re approaching the company at this point in time?

Louis Silverman: I would say that the lion�s share of our focus is on organic growth.� And with a little more texture to that, I think that we are becoming fairly effective in that moving resources into the MicroMed Division where there is growth and even within that Division to fund not as much as we�d like to be sure, but to fund what we can afford to support the places where we do have momentum - some momentum building and to be a little more efficient let�s say in the QSI Division that has not experienced the growth that we�d like.

So first - to answer your first question is the lion�s share of our focus is on organic growth.� In terms of acquisitions, our answer is the same as it has been in prior calls which is we continue to be on the dance card for investment bankers that have deals that they are shopping.� It is not by any stretch of the imagination an extremely high priority for the company or for our Board to be acquisitive but certainly we owe it to our shareholders and owe it to ourselves to understand what�s out there.

And if something came up that was particularly appealing, to work collaboratively with our Board to decide whether or not to pursue it and if so, if we were to choose to pursue it, how aggressively?

Tom Kickus: Is it fair to say that at the moment, the share buyback is on hold or is that sort of to be determined on a daily basis almost?

Louis Silverman: As we mentioned on prior calls, the share buyback is controlled entirely at the Board level.� And so it would be difficult for the management of QSI to speculate on the status of the stock buybacks.

Tom Kickus: Can you talk a little bit about the reconfiguring of the clinical dental product and whether in fact it is a viable offering?

Greg Flynn: We are in the process in particular of looking at a different packaging of the product on a software only mode.� And to be very frank with you, we are determining how viable that type of offering will be.� We are encouraged, again, I�m not trying to cite a trend here, by the increased interest we are seeing.

Also something I would add and it�s all - it is early on.� We are looking at some joint marketing of the product within the MicroMed Enterprise clients.

Tom Kickus: You�ve been sort of thinking about this for six months now.� I mean how much longer are you going to sort of evaluate it?

Louis Silverman: We had put a timetable on this to be through our evaluation period in - by the end of June and I�m confident that we will be - we�ll have our decisions made.� And have a direction - a specific direction at that time.� We�re making I think good progress; we�re on track.� And if we promise - or I promise a late June decision date and a strategy date, and again, I�m confident that we will make that date.

Tom Kickus: Can you say - did you generate any sales at all from that product in, you know, your last fiscal year or this past fiscal year?

Greg Flynn: Yes.� And certainly we generated some last quarter.

Tom Kickus: Can you share what they were?

Greg Flynn: I don�t have authorization from the clients that we sold to to discuss actual dollar figures.� It was in the�

Tom Kickus: But can you just give us a rough year figure of total sales?

Greg Flynn: Can I return to that question?�I�m going to have to research that.�I know the quarter; I don�t have the year.

Tom Kickus: That�s fine.� Thank you.

Louis Silverman: Thanks, Tom.

Tom Kickus: Yep.

Operator: Your next question comes from Andrew Shapiro.

Andrew Shapiro: Hi.� A few questions and I�ll back off and rejoin the queue but a lot of stuff we had was asked.�Regarding the DSOs, in the past calls, you had talked about the DSOs by division, in medical versus dental being somewhat different with the Medical Division, usually having longer DSOs.� As the Medical Division is growing much faster right now than Dental, your sales mix is shifting and would increase your DSOs.

Are the improvements behind us?� Can the current level be improved upon?� And when you say your target of 110 with the sales mix shifting, does that basically imply that you have expected additional improvements in there?

Louis Silverman: I believe that over time, we can do better than the 114 we�re at now and even the 110 that I cited.� I continue to feel that 110 is an appropriate near-term goal in the next several quarters.� Given that - if you say, gee, 110 is an appropriate near-term goal and we�re at 114 now, we have made a lot of progress towards getting to that goal obviously.

As Paul referenced and as I referenced, I don�t believe this is going to be a straight-line kind of issue.� And I think that we may have the number - we may very well have the number bounce around a little bit between the quarters.

Andrew Shapiro: Was that a correction assumption though that the DSOs from the medical product area are decently higher than they are on the dental side?

Louis Silverman: That is absolutely the case.� Paul has the exact DSOs by division.� Do you have them, Paul?

Paul Holt: Yes.� Yeah, we�re at 142 days and in for MicroMed and 73 days for the Dental Division.

