Transcript of the QSI Conference Call
Moderator: Louis Silverman
July 24, 2001
12:00 pm EST


Operator: Good afternoon.� My name is Lamont and I will be your conference facilitator today.� As this time, I would like to welcome everyone to the Quality Systems First Quarter 2002 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 �1� 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 Lamont.� I�d like to welcome everybody to Quality Systems� First Quarter Fiscal 2002 conference call. Joining me on today�s call are Greg Flynn, Executive Vice President and General Manager of our QSI Division, Paul Holt, our CFO, and Pat Cline, President of our MicroMed Division, which develops and markets our NextGen product line.

Before we begin, call participants should be aware 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, and projected operating results.

Actual results may differ materially from our expectations and projections and you should refer to our SEC forms 10K and 10Q for discussions of the risk factors which could impact our actual performance.

Overall the company posted a strong quarter which included record performance on a number of key metrics.� The quarter�s highlights include record revenues of $10.9 million, which is an increase of 18% over the $9.3 million generated in the prior year.

We had record operating income of $1.7 million—a little over that—which was double the operating income generated same quarter prior year.

Earnings per share at 19 cents was 90% ahead of the Q1 prior year total.

Cash and short-term investments increased to approximately $20.2 million in the quarter, an increase of nearly $1-1/2 million over the prior quarter.

Our DSO performance is also strong as we held onto the gains that we made in the prior quarter.� And at quarter�s end we stood at 114 days for our DSO number.

Our quarterly performance was driven by another record setting quarter at our MicroMed Division at $6.6 million for the quarter. The division was up 30% over the prior year.

Our EDI unit followed suit with revenues of $1.49 million, also up 30% over the prior year.� And in this particular quarter we saw significant gains in the EDI revenue generated on the MicroMed side of our business.

Revenue per employee continued to run very near our historical levels and well above our public competitors for whom such data is available. Our revenue per employee was at $192,000 annualized, using our average headcount for the quarter as we�ve done since we�ve begun giving out that figure.

We did add to our sales, implementation and programming resources during the quarter, particularly in the MicroMed Division, and at quarter�s end our total headcount stood at 235.

Paul Holt will give you a bit more texture on the financial data in a couple of minutes.

Notable non-financial developments occurring in the 60 days since our last call include the fact that NextGen's PDA is progressing nicely, though it will enter beta testing a bit later than we originally anticipated. We now expect that product to enter external beta testing during the month of August.

This has less to do with our PDA product itself and more to do with a strategic decision to sync the PDA product with our next version 3.7 of our medical records software, which is scheduled for beta release in August.

Our QSI CPS product has moved through the reformulation process that we�ve discussed in earlier calls.� And though it does remain far too early to talk about long-term trends, �

we did close a number of new sales in the quarter for this product, continuing the measure of increased interest in the product from the marketplace that we referenced in the last conference call.

In early July the company filed an 8K regarding our change in auditors from Deloitte & Touche to Grant Thornton.� And also during the quarter two of our company�s senior executives on this call, Pat Cline and Paul Holt sold portions of their holdings. Pat�s transaction was significant in terms of his overall equity position in the company.� Paul�s transaction was of a more minor nature.

That concludes my opening remarks.� And at this time I�ll turn things over to Paul Holt for some additional texture on our financial performance.

Paul Holt: Thank you Lou.� Greetings to all those on the call. I�m happy to report our sixth straight quarter with growth in both revenue and earnings.

Sales of software licenses, hardware and supplies hit a record $5.6 million for the quarter, which represents a 1.4% increase compared to the prior quarter and a 27% increase compared to the prior year quarter.

Total recurring revenue was also a record at $5.3 million. This represents a 3% increase compared to the prior quarter and a 9% increase compared to the prior year quarter.

The MicroMed Division reported total revenue, as Lou mentioned, of $6.6 million, which represents a 5% increase compared to the prior quarter and a 30% increase compared to the prior year quarter.

Operating income with the MicroMed Division was $946,000. This is a decrease of 2% from the prior quarter at $1,094,000 and an increase of 13% compared to the prior year quarter of $837,000.

Operating income for the MicroMed Division declined slightly compared to the prior quarter, primarily due to a combination of the decline in gross profit margins due to a higher proportion of hardware revenue combined with an increase in resources allocated to software development and an increase in expenses related to the expansion of our sales and implementation staff during the quarter.

The QSI Division reported revenue of $4.3 million, which represents a decline of 2% compared to the prior quarter, and an increase of 3% compared to the prior year quarter.

The QSI Division has been able to continue to increase its contribution to profits by controlling and reducing operating expenses.

Operating income for the first quarter in the QSI Division was $1,177,000, which represents an increase of 17% from the prior quarter and 138% from the prior year quarter.

Our gross profit margins came in at 56.6% in June quarter. This compares to 58.5% last quarter. Our current quarter margin is at the high end of our normal historical band of between 54% and 56%.

As a percentage of revenue our SG&A expense declined in the quarter to 30.7% compared to 33% in the March quarter.

Our investment income declined by 25% in the June quarter to $206,000 compared with $274,000 in the March quarter.� As you might expect, our investment income was impacted by the decline in short-term interest rates which we�ve seen in the last few months.

