Transcript of the QSI Conference Call
Moderator: Louis Silverman
October 25, 2001
1 p.m. EST


Operator: Good afternoon. My name is Louanne, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Quality Systems quarter two 2002 earnings results 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 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, Louanne. I'd like to welcome everyone to Quality Systems' Q2 fiscal 2002 conference call. Per usual, I'm joined on today's call by 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.

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

For the quarter the company had revenues of $10.5 million, up nine percent over the prior year. Earnings at 18 cents a share were up 50 percent over prior year. Within those figures the MicroMed division posted revenues of $6.3 million, a 23 percent increase over year prior and, as Paul will detail a little bit later in the call, the MicroMed division posted a 37 percent gain in operating income, also over the year prior.

Our QSI division was again soft from a revenue perspective with revenues down about seven percent versus year prior at $4.2 million. Performance at the operating income line reflecting our continued focus on expense management was strong, up 34 percent from the prior year.

Our EDI unit, whose numbers are embedded in each of the divisional figures that I've given you came in at about $1.5 million for the quarter, 19 percent ahead of prior year figures. Our initiatives to expand our EDI revenues in the NextGen division continue to make good progress. We more than doubled versus year prior, and we're up about 33 percent sequentially while EDI revenues within the QSI division itself contracted a bit, due in part to a loss of a significant client at the beginning of the quarter.

Cash and cash equivalents increased to $21.4 million during the quarter. Our increase in cash didn't overpower the drop in interest rates, though, as our interest income declined year over year from about $251,000 to approximately $190,000 in the current quarter.

Important non-financial events since our last earnings call include having QSI named to the Forbes Magazine "Best 200 small companies in America" list. That's the first time we've been on this list in company history. The list is selected by Forbes based on financial performance over three criteria points over one and five year time periods. Additionally, one of our newer EDI product offerings was named as a finalist in an "Innovations in Healthcare" competition sponsored by a California based organization of healthcare executives.

We hosted our annual NextGen user group meeting in Las Vegas in early October and had record attendance there. We had about 425 people that attended the user group meeting, which was an increase of about 40 percent over prior year.

At this conference we announced and expanded branding effort, which will increase our focus on the NextGen name, and decrease the presence of the names MicroMed and Clinitec in the marketplace. There will be more to follow on this in subsequent weeks and months, but suffice it to say that from a market positioning perspective this will be an important strategic activity for us over the next few quarters.

Product-wise we continued our progress in several new product areas and new release areas during the quarter. Our NextGen PDA application is now being beta'd in three sites. And at the user group meeting we had an additional number of people sign on as early adopters who are anxious to use that product.

Our EMR version 3.7 and EPM version 2.7 are in their early stages of roll-out. QSI's project Sequoia phases one and two were delivered to beta sites during the quarter as well.

Our quarter was impacted by the following factors, and I would say negatively impacted by the following factors: Our MicroMed division was impacted by deferrals on certain hardware elements on a number of deals that we did execute late in the quarter. In other cases entire deals were deferred a bit. We expect to get some of these opportunities back in the December quarter and beyond.

Individually, either of these items, the deferral on certain hardware elements or the deferral on deals entirely, would have likely put us at record revenue levels for the MicroMed division and for the company as a whole. Together these situations more than likely cost us our string of consecutive record quarters, both at the top line and the bottom line.

Our EDI transaction volume was low for the middle part of September, which impacted our EDI results in addition to the loss of a customer mentioned above. Similarly, our collections activities slowed a bit during the middle part of September, and we simply didn't have enough time to catch up by quarter end. We continue to make progress in catching up there, but by the quarter end, as you'll see, our DSO numbers were up a bit, and that was one of the impacts of the mid September issue. Also, needless to say, we had a virtual suspension of our sales related travel and some sales activity during what is for us a peak selling period coming down the stretch of our quarter.

I'll decline to put specific numbers around these items and would like to just simply say that we'll look forward to the opportunity to get back to our record setting ways in the coming quarter.

Our NextGen sales pipeline continues strong and is running at record levels. NextGen RFP activity, a feeder for our sales pipeline also continues to be very strong. We continue to work our EDI product development and client development very hard and continue our expense discipline at the QSI division.

That concludes my opening remarks, and I'll turn things over to Paul Holt at this time for some additional texture on our financial statement.