Andrew Shapiro: So it�s basically double.� I mean it�s a substantial difference.

Paul Holt: But you�re talking about also - I mean there are reasons for it.� You�re talking - MicroMed is selling a lot of new system sales contracts.

Louis Silverman: But your point is that if MicroMed is a growing percentage of our business and it appears that the DSO - well it is the fact that the DSO numbers are higher there.� As MicroMed grows, the percentage of sales, what does that do to your DSO number?� And your question is fair.

I continue to feel like with continued diligence, continued work, our appropriate near-term goal of 110 days; I think we can get there.� I�m not going to promise it for next quarter or frankly even the quarter after that.� But understand that I believe that is a reachable target in the near-term and the next few quarters and we�re going to be working very hard to get there.

Andrew Shapiro: Great.�You gave some cash flow numbers out.�Can you break out what the appreciation cap ex and capitalized software numbers were so we can come up with an EBITDA number here?

Paul Holt: Are you ready, Andy?

Andrew Shapiro: Yeah.

Paul Holt: Okay.� Capitalized software for the quarter—QSI 34,000; MicroMed 208,000.� Fixed asset investments—sales division, 6000, MicroMed, 95,000.� Moving over to the expense side, amortization expense for the Dental Division—122,000. Amortization on the MicroMed side -- 338,000.� Depreciation expense on the Dental Division—64,000, and 140,000 for MicroMed.

Andrew Shapiro: Okay.�So your EBITDA is higher than your EBIT quite a bit.� And for the full year then, you�re doing about what, around 6 million or so EBITDA you did?

Paul Holt: Approximately.

Andrew Shapiro: Okay.� A question for Greg, you talked about some dental cost cuts and where you�ve been.� Are you done on the cost cutting side?� Or to what level do you think you can bring the costs on the dental side down to?

Greg Flynn: I think at this point in time, we�re reasonably done. There are - we continue to look aggressively at that, but I think we�re reasonably done.�We have reconfigured our offices here, which is going to reduce our rent somewhat.� But along the headcount line, I think this past quarter, at least as I anticipate in the near future, pretty much put us there.

Andrew Shapiro: And what was that expense level for that Division then?

Greg Flynn: Our expenses for the fourth quarter were $2.186 million.

Andrew Shapiro: Okay.�And for the first quarter last year, do you have that handy just to know if we still have a few more quarters of year over year growth or I should say year over year improvements?

Greg Flynn: The first quarter of 2001 was $2.735 million.

Andrew Shapiro: So it�s a quarter or two more before anniversarying it all and so there�s some margin improvement to be seen.

Greg Flynn: I would conclude that.

Andrew Shapiro: Okay.� I�ll back off.� I have a few more questions so please come back to us if there�s no one else in the queue.

Operator: There are no further questions.� Mr. Shapiro, you may proceed.

Andrew Shapiro: Thank you.� Last quarter you spoke of a new governmental customer at MicroMed and I think also possibly in a new - or regular semi-large customer.� You spoke of both of those customers having some possibly substantial downstream additional revenue opportunities. Did either of those two customers come back this quarter and buy more product?� Or in what quarter do you feel that your first opportunity for some downstream sales should kick in?

Pat Cline: This is Pat, Andy.� On the government side, it was actually two contracts that we closed and that I had indicated on the last call.� And yes, one of those government customers did place an additional order with us in the March quarter.

And the other large customer I was talking about, yes, we did book some additional revenue from that customer during the March quarter. And we still have a reasonable number of I think of follow-on orders from a couple of our large customers and from our government customers.

Andrew Shapiro: Now do you need approval to get it into these particular government customers?� Is that enabling you to move around and get into additional government (RFP�s)?

Pat Cline: We have some efforts going on in that direction, Andy. I�ve had a couple of meetings with another government entity. Obviously, I�m not in a position to promise additional government entities or business with those entities.� But I�m optimistic.

Andrew Shapiro: And last quarter, you couldn�t give out the names of the large record customers and the new governmental customers. Are you at liberty to now share those with us at all?

Pat Cline: No.� Unfortunately, while I�d like to, same story. We can�t talk.

Andrew Shapiro: Then you have to�

Pat Cline: We don�t have the authorization.� The government entities that we�re dealing with have asked us not to promote the relationships in a public forum and obviously we�re going to honor those requests.