I�m going to change gears here and talk about a couple of key items on our balance sheet.�

I�m happy to be able to report that our cash and cash equivalents have increased to $20.2 million as of June 30.� This compared to $18.7 million as of March 31.

During the quarter we generated $1.8 million in cash from operations and invested approximately $400,000 in capitalized software and equipment.

Our Days Sales Outstanding remained constant during the quarter at 114 days despite the fact that we added $600,000 in deferred revenue as a result of current quarter contracts built.

No shares were purchased during the quarter as part of our company stock buyback program.�

And with that I�d like to thank you for being on this call and your interest in our company.� I�d like to turn things over to Greg Flynn to give you an update on the QSI business.

Greg Flynn: Thank you Paul.� Good day to everyone on the call. While it was mentioned the QSI Division revenues were an improvement over corresponding quarter of the prior year, the revenue figures were somewhat softer than we had hoped.

This said, there were a number of positives for the quarter. First, again as mentioned, our EDI business continued to be a significant growth area for the company.

Also, as Lou said, we did see further sales of our CPS product. Two clients added on to their existing CPS configurations, and two existing MicroMed clients purchased CPS for dental portions of their operations.

One such national enterprise is currently beginning implementation of CPS on a pilot basis in one state.

We feel that with its scalability CPS is potentially well suited to such large healthcare enterprises.

QSI also made progress on several technical fronts. This quarter saw several sales of our Dataminer reporting product, one of the first software deliverables from our project Sequoia development efforts discussed on the last call.

Additionally, QSI teamed with one of its large multi-specialty medical groups on the East coast to introduce a suite of innovative features utilized in the QSINet Patient Access software and QSI Practice Management System as their engine.

Among the features introduced is the ability for patients to interact online with clinical staff at the practice regarding health questions and concerns, the ability for patients to register prior to an appointment as well as actually scheduling their own appointment online, and the ability for patients to review bills and make payments via credit card electronically.

We�re very excited about these new features and have, in fact, recently received recognition for our �Innovations in Healthcare� from the Adaptive Business Leaders organization.

Lastly, we are proud that the division�s attention to expense management, and strong client relations were again key for the company, as the QSI Division made a strong contribution to overall profitability.

Now I�d like to turn the call over to Pat Cline, President of our MicroMed Division.

Pat Cline: Thanks Greg, hello everyone.� I�m especially happy about MicroMed�s performance in what has previously been a challenging quarter for us.� During the quarter we executed 28 new contracts, which is a record by far.�

Lou and Paul already reviewed the numbers with you so I�ll just move on.

MicroMed is busy finalizing new product releases that we�re targeting for this fall both on the practice management and on the electronic medical records side.

We�re continuing to make, as Lou mentioned, very good progress with NextGen PDA and we�re also seeing the market for that product heat up. We feel very good about that product in the market. And as Lou mentioned it�s about ready to go into beta testing.

The market for our systems both on the EMR side and practice management side remain strong and continues to grow.

Within the last few weeks we�ve had three competitors announce that they�re sun setting major product lines which are competitive to NextGen. And over the last few months also a couple of competitors on the EMR side have stumbled pretty badly.

So now we think is a good time to act with respect to our marketing campaigns.� We�re developing a new campaign to begin as soon as possible to try to take advantage of some of these new opportunities.

And finally our pipeline has increased to about $22 million at this point. Lou.

Louis Silverman: Thanks Pat.� Operator we�re now ready to take questions.

Operator: At this time, I would like to remind everyone, in order to ask a question please press the number 1 on your telephone keypad.

Your first question comes from Derrick Peterson.

Derrick Peterson: Hello and congratulations on a great quarter.

Louis Silverman: Thanks Derrick.

Derrick Peterson: Quick question, just a product-related question about your PDA.� You mentioned you�re going into beta testing. Isn�t there a huge proliferation on the PDA market from industry to industry? � Policemen are now using them for statutory code, physicians assistants are using for medical records.

What is your marketing strategy for this product number one? � And what is your anticipated impact to your bottom line?

Pat Cline: Well we haven�t done a formal study with respect to the impact to the bottom line.� Our strategy includes selling this as an adjunct or an add-on to both our electronic medical record and our practice management system into our existing customer base. And we think there�s a very good market for it there.

But as well, using this as a lead in to a couple of our other products where we�ll be able eventually to market this with, for example, a �light� version of the EMR product where practices or physicians could take advantage of some of the features on the PDA, like charge capture, lab orders, prescriptions, limited medical records, appointment scheduling, and lists—like problem lists and allergy lists—without implementing the full blown EMR. And then as time goes on, implementing piece-by-piece more of the full-blown functionality both on the EMR side and the practice management side.

We�ve priced the product on both a monthly subscription basis or an upfront license plus maintenance—very similar to the pricing on our other products—and we think that is the best way to go.� And that is to offer either option.� Some customers are more apt to go with a subscription base and some would rather just pay the upfront fee.� So we�re going to, like the others, again offer both.

Derrick Peterson: Great.� Have you announced a partnership with a particular hardware company or do you plan to in the near future?

Pat Cline: We�ve not announced one and I doubt we will. We try not to � we try to adhere to standards with our PDA initiative � we�re using the pocket PC standard and we�re testing the product on three hardware platforms. One is a Casio, one is the Compaq unit and the other is the HP Jornada.