Paul Holt: Thanks, Lou. Greeting to those on the call. I'm happy to report another quarter of strong earnings despite the setbacks that were discussed earlier. Some of the highlights to our quarter include generating about $1.5 million in cash from operations during the quarter and posting our ninth straight increase in quarterly recurring revenue, which at $5.4 million represents an 11 percent increase from the year ago quarter.

Our gross profit margins have remained consistent with the last several quarters holding steady at 56.7 percent. I'd also like to point out that, as Lou mentioned, our discipline in controlling our SG&A expenses is reflected in the fact that our overall SG&A expenses were roughly even with last quarter as well as our year ago quarter. Expense reductions in the QSI division have compensated for the investments being made in the MicroMed division, keeping our consolidated SG&A expenses roughly unchanged.

MicroMed division reported its second highest quarterly revenue at $6.3 million with operating income of $876,000. This represents, as Lou mentioned, a 37 percent increase compared to the prior year operating income of $639,000.

The QSI division coming in at $4.2 million, represents a decrease of seven percent from the prior year quarter of $4.5 million. Despite the drop in revenue, the QSI division has been able to continue to increase its contribution to profits by reducing operating expenses.

Moving down to investment income, as Lou mentioned, we were affected by the decline in interest rates. Compared to the prior quarter, our June quarter, our investment income declined by eight percent, $190,000 compared to $206,000 in the June quarter. We were able to increase our interest bearing assets during the quarter, but it just wasn't enough to offset the drop in interest rates.

Moving on to a couple of the balance sheet areas, as Lou mentioned and I discussed, our cash and cash equivalents increased this quarter. We're now at $21.4 million as of September 30. And during the quarter we invested approximately $400,000 in capitalized software and equipment and generated $1.5 million in cash from operations.

Our DSOs grew to 121 days from 114 days. As Lou mentioned, our collections efforts were impacted by the slowdown that occurred in the middle of September. We've been working diligently and have made significant progress after the quarter was closed. So, you know, we clearly have our goal to continue to work on our DSOs and bring those down.

At this time I'd like to thank you for your interest in our company. And I'm going to turn things over to Greg Flynn, our Executive Vice President and General Manager of our QSI division.

Greg Flynn: Thank you, Paul. Good day to everyone on the call. While revenues at the QSI division were softer than we would have liked, our operating income did remain strong at $1.312 million for the quarter. This, in fact, represents an approximately 11 percent operating increase over the past quarter and an approximate 34 percent increase over the prior year's quarter. I believe that this profitability indicates the success of our cost containment efforts as well as our client retention initiatives resulting in strong, ongoing revenue streams.

On the EDI front we were pleased by our continued penetration of the NextGen client base. We view this expanding base as a significant opportunity for EDI growth into the future. Our plans for this quarter are to look to further increase our penetration of the NextGen base with our statement, correspondence, and eligibility offerings. We also look within the QSI division client base to expand our penetration of eligibility services with our dental and medical legacy clients as well as expanding carrier coverage for our dental clients and to focus, in particular, on increasing our suite of services and acceptance within our larger clients.

On the CPS front we did have two clients further expand their use of the product through purchases made this last quarter. We are currently working with several larger opportunities, one of which is the national organization piloting the CPS product on a single state basis. I have mentioned this opportunity on previous calls.

As Lou noted, we've also made significant progress on our Sequoia software initiatives. Currently, our data-miner reporting product is moving out of beta phase with a number of our clients with an intent by QSI to now market this product broadly to our entire client base. Also, the first phase development of our new, enhanced user interface screens, which utilize PCs in a Windows-like environment have been completed for our dental system. At this time, I and other staff members have been previewing our new system development with several of our larger key clients. I would rate initial reaction to this new offering as positive.

As we look to this current quarter and beyond, we intend to continue our expense management, to focus on new product offerings, to increase our EDI penetration, and to maintain our reputation for excellence in client services.

At this time I'd like to turn the call over the Pat Cline, President of our MicroMed division.

PAT CLINE: Thank you, Greg. Hi, everyone. As Lou mentioned, MicroMed was impacted slightly by the attack in September, but in spite of these events we had hoped to set another record. We didn't quite get there. One contract that we actually signed was not booked due primarily to approvals that were required by the customer, and we hope to resolve that matter with the customer in the current quarter.

I'm very proud of what this division and our employees have been able to accomplish with respect to both year over year revenue and year over year profit growth. And I'm especially happy with the growth in maintenance revenues and EDI revenues and the backlog of our services.