Andrew Shapiro: Right.� You talked about how the sales staff has grown at MicroMed by 30%.� What sales staff number does that put you at now?

Pat Cline: I was talking about just the sales force - the entire sales staff which would include sales - senior sales manager and sales support people and a telesales person would throw these numbers.� But just sales people feed on the street went from 10 to 13.

Andrew Shapiro: Okay.� And I think last quarter you guys had on the dental side it was now up to 6.� Is that number still the same?

Greg Flynn: Yeah.� That�s not including myself and that�s including individuals marketing both our existing clients as well as new clients.

Andrew Shapiro: Okay.� And I know it�s early, it�s only been a few weeks.� But from your existing prospects, the ones that were in the pipeline path, what kind of impact is the TEPR honors enabling on your closure rate or in the process?� Is there anything noticeable?

Pat Cline: Yes.� What�s noticeable isn�t yet the result but more the interest level and some of the comments that we get and anecdotal stuff.� We had a number of people come to our booth which I believe was either the largest or one of the largest booths at TEPR and not only congratulate us but tell us that things like - they were looking at XYZ competitor and the awards - our winning the awards really opened their eyes and they�re going to now take a serious look at us.� Or in one case that I recall, take another look at us.

So we�re not seeing the results as far as the bottom line is concerned. But if the question is, does winning the awards help?� It sure does.

Andrew Shapiro: Only a few more questions here.� Have the number of paying clients on either the NextMD.com and/or the QSINet.com grown in significance?� And what�s your expectations or goals do you have here in the Internet sector and your Internet products?

Pat Cline: On the NextMD side, I would say that the number of customers has not grown substantially.� And as I�ve indicated on prior calls, the near-term revenue generation from transaction-oriented stuff or advertising or those types of things or prescription fees, still not material.

However, I think the NextMD features, which includes secured communication between patients and physicians and appointment requests and confirmations and registrations and bills on-line and those types of things, are all features that help us compete in the marketplace and features that in some cases have helped us to win sales.� And I think that�s the most significant contribution to revenue.

Greg Flynn: On the QSINet practice management side, we�ve not seen a significant increase in the number of clients.� What I would point out, however, that we have seen in increase and feeling it even today in this quarter is in what we call patient connectivity which is use of the Internet for patients to make appointments, to verify their statements, to actually remit payments.

We even have just rolling out live in the next two weeks a very sophisticated e-mailing mechanism by the Internet so that patients can in a secure fashion ask questions of their nurse practitioners through QSI�s port if you will - portal.� And we are seeing an increase in that, a lot of different types of developments currently under way.� And much of that will be a transaction-based type of offering.

Andrew Shapiro: In terms of - what other products on the dental side or what is it that you were doing on the dental side to enable the Dental Division to grow regardless of whether or not the consolidators in a sense re-liquefy and start the growth?� In other words, what are you doing and where do your products stand regarding, I guess, products available to the smaller practice groups, if at all? Are you targeting them or it doesn�t make economic sense at all?

Greg Flynn: Our focus at this moment in time has not been on the smaller end of the niche.� We have certainly focused our existing clients and let me give you some of the developments that we�re looking to roll out in the next couple of quarters there.

As I mentioned, the DataMiner project which is a means to enhance the reporting capabilities of our product.� We also have what we call a business intelligence reporting mechanism, which is the third-party metrics-type of tool that we�re looking to roll out in the next two quarters.

We also have for the longer-term and looking at enhancing the user interface on our products.� So it will have more GUI looking feel and be contemporized.

Intuitively, I do feel though that the patient connectivity, and I can�t give you a precise numbers with it, but I think the patient connectivity that we�re offering out into the marketplace and really getting a feel for and developing for now should enhance our ability to penetrate larger segments of the market.

Our focus again though has not been on the lower end of the market at this time.� We�ve been looking at larger clients and prioritizing existing clients.

Andrew Shapiro: Pat, on the last call you said - you really couldn�t talk about some of the features of the differentiation of your PDA product from others.� You wanted to save that for your announcement or rollout at HIMSS.� Now that that is out there and rolled out at HIMSS, what sets your product apart and makes it superior to and the needs it meets for physicians on this PDA product?

Pat Cline: The most significant competitive edge I think that we have, Andy, at this point is the fact that the solution is far more complete, far more broad-based than what we�re seeing out there.� In other words, you see many, what we call component technologies.