But any of what was formally the Windows CE palm orientation computers, now referred to primarily as pocket PC platforms, seem to work pretty well with our NextGen PDA product.

Derrick Peterson: Great.� Appreciate it guys.� Again, congratulations.

Pat Cline: Thank you.

Operator: Your next question comes from Justin Cable.

Justin Cable: Good morning gentlemen.� Of the $20 million or so net cash that you have on the balance sheet, how do you expect you�d be using that cash?� You know, how much of that is excess that could be used for something I guess stock buyback or acquisition purposes?

Lou Silverman: The answer to your question is that virtually all of it is accessible.� We have the cash invested in a very liquid short-term investment. And so again reachable very quickly, very easily for whatever particular need the company has.

Justin Cable: Okay.� So as far as acquisitions, what kind of companies on the medical side would you be looking at?

Louis Silverman: In terms of acquisitions, we continue to, as I have said on a number of calls, be on the dance card for the bankers who are working on strategic alternatives for many of the companies that are out there pursuing acquisitions. This has not been, and continues not to be, our highest priority.� We�re working very hard to focus on de novo growth or �same store� growth so to speak.

And again, acquisition is not a high priority for us, but we do look at deals that come through in the ordinary course of business.

Justin Cable: Okay so it could be various�

Louis Silverman: Yes.

Justin Cable: �various things.� Okay. Last question. How often do you come across Medscape, Medical Logic and Vitalworks today versus a year ago?

Louis Silverman: Let me move that over to Pat who runs into those guys more often that I do.

Pat Cline: Frankly, we�re not competing with either one of them very much any more.� A lot of prospective customers have told us that they�re concerned about Medscape's long-term viability.

I would say that the EMR market, we think, is a very viable market. It�s a growing market and we�re, we think, very well positioned.

And I think that applies both to Medscape and to Vitalworks. I don�t want to single out any one or any two competitors but more focus on our strengths.

Justin Cable: Okay.� Thank you.

Operator: Your next question comes from Evan Greenberg.

Evan Greenberg: Yes, Evan Greenberg from Raymond James Financial, new to this story.� How are you guys?

Louis Silverman: Doing fine.

Evan Greenberg: Okay.� One of the questions I had pertains to overall operating expenses. I was very impressed to see that SG&A did not increase, but I can�t believe that that�s a phenomenon that will go on forever.

Can you give a little guidance to SG&A and why SG&A was so flat even � not even on a percentage basis but on a real basis?

Louis Silverman: Well in terms of what�s driving the number, we are working very hard to spend judiciously, spend very carefully. And I think that the number that you�re seeing not just in this quarter but in prior quarters are the result of some very hard work in that area.

I think, without giving specific guidance, that we are at a place where I think it�s fair to expect expenses in hard dollars to move up, or SG&A expenses to move up a bit in keeping pace with our growth. I�ve said that we like to lead with revenue to follow with expenses.� And I�ve mentioned even in my early remarks we did make a number of additions over the course of the quarter that we think are well positioned to seed future growth for the company. Examples would be some additions to our sales force, additions to our implementation staff, and certainly not least, additions to our product development staff.

So we are being very careful trying to not spend where we don�t have to, trying to save money and be more efficient where we can. But also working to move up our spending in areas that we feel are good for planting the seeds for future growth.

So again, we�re very pleased with where the number came out in this quarter. We�ve been pleased with the overall trendlines in prior quarters.� And although we may very well see an increase in SG&A expenses in the going-forward quarters, know that those expenses are being managed very carefully. And when we are increasing our spending it is in the areas that we deem very strategic.

Evan Greenberg: Okay.� So you � do you feel these newer products you talked about today, these newer initiatives with the Web-based initiatives and the PDA initiatives, you feel that that�s going to result in � did that result in any revenue this quarter?� Or � and do you feel that it will result in revenue in the next quarter?

Louis Silverman: I think that the way I would look at it is from a overall products offered perspective. I think I am and we are feeling very good about the products we have to offer today and certainly the products we�ve added to our product suite in recent quarters.

It�s my feeling that no one new product, in and of itself, is going to be a quantum leap for us in terms of added revenues or new markets but the totality of our current product offerings, the new releases of those offerings and the new product enhancements and additions that we�re offering leave us, I feel, well positioned down the road.

Pat referenced his pipeline being in a pretty healthy place and we�re looking to be able to continue to say that in the going forward quarters.

Evan Greenberg: Great.� Thanks a lot.

Lou Silverman: Thank you.

Operator: Your next question comes from Andrew Shapiro.

Andrew Shapiro: Hi, Lawndale Capital Management. A few questions if we could and we�ll back off, let others into ask then come back to us please.

Paul, could you tell us what the DSO�s and receivables were like with respect to medical and dental?

Paul Holt: Sure Andy.� We had � we ended up the quarter on the dental side with DSO of 76 days, which was a slight increase compared to last quarter of about 73.

But on the positive side we brought MicroMed down from 143 to 140.

Andrew Shapiro: Okay, so with MicroMed, the medical side of MicroMed being so much higher than your average DSOs and MicroMed growing faster than dental, the question I have for you is, is your goal to maintain DSOs where they are, do you think there�s even more room � I mean I know we all strive for improvement but do you feel there�s more room for improvement with what you�re � you�ve been initiating?� And what is kind of your long-term goal with the higher DSO sales mix growing faster?