As Lou mentioned earlier this month, we had a very successful User's meeting where our new software releases and NextGen PDA and other things prompted very positive responses. Product wise I don't think there's anything on the landscape that comes close to the NextGen division's products both with respect to practice management systems and electronic medical records.

Our pipeline has grown to about $25 million. We've also entered our trade show season. Many of you know that we generate a lot of our leads through exhibits at these conferences. Our sales force numbers, currently, 15 people. That includes a national sales manager, three regional sales managers, and 11 salespeople. We are continuing to grow our sales force over the next couple of quarters, we hope, as long as we find the right people.

In closing, I feel very comfortable saying that we think we'll quickly return to a record setting pace, both on the top line and on the bottom line.

LOU SILVERMAN: Operator, I believe we're ready for questions.

OPERATOR: At this time I would like to remind everyone, in order to ask a question, please press the number one on your telephone keypad now. Your first question comes from Mike Crawford.

MIKE CRAWFORD: Everyone, good morning. Lou, you said that NextGen RFP activity was strong. Could you put any magnitude on that?

LOU SILVERMAN: I don't have all the comparative stats year over year, Pat. I don't know if you have those handy or not.

PAT CLINE: No, I don't have the stats. That comment probably came from a conversation with Mike Campana, our Director of Marketing, who reported more subjectively that he's seen a heck of a lot more RFPs coming in the door and is working on many more proposals at this time. Again, it's the beginning of the trade show season, and some of the marketing efforts that we put forth through the summer and some of the word of mouth and specifically also some of the efforts that we put in the direction of marketing to consultants that can provide a stream of these RFPs is beginning to pay off.

MIKE CRAWFORD: Okay. Thanks, Pat. On the NextGen user's conference, I know that that cross-selling now is a goal of the company. So I was wondering if you could just fill us in a little more about that. Like, for example, the one and a half million of EDI revenues, how much of that now is currently from NextGen users, and what are your thoughts going forward?

LOU SILVERMAN: Mike, in terms of some hard numbers, this quarter the MicroMed division did $217,000 in EDI revenues, so of the $1.5 million, MicroMed is up to just about 14 percent of the total, and that's coming from darn near zero six or seven quarters ago. So we continue to make good progress there. Our EDI team was well represented at the NextGen users conference, was well received there and, clearly, we are working toward continuing to build our momentum with the NextGen user base, and we think that there are very good opportunities for us there on a go-forward basis. We're very pleased with the progress we've made moving into the NextGen user base and anticipate that that should continue on a go forward basis.

MIKE CRAWFORD: Okay. On the NextGen PDA, you said it's beta'd at three sites. So how long has it been there? How long do you think that process is gonna last? And, you know, what feedback have you received so far?

PAT CLINE: We put that product out, oh, either the end of August or in September. I'm not sure which. We had a little bit of a delay in that the product was written to our NextGen EMR version 3.7, and we had to get that version finished up and out there and also ready for beta.

The actual date of release is always going to depend on the testing. We're not sure. We're hopeful that that finishes up and we go to general release this quarter. We have just armed our sales force with demo units. The product has been very well received so far. We did, I think as Lou mentioned in his talk, get a number of orders for it at our users meeting. I also mentioned on our last call that initially the product is designed to integrate with the NextGen EMR and EPM products. But we're getting a lot of interest. I mentioned that in the future we would probably come up with maybe a light version of NextGen EMR to run for those customers that are interested just in having the functionality that NextGen PDA provides and penetrate outside of our normal customer base.

As we start pushing on the marketing, we've put some full page color ads in trade publications, and as we push at shows and arm our sales forces, we are seeing a heck of a lot of interest in the product, running the product kind of as a first step to going to a full blown electronic medical records system. So we're going over our strategies and trying to come up with things to capitalize on that.

MIKE CRAWFORD: Thanks. And then one final question for now, maybe this is more for Lou. So HIPAA dates I think are important to the adoption of EMR and electronic practice management system. So what do you see with some of these dates, whether they're getting pushed back a little bit and how this affects QSI?

LOU SILVERMAN: Mike, as you're aware, there are several different elements of HIPAA and, relatedly, several different target dates through 2002 and 2003. There is certainly a lot of speculation as to whether or not any of these dates will be pushed back, and any opinions I have would just simply add to the speculation on whether or not that's going to happen.