One company has PDA-based prescription generator of - and maybe they have underdevelopment charge capture.� And another vendor has electronic charge capture and is in the process of partnering with somebody to downstream, put prescriptions in their - into the PDA.� And another vendor has appointment synchronization with a couple of practice management systems.

Whereas because we�ve had this PDA product under development for better than two years, we�ve got charge capture, lab orders, prescriptions, full medical records, templates, voice dictation capture, appointment schedules, synchronization, patient problem lists, allergy lists, procedure lists, medication lists - all connected.

And this is another significant advantage over the component technologies to a full-blown comprehensive EMR suite that the practice can have installed within their facility that then links them to many, many external facilities to their practice management systems as well as outside to labs and hospitals and those types of things.

So - they�re really today is a night and day difference between our PDA solution and what we�re seeing out in the market.

Andrew Shapiro: And it sounds like that solution does not require a MicroMed-based EPM.� It is compatible with most other systems?

Pat Cline: Yes.� The PDA product links primarily to the electronic medical record and the EMR product has interfaces to many practice management systems.� However, the NextGen PDA product will play much better with the MicroMed system as you might imagine.� There�s a much tighter level of interfaces and integration between this product and the - than our practice management system.

Andrew Shapiro: Last question, I think it�s more mostly for Lou on the corporate side.� The company is sitting here at $11 a share, which is about a 66 market cap.� You�re sitting on $19 million in cash; you�ve got no debt.� Your enterprise value of revenue ratio here is amongst the lowest in the industry.� In other words, we�re suffering here in the stock price although it�s done great. It is still one of the lowest multiples in the industry.

I�ve heard or have seen, I guess, that the company recently got picked up for coverage from the Red Chip Review so it�s got another analyst in here.� And I think you�re making some form of a presentation in Los Angeles; I don�t think it was this week or next week.

But with respect to that presentation or when is that and where else or what are your additional - we�ll call it investor relations or investor conference items that you already have scheduled or are planning to do?

Louis Silverman: Andy, we will be up in LA, I believe Pasadena actually tomorrow.� We�re talking to investment people.� This is a program put together by the Coffin Group who is our Investor Relations firm.� The Coffin Group continues to be active and I continue to be active as well in getting our story out to potentially interested members of the financial community.

And I�ve mentioned on prior calls that that continues to be an important focus of a portion of my time and the last quarter and the going forward quarters will be no different.� I don�t have any formal additional speaking engagements or conferences that we have signed up for.

But I certainly do have trips scheduled to various large cities in various parts of the country for a variety of business reasons. And when I do go to those cities, we take that opportunity to get the story out to various members of the investment community.

A case in point, when I was at the TEPR conference in Boston, I had the opportunity to meet with a couple of folks in Boston who manage a couple of fairly significant mutual funds.� The meeting went well.� I don�t know what else is going to happen with those meetings.� But that�s a good example of taking advantage of travel to different cities and taking advantage of some of the connections that we have and also that Coffin has established to get the story out.

Andrew Shapiro: So with respect to possible people that may be on this call and geographies that you�re traveling to, your upcoming travel schedules where you may entertain meetings are coming up in what cities?

Louis Silverman: Currently, Coffin is working on setting up an itinerary for me in New York in the early part of June.

Andrew Shapiro: Okay.� Great.� Thank you very much.

Louis Silverman: Thank you, Andy.

Operator: You have a follow-up question from Tom Kickus.

Tom Kickus: Yeah.� I was just curious if you�ve gotten that revenue number on the clinical dental suite?

Greg Flynn: Tom, I actually have our accounting department working on that.� I don�t mean to sound as if I�m not trying to provide you with a number.� It�s a little more complex than you might think because the number of the add-on sales for CPS are actually embedded amongst larger purchase orders and I will get you that number.

Tom Kickus: Okay.� Okay.� No problem.� Thank you.

Operator: At this time, there are no further questions.

Louis Silverman: Well, I would like to thank everybody on the call for joining us.� I�d like to echo and expand past comments on the great work done by the MicroMed employees to include all of the QSI employees as a whole.� It�s been a very good year and a very good quarter.� And we hope to always be able to say that. Thanks again for joining us.

Operator: Thank you for participating in today�s conference.� You may now disconnect.