Lou Silverman: Consistent with our discussion of this topic on the last call I feel like first of all we�re very pleased with the progress we�ve made over the last three or four quarters.

Andrew Shapiro: It�s been very good yes.

Lou Silverman: Secondly, you�re right. As the MicroMed Division with the higher DSO figures become an increasingly high percentage of our revenue mix, that would tend to put some upward pressure on our DSO calculation.

While we are very happy with the progress we�ve made, I think that our interim target � my interim target is to get us to about 110 days. But I don�t want to give anybody the projection that we�re going to get there next quarter.

But what we�re working toward is an overall company DSO of 110 days which given our market, given our competitors and, et cetera, et cetera, I think is an appropriate near term goal.� My definition of near term is the next two, three, four quarters. We look to hold the progress we�ve made and to make some incremental progress in our overall DSO position.� I don�t see us going much below 110 in the very near term.

Andrew Shapiro: Okay.� Another question is, I think last quarter it was stated on medical 15 people were on the street selling on the medical side and I think six people plus Greg Flynn on the dental side.� Have those numbers changed?� And what are the numbers up to for this quarter?

Louis Silverman: When we talked to you on the last call we had in many ways combined the actions going to and through the March quarter with actions to date.� I think the call was in late May, May 23, 24, something like that.

Andrew Shapiro: Yes it was.

Louis Silverman: And so the bottom line answer is that we have not added materially to those numbers.� I think we � in fact I don�t think we�ve added to those numbers at all since the last call.

Andrew Shapiro: So the current count is 15 and six then?

Louis Silverman: That�s about right.

Andrew Shapiro: Okay.� Dental � I think Pat gave an increased medical � MicroMed pipeline number?� Was a dental pipeline number given out and what is the number?

Pat Cline: Actually I don�t believe I�ve been asked that question the last two calls.� Let me give you some context.� The last call our number would have been approximately $5 million.� It�s currently standing at $5.5 � dental and CPS.

Andrew Shapiro: All right.� On the buyback � I�ll pass.� I have a few more questions for you though so please come back to us.

Operator: Your next question comes from Jim Ragan.

Jim Ragan: Yes, good morning.� I wanted to focus on the pipeline number that you had given, Pat, of $22 million. Could you just kind of review what you define as a pipeline?� Is it deals that you�re working on?� And if so, generally what would be your success rate on closing those transactions?

Pat Cline: The way we define the pipeline—this comes from some sales management techniques that we use—is those deals that we feel, or our sales force feels, are 50% or better likely to close within the next 120 days.

However, I�ll caution you that the number is important on a relative basis but really doesn�t quite turn out that way.� Salespeople sometimes are a little bit more optimistic and sales cycles tend to drag beyond where the customer�s initially tell you.

So I don�t the number of $22 million is as meaningful as the trend. I think the pipeline on the last call was about $19 million. So hopefully that answers your question.

Jim Ragan: Okay, great.� And then just a separate question on the comment that at least three competitors have recently dropped software products or are considering doing so. Maybe just a little bit of a discussion on why � you know, what kind of problems they�re having out there? � Why do you think that�s happening?

Pat Cline: Well, on the EMR side I think the trend that we�ve seen over the last couple of years continues to play out and that is that competitors on the medical records side have severe difficulty with physicians � physician acceptance of the product and getting physicians to use the product.

And I think they�ve also run into difficulties with business models that didn�t pan out.

With our products we spend a lot of extra time and money and effort making sure that the products are not only state of the art with respect to features but also extremely flexible.� And flexibility helps us to combat the physician acceptance issue. Physicians are much more apt to take mental ownership of our systems when they see them customized or tailored to their practice. We don�t customize with the programming code but with a very flexible front-end.

Jim Ragan: Great, thank you.

Operator: Your next question comes from Ken Heller.

Ken Heller: Good morning.� Could you go back and � I missed the numbers regarding the sales force for the two different divisions. Could you just repeat that for me please?

Louis Silverman: We said 15 on the MicroMed side and six on the QSI side.

Ken Heller: Okay.� Now on the MicroMed side, you�ve obviously alluded to this increased pipeline, but you also stated that I think the sales force wasn�t � was basically unchanged from when you updated us last.� Does that seem like you guys are capable of accounting for all this new potential business out there? Or does that have to increase going forward?

Pat Cline: As you might know it takes sometime to get new � salespeople up to speed.� There�s a training issue of � usually there�s a few months of training.� And then each new salesperson needs to build a pipeline.

We think we�re fairly well equipped in the very near term to address the pipeline that we have.� But frankly we�d like to see that pipeline continue to increase.�� We think with this new marketing campaign that I mentioned, we may be able to increase that pipeline. And once we�re able to get a few of these new salespeople fully up to speed, we�ll look to continuing to grow the sales force.

Ken Heller: Does that full figure � is that all quoted or is there is a quota number based out of that 15 and what is that figure?

Pat Cline: We do assign quotas to each one of our sales reps. They differ by sales rep.� And there�s an overall company quota. But it�s not a number that I want to comment on during this call.

Ken Heller: Okay.� And could you give us a point of reference with respect to this pipeline being $22 million. How does that � I don�t recall what you guys characterize that if at all in the last quarter.