In terms of specific impacts on us, I think that our hope is that the HIPAA dates will not move and that -- and, we feel that HIPAA should give us some nice wind at our back, continuing on our expanded sales results, principally in the NextGen product area but also relatedly in the QSI area. If they get pushed back, our next hope is that they get pushed back by months and not years which, in effect, probably wouldn't change a lot for us.

I think the worst thing for us is, just to cover the waterfront here, uncertainty. The second worst thing is a defined long-term push back on the HIPAA date. Short of that, it's, I would say, business as usual for us.

MIKE CRAWFORD: Okay. Thank you.

OPERATOR: Your next question comes from Patrick Winton.

PATRICK WINTON: Hi, guys. In your QSI division, I definitely see that you've done a good job with cost cutting and increasing operating income. Kind of a top-level view, what is it gonna take to get revenue growth going back in the positive direction?

GREG FLYNN: I'll go ahead and take that question. Obviously, we have a significant existing client base. I think we clearly need to look at marketing new products into that base. We're rather dominant in the base of larger consolidator practices, in particular, as you know. We need to expand our EDI services. And the other thing, frankly, that for the last number of quarters has impacted us has been the stagnation amongst the consolidators. There's been some recent activity there in terms of some potentially new funding within those organizations that might see a shaking loose. I can't assure that. We certainly haven't felt it yet, but we feel we would get a benefit there as well.

Clearly, we're focusing on retaining our clients as, again, they are captive markets and new products. And then we would and still are aggressively looking to identify new prospects.

PATRICK WINTON: Great. In terms of client retention for both QSI and for MicroMed, do you break those numbers out?

GREG FLYNN: We do not, Patrick

PATRICK WINTON: Okay. And also, just wanted to touch on your cash position. It's obviously very strong. Any plans for that cash in the near future?

LOU SILVERMAN: Well, we continue to work with our Board on where the cash is invested and what we do with it. If I could restate your question a little bit, do we have any plans that we're ready to announce suggesting that we're going to take that cash in a different direction than we've taken in the past? The answer is no. But, certainly, we continue to review our investment alternatives and investment strategy with our Board on a regular basis.

PATRICK WINTON: Great. Keep up the good work.

LOU SILVERMAN: Thanks, Patrick.

GREG FLYNN: Thank you.

OPERATOR: Your next question comes from Andrew Shapiro.

ANDREW SHAPIRO: Good morning. I have actually several questions. I'll ask a few and then back off and let others into the queue, but please come back to us. With respect to the cash question that was just asked, I'll be a little bit more specific, if I could. In the 10-K for the company a few quarters back, you had mentioned how the authorization for the buy back that expired. What I wanted to know is if the Board has taken up and has since approved reauthorizing the company buy back so that if, you know, things happened you guys could act quickly and the take out shares that would be offered at such a discount.

LOU SILVERMAN: On that, Andy, we're not prepared to go into much detail on this call, but I can tell you that we are dotting the I's and crossing the T's on a press release on that topic, and you can be looking for that in the next two or three business days.

ANDREW SHAPIRO: Very good. At least it got taken up. The next question, if I could understand on the dental side, a few dental questions here, the loss of the dental EDI customer you speak of, can you describe the factors that contributed to the loss? Is it a competitor that took the business away? Did they bring it in-house? Are they no longer in business? What happened regarding that particular customer?

GREG FLYNN: Yes. Specifically what occurred is we lost their EDI business. We did not lose the business of the customer in total. It was to a competitive offering. It was not taken in-house by the client. I can tell you that we are fast and furiously trying to work to regain the business as well as other business with this competitor -- with this client, excuse me.

ANDREW SHAPIRO: And the factors that you think contributed to the competitor winning out over you, was it price, quality? What might be the factors cited?

GREG FLYNN: I'd say more price that quality, certainly.

ANDREW SHAPIRO: Okay. With the reduction in interest rates and the continued pay down of debt at the consolidators, are your contacts at the consolidators discussing how their capital expense budgets are now beginning to loosen up at all? I know they haven't given you business yet, but is there direct indications that this is occurring and is a trend in the industry?

GREG FLYNN: Without breaching any confidentiality, I can maybe describe the situation as appearing a bit more fluid in terms of some of their expenditures. There has not been specificity with me. However, I can give you a little bit of a change and coloring of what I've seen at least among some of my contacts, which are at the key contact level, as you know.

ANDREW SHAPIRO: Uh-huh. I think Pat was kind enough to give us the number of salespeople out on the street on the medical side as well as a few items. Could you guys tell us what it is in terms of the pipeline and also the salespeople out on the street here for the dental side? And then, also the total number of employees, Lou, so we can do our, you know, sales per employee kind of numbers as well?

GREG FLYNN: The QSI pipeline versus the last call stands relatively unchanged. It's 5.4 million. The last call it was 5.5, just to put it in context. We, as of the 31st of this month, will have reduced our sales force from six to five. We are looking to restock. We simply made a change there that we felt was appropriate, Andy.

LOU SILVERMAN: Andy, on the revenue per employee numbers, for the quarter it's $180,000 rounded. That's $10,500,000 revenues divided by 234 employees.

ANDREW SHAPIRO: Okay. Great. And then in terms of the quality here of the deals, I think you mean mostly in the medical side, to describe this, if you wouldn't mind, is the total number of deals, Pat, you had and how many of those went to new customers and if you can give a little color on your pipeline. You had talked about in the past you had a couple of nice size deals in the pipeline. I was wondering of those you referred to on the last call, how many of those closed in the current quarter, how many got lost to competitors, and how many are still in the pipeline.

PAT CLINE: Boy, those are a lot of questions. I'll try to remember them all. The number of new deals, Andy, was 18. Total number of deals, I may be one or two off here, but I think was 25 or 26. Of the large deals that were in the pipeline during the prior call, I know of two that we closed in the quarter that we're discussing. I know that we lost one of the deals in the pipeline, to a competitor. Interestingly, that customer has now come back to us and told us that they made a mistake, and we're hoping to sign them over the next couple of weeks here. They decided to make a price buy and went with a local vendor that apparently isn't working out very well.

We have increased the pipeline again this quarter, not a heck of a lot with respect to quantity, but another couple of fairly large deals have come into the pipeline. We have just been told over the last couple of days that we've been awarded vendor of choice on one respectable deal in the pipeline, but that doesn't by any means guarantee that we'll sign it. There's a lot of steps to take between now and when they put the pen to paper, but we feel good about it.

ANDREW SHAPIRO: Great. Last question, I'll back off. And that is a few quarters back you had some -- you signed on some new governmental business, I think including some that was either Department of Defense or otherwise. Given that you are medical products and the higher concern or, you know, sensitivity, some of the medical issues here as the armed forced deploy, are you seeing a perk up of any of your governmental interest in RFPs?

PAT CLINE: No, we're not. We are excited about the possibility of doing more business, as I've mentioned in the past. We've discussed, increasingly discussed, hiring a full time person to pursue that business. But, actually, we've seen the opposite. We've seen that many of our government contacts have attentions directed elsewhere, and I think the interest is there. One of our contracts has sort of a set purchase schedule, and we will, we think, book some more business on one of those contracts in the current quarter. But as far as new contracts, I don't see that over the next two or three months a new contract will be signed because of the diversion.

ANDREW SHAPIRO: Okay. Great. We'll back off. Please come back to us. We have more questions.

OPERATOR: Your next question comes from Neil Bradsher.

NEIL BRADSHER: Hey. Good quarter, guys.

LOU SILVERMAN: Thanks, Neil.

PAT CLINE: Thank you.

NEIL BRADSHER: Lou, you mentioned a little bit about the impact of September 11th and, Pat, I think you said something about that also. And it sounded as though you at least have a sense of what the impact was based on the implications of your words. I think you said -- I think in each case you said it would have been probably a record quarter if it weren't for what happened during that period, both for the company as a whole and for MicroMed. I wonder if you could help us understand those dynamics, and, in as much qualitative and quantitative detail as you can and also the degree to which you see any ongoing shift in your customers' behavior. You did just identify one with respect to a distraction on the part of government customers. Just if you could kind of cover that. It's a wide range of issues and probably requires response from at least a couple, maybe two or three of you.

PAT CLINE: This is Pat. I'll address that on the NextGen side. It's going to be hard to quantify, Neil, but I can tell you that there was a period of a couple of weeks where I think the first area of impact was that our salespeople and our trainers and project managers were literally stranded all over the country when the airplanes weren't in the air. We had people driving from Colorado back home to Pennsylvania and Colorado to Atlanta and Pennsylvania to California, you know, all over the country. And when salespeople are driving across the country, A, to get home, and, B, either trying to make appointments or rescheduling appointments, that has a little bit of an impact in the way of a delay.