Pat Cline: I believe in the last quarter it was at about $19 million.

Ken Heller: Okay.� Another question, maybe better for you Lou. With respect to the cash position, you guys didn�t buy back stock in the current quarter, not out really looking at acquisitions as something that�s a high priority for the company based on what your comments were.� R&D spending year over year, you know, was decent but obviously no meaningful increase there.� SG&A, you�re not really adding tremendously on - sequentially on new people.

So I�m really curious what the thoughts are with respect to the use of that cash and new product development.� It seems like it�s sitting there.� Obviously it�s a great cushion for you guys but it seems like there might be better uses for it.� Could you comment on that?

Louis Silverman: Yes.� Well I think that I and the rest of our management team and the rest of our board are, I think, in favor of making sure that we are using our cash in the smartest possible way.

I can tell you that our board is considering a number of different options, some of which have been brought by management, some by board members themselves, and yet other ideas from people outside the company.

And I would agree with you making sure that we get a good and better return on our cash is an important issue for a company of our size with the amount of cash that we have.

So, we agree and our board is considering a number of different options in that area.� And we�ll certainly l keep you posted on anything that�s reportable in going forward calls.

Ken Heller: Okay, Lou just one more thing.� If you could comment on the change in auditors. Reading the 8K it seems like it�s a non-event because there weren�t any disagreements with the prior auditors. If you could kind of just, you know, maybe alleviate any other concern anyone might have with respect to that or signify that it was truly a non-event.

Louis Silverman: Yes, I would agree that - and it�s a little hard to say this, I hope nobody from Grant Thornton�s on the phone because they worked � both Deloitte and Grant Thornton worked and will work hard on our account.� So, you know, I hesitate to say that it was a non-event because there�s a lot of work to back up a non-event like that.

But at any rate you�re right, there were no disagreements that the company or the board had with Deloitte.� And I can say that, looking back, management certainly got a very good level of service from Deloitte and we certainly are very optimistic that we will maintain that level of service and perhaps even enhance it in our new relationship with Grant Thornton.

So, no negative issues, no problems.� I think your characterization of basically a non-event is a fair one.

Ken Heller: Okay.� And Pat maybe if you could � coming back to just briefly again I know you obviously - based on the pipeline business is looking good but can you maybe give us a little more color regarding just a general industry and maybe spending trends and you know, kind of resistance you�re getting at product.� Has that changed at all, pricing, things of that nature?

Pat Cline: Well I think, as we�ve seen the last couple of quarters, the market for both the medical records product and the practice management product remain strong.� As I said they�re growing. I think there are a number of factors that contribute to that. The HIPAA regulations and all the talk and press that that�s receiving being one of them.

At the same time, there continues to be a lot of pressure from payers and from employer organizations on health organizations improving quality of care.

At the same time, you know, on the medical record side in particular, there are more and more success stories where people are starting to realize that practices and networks of practices can really see a return on their investment both from a financial perspective and from a quality perspective.

Of the few companies that I mentioned that have decided to sunset products, have been both in the practice management side and the medical records side. And I think that, as I mentioned, opens up some opportunities for us.

We continue to see interest in the Internet and the Internet-based products and tools.� Not so much anything with the dot com anymore but interest in how the Internet can be used to better connect organizations not just with respect to communications connection, but improve the level of communications between practices in a community for example in sending records back and forth and those kinds of things.

We do see, as I mentioned, a heck of an interest in the PDA and in the wireless market.� And we�re going to keep doing what we�re doing.� We�re going to stay customer-focused and stay ahead of the technology curves. We�re going to continue to leverage our customer base.� And as I mentioned I think we�re very well positioned.

Ken Heller: Great, thank you very much gentlemen.

Operator: Your next question comes from Lance Stringham.

Lance Stringham: Hi gentlemen.� Congratulations on the quarter.

Pat Cline: Thank you.

Louis Silverman: Thanks Lance.

Lance Stringham: The first question, just some - a housekeeping item here.� Your tax provision the last two quarters has come in at about 38-1/2% of pre-tax income. Can you give us some guidance on what that will look like over the next three quarters?

Paul Holt: Lance, I would expect to see that stay somewhat consistent over the next few quarters.

Lance Stringham: Near 38-1/2%?

Paul Holt: Yes, in that range.

Lance Stringham: Okay, all right. And then can you give us some color on the growth drivers behind EDI and if your expectations for that segment are still for 30% growth year over year.

Louis Silverman: Our growth drivers are two fold on the EDI segment. One is very simply more aggressive selling.� We have � as mentioned had a better quarter this quarter in getting some EDI penetration in our MicroMed Division which helped us a lot with our quarter over quarter and year over year growth.

And the second primary growth driver is in new product introductions and Greg referenced one or two of those in his comments. And our plan is to be fairly aggressive on the EDI side in rolling out new products basically quarterly.

Now, I say that, these are not going to be revolutionary new whiz-bang products changing the pace of the EDI marketplace, but simply they are enhancements and additions to our current product offering.

I feel like those two drivers are the key drivers that will impact our business.� And you�re exactly right, our internal goals on the EDI side are to continue to see that segment grow at or near the 30% year over year rate.