Another thing, certainly, is that the customer mind set, I think we saw a short-term change. I don't think it's a long-term change. In fact, we've seen that mind set kind of turn around and have seen a back to business attitude. There's still a little bit of concern, as you understand, with what's going on with anthrax and things. But most customers are flying again. They're out, they're flying, and doing due diligence, visiting current customer sites and those kinds of things. So I don't think there's any long-term impact barring any other unforeseen events.

GREG FLYNN: On the QSI division side, I'd sort of echo what Pat had to say. I think the impact, other than how it hurt us in the EDI area, obviously, I mean, some of our dental offices for a period of time were reporting as little as 20 percent of their standard patient load for that period of time. But it was a delaying factor. I know, for example, myself personally I was on my way to New York, and I had three meetings, all of which cancelled literally out until the very end of last quarter into this quarter. So it looked like a delaying process in terms of the movement of business.

LOU SILVERMAN: And I would add, and this might be the height of stating the obvious, but I think that in terms of your question about the future, I would echo what's been said thus far. And, actually, I think we'll know a lot better of how this has impacted longer term mind sets on the customer side next quarter. We were talking about things that have been deferred or delayed, but at the same time, for reasons that I hope you folks can appreciate, we really are reticent to quantify exactly the impact in this quarter because we do need to see what comes back and what comes in. We continue to be very optimistic. All of our internal indicators, both quantitative and qualitative look good. But we need to see the contract closed and booked and all of the business activities kind of get back, fully back up to speed before we'll give you a report with great confidence that it is, in fact, business as usual. But, again, the indicators we can see from our vantage point here right now all look positive.

NEIL BRADSHER: Okay. That is very helpful. Lou, I'm not gonna let you off the hook entirely on not quantifying it in that I'd like to kind of hone in on it in the following way. Can you guys give us some sense of linearity in how much of the business is typically done in the last month and how different it was this time?

LOU SILVERMAN: In terms of -- I'll let Pat go after I do. In terms of linearity it's, I'd say, non linear in many ways. We are still "lumpy" in our sales flow, but what is regular and very predictable is that we are very back end loaded, and this quarter, I think, was a particularly acute case of back end loading, at least in my brief history with the company. I don't recall us working the last weekend of the quarter to get the last few deals signed. I know most of the times our quarter ends on the last Friday of the quarter. This quarter, just to give it a fairly graphic example, we had guys in cars and travelling around getting final signatures in on that final weekend, which is perfectly permissible but made for, I'd say, a fairly interesting last 48 hours of the quarter. So, again, this was a particularly acute case of our typical back end loaded revenue or new contract streak.

NEIL BRADSHER: Okay. In terms of the month, though, I mean, it sounds like part of the reason for that was that you'd had a hiatus right before the end of the quarter, so some of the end of the quarter stuff got stuffed into the last weekend. But, I mean, was the monthly pattern significantly different from what you've usually seen?

LOU SILVERMAN: No. That I'd say was, at least from my vantage point, looking back at the numbers, we had, as I mentioned, the largest percentage of our deals booked in the last month of the quarter as per usual. They just were later in the quarter than they usually are.

NEIL BRADSHER: Is it usually like 30, 30, 40 or 20, 20, 60 or somewhere in between?

PAT CLINE: Let me tell you on the NextGen side, and then I think the QSI side may be a little bit different because of the maintenance revenues. On the NextGen side roughly half of what we do at the current sales level, maybe a little bit less than half, is bookings of back logged service revenue and maintenance revenue. That is fairly linear throughout the quarter. So if we say that that's between 40 and 50 percent of the total, I think that would be reasonably accurate. The other 50 or 60 percent comes from new sales of -- if we call that 60 percent of new sales, I'd say it's probably 15 percent, 15 percent, 70 percent the last month of the quarter as a reasonably educated guess.

GREG FLYNN: On the QSI side, obviously, our maintenance is fairly consistent, as is our license, annual license renewals. They simply follow a time schedule. Our EDI does tend to have a spike at the end of each quarter, typically because of some promotions we run as well as some quarterly situations with our clients as well on the sales side. I would say generally, and this is somewhat a top-of of-the-head number, at least 50 percent of our sales will typically fall in the last month of the quarter. That's upgrades and new system sales.

NEIL BRADSHER: Okay. And that correlates with the number Pat just gave, so it sounds like that's probably a corporate number. And, Lou, you're saying it wasn't significantly different from that this quarter.

LOU SILVERMAN: No. Simply it's placement within the month, the last month was different, but I think the monthly allocations, so to speak, were about consistent.