Lance Stringham: Okay.� You mentioned there have been some recent insider sales, do you have a number � a current number on insider ownership?

Louis Silverman: Paul�s getting the exact number.

Lance Stringham: I think in your most recent proxy it was 47%.

Paul Holt: Lance I wouldn�t � that wouldn�t change.

Lance Stringham: Okay.

Paul Holt: You know, since we�ve put out that proxy.

Lance Stringham: Okay. And I know there have already been some questions on the NextGen PDA product.� Assuming that beta testing runs smoothly, do you have an expectation for when the full launch would be?

Pat Cline: The full launch obviously depends on what�s uncovered during the beta testing both with respect to usability of features and also bugs. So, that�s difficult to pinpoint.

I can tell you that we do have our annual users meeting which is a great time to launch something like this in October.

Lance Stringham: Okay.� All right.� That�s all I have.

Louis Silverman: Thank you Lance.

Lance Stringham: Thanks.

Operator: Your next question comes from Martin Roth.

Martin Roth: Good afternoon, hi.� Nice numbers.� We�re pretty new in the company so we�re delighted shareholders.� Let me ask you a couple of things.� One, the QSI revenues were, as you indicated, a little softer than expected.� Can you break that down as to whether that was in Windows or Unix?� And why do think that happened, the softness?

Greg Flynn: Principally the product was still marketed as a Unix-based product.� We had a slightly higher mix, - I don�t have the exact number - of software-only sales so that impacts our revenue. In particular on the CPS we had software-only sales than we had in the past.

The CPS product is Windows-based.� We had hoped to make a couple of additional sales there and a couple of additional sales either in upgrades or a new system sale that would have made up for the slight softness.

Louis Silverman: I would add to that that if you�re a newcomer to the calls and the company, we have mentioned in the last several quarters the softness in our key selling segment on the dental side which is the large dental consolidators.

And we have tried not to harp on that unduly on the recent calls but the fact is that it�s still impacting the fortunes of our dental division.

Our software is particularly well suited to the companies that are out rolling up dental practices.� And if those companies are not out buying new practices, it does make for a bit of a challenge for us in growing our top line to make new revenue progress. And unfortunately that sector has not gotten unlocked as quickly as we would have hoped.

Martin Roth: Right. So it has nothing with the change over from Unix to Windows.� That�s not really an issue here.

Greg Flynn: No, I don�t feel that it is.

Martin Roth: Okay.� Could you also explain � you had indicated that your gross margins are at the high end of where you�ve been. You seem to give the impression that you think they will continue around these levels. Is there a way that you will be able to improve upon those in the near future?� Or can you maintain those? Can you give us a little bit of guidance as to what the future trend might look like?

Louis Silverman: It�s really hard to give specific guidance.� And, in fact, we have refrained from giving specific guidance fairly consistently on these calls, other than to say that if you look back over the last several quarters we have been in a fairly narrow band of 54% to 56% on the gross margin line.

And whether we�re at the high end or low end of that figure and in fact whether we are even within that band, is dictated by the relative mix of hardware and software in the totality of our new business sales and also the mix of new sales to recurring revenues.

And all of those are a little hard to predict with great precision on a going forward basis.� I guess I�d be comfortable saying that it�s our expectation that we�ll continue to live in the band that we�ve been living in.

Martin Roth: Is it fair to say that with the price of computers coming down and if there is a successful rollout of PDAs, that the mix will change more towards software and hence involve a higher gross margin and perhaps a higher SG&A?

Louis Silverman: I would say it this way. It�s not illogical to paint that as a story.� But I would hesitate to say that that�s our projection going forward because we are still small enough as a company where the particular characteristics of one or two or three deals in a quarter make a heck of a lot of difference in the numbers that we report.

Martin Roth: One final question if I may.� With regarding the MicroMed, there are, as I understand it, different modules in effect that the clients can buy.� Is there a great ability on your part to sell them the entire suite?

Pat Cline: Yes there is.� We have pricing models in place that have been very successful in convincing somebody that comes in perhaps looking at the medical record product to go ahead and change out their practice management system, or somebody that comes in looking at the practice management system to go ahead and maybe implement EMR a little sooner than they would have otherwise.

And then we have a number of other modules, the Internet connectivity modules, our managed care server and soon to be PDA that will then be add on sales.

So, yes, a resounding yes.

Martin Roth: Is there any way you can cite a success rate or give us some kind of handle as to what that trend has been where someone purchases three of the modules or the entire suite?� Or can you elaborate on how that trend is � has been performing.

Pat Cline: I can�t, off the top of my head, give you those numbers. I can tell you that it has tended toward about half of the contracts that we are signing these days are contracts for both the practice management and the medical record component.

I�m not sure, frankly, whether that�s something that�s going to continue or whether we can boost that a little bit and get to a higher percentage. I�d like to see that happen. I think the pricing models help. And I think as these opportunities that I discussed earlier on this call present themselves, that number has a potential to go up.

Martin Roth: Okay, thank you.

Operator: Your next question comes from Andrew Shapiro.

Andrew Shapiro: Hi a few follow-ups if I could. On the 10-K it reported the buyback formally expired in June.� Wanted if know if authorization has been renewed on the buyback yet or not?

Louis Silverman: Andrew this is Lou. That was taken up at the last board meeting. And to be honest with you I�m not 100% sure exactly how that resolved itself.� I do know it was an agenda item at the last board meeting.

Andrew Shapiro: Okay.� If, in fact, authorization has been renewed, I mean, you would look into that and then announce that and get that out there.

Pat, you had 28 new contracts you say you signed up this quarter. Last quarter you had about 20 new contracts; the quarter before that about 15.

The new contracts numbers have been rising.� Is the size of the contract that you�re signing up remaining the same?� Have they been increasing or decreasing in size?

Pat Cline: Last quarter, Andy, they did decrease in size. I don�t see that as a trend but just something that happened in the quarter.� We had a couple of pretty sizable deals the last couple of quarters in the pipeline.� But in this past quarter we didn�t have any of the elephants to hunt.� So we needed to shoot at some of the smaller game—important game nonetheless.

I think our sales force did a great job in being able to pull in that kind of record going from 20 to 28 is tremendous.

But, based on, as you can see, the growth in revenue, the average number per sale did shrink.� We do have a couple of nice size deals in our pipeline and I�ve got my fingers crossed for the current quarter.

Andrew Shapiro: Now when you say 28 new contracts, these are 28 new customers or 28 new sales some of which went to existing customers?

Pat Cline: These are 28 new customers.� I think the total number of deals that we executed was closer to the 40 contract range. But these are generally new customer deals.

Andrew Shapiro: Okay.� And so what I�m trying to get a feel for is with all these new customers that have been added, 15, 20 and 28, what is generally the time period for which, shall we say, follow on deals start to kick in, similar to the, we�ll call it the razor blade kind of thing that you see with the maintenance side of the equation?� Or would there be some momentum kicking in on the revenue side from the buildup of a lot of these new customers?

Pat Cline: That�s a good question Andy.� On the maintenance side, maintenance payments generally commence around 120 days from the execution of the agreement depending on exactly when we can get the systems installed.� Some of the contracts are negotiated with a little bit different terms but that�s a rule of thumb that you can follow.

With respect to the downstream selling of other modules, that tends to be anywhere from nine months to 18 months after the original contract, once the customer has a chance to implement the first purchase that they made and start to look elsewhere into other areas of their organizations.

Andrew Shapiro: Okay.� Just a question on follow on, you guys announced a few new relationships the last quarter or two.� The most recent one I think was Zeis Humphrey in the ophthalmology area. What is the time period from which those kind of alliance sell through arrangements gain traction or have � has Zeis Humphrey already gained traction for you?

Pat Cline: Zeis Humphrey has already gained traction. I�d say off the top of my head roughly a third of the deals that we did last quarter happen to be in ophthalmology. Not all of those came from Zeis Humphrey but from a lot of marketing that we�ve been doing as well and attendance at some specific trade shows. But that relationship has started to pan out and we�re also optimistic about it accelerating.

Andrew Shapiro: Okay.� With all the cash that�s on the balance sheet, acquisitions for a variety of reasons not being the number one priority, you folks took a � seem to be some very notable trade show honors with your EMR product being first of show at TEPR.

Are you increasing your resource allocation towards either vertical marketing or overall marketing of your achievements in the trades and such?

Pat Cline: The marketing campaign that I briefly mentioned a little while ago I think will address that as you see that come out Andy.

Andrew Shapiro: Yes, and is it premature or can you share what trades and where we should be looking for such advertising?

Pat Cline: I would say it�s a little bit premature. Typically we use Health Data Management magazine, Healthcare Informatics magazine, sometimes Modern Physician, sometimes a publication called Advance for Healthcare Executives.�

We also do targeted mailings and, as you know, trade shows and those kinds of things.

But perhaps we can see if we can get you a list of those. If anybody would like to request a list of the publications that we pay attention to and the ones that we advertise in perhaps you could send a request to Paul Holt and we�ll provide a list for you.

Andrew Shapiro: Right.� Or alternatively on your investor relations page on your Web site you could link to whatever�s Web linked or provide that info.

A question I think is for Paul.� Your deferred service revenue number in a sense is somewhat of a backlog. But help me out here with the accounting. The company�s consolidated financials have a sales and systems upgrades and supplies about 50%, 51% this quarter and about 49% for maintenance and other services which is generally the line item that people view as recurring.

The deferred service revenue, is this all revenue that will come through on the recurring line item or is some of that that would go on the other line item which was the system sales line item?

Paul Holt: Yes, Andy, on that note, approximately a little more than half of that deferred item is services and consequently the balance is deferred maintenance.

Maintenance is going to go on our bottom line maintenance and other. And services are part of systems sales or implementation and trading type services.

Andrew Shapiro: So some of the deferred service revenue line item is going to go into your line item that we otherwise would say is unpredictable and is usually determined the last week of the quarter.

Paul Holt: Yes.

Andrew Shapiro: Okay.� And then in terms of the deferred service revenue amount which is around $6.2 million?

Paul Holt: Yes.

Andrew Shapiro: If you had to say, like, the weighted time period for the recognition of that amount, what would it be? � Is it six months? � Is it a full year?� What � where would the bulk of that amount be recognized?

Paul Holt: That�s a little bit more tricky to really get at because you have � it really can vary.� So I�d be a little bit hesitant to try to pick out a certain number of quarters that that�s going to get pulled into.

Andrew Shapiro: But would you be comfortable in saying is it 90% of this would get recognized in a year?

Paul Holt: I wouldn�t want to try to pinpoint even a percentage. It�s safe to say that a portion of that will be seen over the next several quarters, there�s no question about that. But I want to be careful about trying to quote � give out data that�

Andrew Shapiro: Fair enough.� Okay.� The Red Chip Review and B. Riley & Co. are the only analysts that we know of that are currently covering the company.� The company, especially with all its cash, is sitting here at one of the lowest, if not the lowest, multiples in the HCIT industry on a price to sales basis since most of your competitors don�t have earnings or cash - positive cash flow.

What are your near term plans or activities to possibly increase I guess investor awareness of the company?� Any particular shows, presentations or meetings planned?

Louis Silverman: Andy this is Lou. We are basically continuing the same program that we�ve had in place for the last several quarters, which is a reasonable amount of new investor outreach and that is something that I do. Not I alone necessarily but certainly the bulk of that does fall to me.

As talked about in the prior calls, I do get to New York on average about one time a quarter.� And then with that I also hold a number of meetings for people that are coming through Orange County and have been contacted by our investor relations group and have an interest in talking to us directly and also participate in a number of events in the more proximate geographic area.

So our goal is to continue to get the story out to interested and appropriate members of the investing community.� I think that just even on this call we�ve seen and heard from some new people which is evidence that the story is getting out there. And we continue to work to increase the company�s following and the knowledge base that�s out there of the company because we are doing some good things. We are proud of it and want people to know about it.

Andrew Shapiro: Okay last question. I realize that the � you know, your cash is well more than half of the company�s total liquidity. Positive cash flow now and in the foreseeable future, so the cash is only going to build.� And I appreciate the use of the cash is a decision and allocation activity of the board of directors to which, you know, you�re not currently a member of.

The query for you is, because you know better than we would know or others, from your perch in the management role, what are the various options you see and might recommend the board consider for use of the cash above and beyond what�s obviously discussed on this call so far which has been a buyback and also discussed in the call some form of an acquisition? � What other means do you see that could be used here or to enhance shareholder value?

Louis Silverman: I guess the way I�d like to answer your question Andy is to say that the two you�ve cited are the two most obvious ones.� And I don�t feel like it�s really appropriate for me to speculate on what the board could or should be thinking about.

Andrew Shapiro: No, I understand that. I�m not asking what the board�s thinking, I�m asking what items do you � can you share from your wisdom point of view here?� What items come to mind that would be in addition to those activities that you might recommend to the board.

Louis Silverman: Yes.� I�d like to just repeat my other answer which is you�ve cited the two most obvious ones, and I think that my discussions with the board or anybody�s discussions with the board on that topic are � I don�t really feel are appropriate for this call.

Andrew Shapiro: Okay.� I mean we�re just trying to understand what other things the company could do with this and get a handle for the strategic goals and plans for the management and the company.

Louis Silverman: Well again, I would say the management continues to put ideas forward to the board.� We�re not the sole source of ideas.� We�ve contributed some ideas.� I think the board members themselves certainly have sufficient experience that they can contribute to that effort as well and I know that people from outside the company have put their ideas forward to the board. And I can say that the board continues to look at those.

Andrew Shapiro: Okay, thank you.

Operator: Your next question comes from Evan Greenberg.

Evan Greenberg: Yes. I�m sorry I have a follow-up. The HIPAA regulations, does that � did the new regulations that the government set up, the HIPAA Act, does that impact any of your sales and earning forecast?� Is that a growth driver for you?

Pat Cline: We think it is one of the drivers that will help move customers to our technology and technology like ours.� I think it�s helping quite a bit.

Jim Dublin: Okay, I just had a � this is Jim Dublin from (Unintelligible) and Company.� I just had a follow-on � I�m in Evan�s office. Eclipsys and Cerner have both come out recently with, you know, some spectacular numbers, the street seemed to like them anyway. All pointing to HIPAA and the growth in that.

Basically like a - more of like a forced conversion.� I mean, it�s kind of the same question but I mean does that really impact your side of the market to the substantial quantities these guys are talking?

Pat Cline: Frankly I�m not sure I�ve seen those releases. I�ve seen a number of releases put out by many, many competitors. But I do think that HIPAA is a solid driver for our business. I think to the extent that HIPAA would apply to organizations like Eclipsys and Cerner, it would also apply to us.

Jim Dublin: Okay.� And just the last question would be, you have a somewhat sizable cash position on your balance sheet.� Do you guys look to be acquisitive here as an engine of growth or kind of just grow this thing internally?

Louis Silverman: As mentioned � this is Lou � our primary focus is on our own internal operations and growing those as aggressively as we can.� We certainly do continue to look at acquisition opportunities as they come to us. But acquisitions to date have not been an extremely high or top priority for our board or our management team. � I don�t want to suggest that that�s about to change. I will say that it�s possible that it changes down the road.

But at this point in time our focus is on growing the business on a kind of de novo basis.

Jim Dublin: Okay gentlemen, thank you very much.

Operator: There are no further questions at this time.

Louis Silverman: Well, I�d certainly like to thank everybody for joining us on today�s call.� And we look forward to chatting with you again in the coming months. Thank you.

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