NEIL BRADSHER: Nevertheless, you do think that you did lose some business out of the quarter as a result of September 11th. It wasn't just delayed to the last weekend. There was additional business that clearly slipped out.

LOU SILVERMAN: That is our opinion, yes.

NEIL BRADSHER: Okay. Thanks very much for all the detail.

LOU SILVERMAN: Thanks, Neil.

OPERATOR: Your next question comes from Geoff Nixon.

GEOFF NIXON: Yeah. I just wondered if you could talk a little bit about the receivables and just if you can give us some color on how many are more than 100 -- I guess most of them were 120 days old, but kind of why is it so stubbornly high, the DSOs?

PAUL HOLT: Well, Jeff, really we don't go into any details like that in terms of, you know, what our aging looks like and how much is in one bucket and how much is in another bucket. But the other thing, if you look at the trend of what our DSOs have been doing, although we did have a slight setback this quarter, we have actually been moving that down fairly well from three or four quarters ago. But the other thing that you have to keep in mind is that we also have quite a bit of deferred revenue on our balance sheet that, you know, represents revenue that, we just are unable to recognize because we haven't rendered services yet so we can't call it revenue. But, it's not something that's lost on us. It's something that we watch all the time.

GEOFF NIXON: Okay. Two things then. Are many bills disputed, is that a reason for slow pay?

PAUL HOLT: I mean, as a business, do we have some customers that dispute bills? Sure. Just like any other business has it. But I wouldn't say -- you know, I wouldn't call that a reason why our DSOs are what they are.

LOU SILVERMAN: Geoff, this is Lou. If I can add in here a little bit. It seems like there's really two issues or streams to your question. One, I think it's important to look at our DSO on a relative basis. And, as Paul pointed out, our DSO big picture has come down fairly nicely from some pretty high levels in prior quarters to a place where we're still not where we want to be, but big picture we have made progress, and we also have been clear that we have continued progress to make. And so we're not overjoyed in any way, shape, or form with an increase in our DSO from the 114 level back up to 121. Paul, I think, went into a little bit of detail on the fact that we, as did I, simply ran out of catch up time by the quarter's end but have continued to work hard on collections and are seeing things, at least at this early point in our December quarter, falling back into line.

Now the second part is, and as I have said to people on calls in prior quarters that our target in the near term, is around 110 days. And you can look and say, well, gee, that's a significant amount higher than many other competitors in your space or maybe other businesses. And that is true. And the point that Paul was getting to on deferred revenue really comes into play here where through basically historical conventions the company has adopted a certain strategy for dealing with deferred revenues which puts our deferred revenue total into AR on the balance sheet, which in some ways artificially inflates our DSO total. Not all companies do that. And so that's why we're talking about, gee, going from 140 days down to 114 days is good and why we think 110 is an appropriate near term target is largely because of the historical treatment of deferred revenues by the company. And so I hope that helps --

GEOFF NIXON: Yeah.

LOU SILVERMAN: -- give a little granularity on the issue.

GEOFF NIXON: Okay. And then on the QSI side, is the -- you know, I know that there are some products using the ASP model. Is that getting any traction, and what is your kind of view on that as something we could offer?

GREG FLYNN: We have looked at offering it. We actually have the capability to do that. What we've seen still, cost of acquisitions really at the smaller practices tends to be still somewhat prohibitive. We haven't seen great adoption of that model. I know one of our competitors actually appears to be backing away somewhat from that. Another competitor at the time, I believe they were called PAC On-line, has actually disbanded their ASP efforts. We do have the capability to do it. It's not something we're pushing at strongly at this time. Probably the most attraction ultimately in a model like that would be the ongoing transaction revenue.

GEOFF NIXON: Yeah. Okay. I appreciate it. Thanks. Thanks for a great quarter.

GREG FLYNN: Thanks, Jeff.

LOU SILVERMAN: Thank you.

PAUL HOLT: Thank you.

OPERATOR: Your next question comes from Lance Stringham

LANCE STRINGHAM: Good morning, guys. Most of my questions have been answered. I do have a couple more. EDI revenues were $1.5 million in the prior quarter, is that right?

GREG FLYNN: Yes.

LANCE STRINGHAM: Okay. Can you give me an idea or quantify what revenues from the lost client were in the prior quarter on the EDI side?

GREG FLYNN: I can give you precise numbers, but I'm doing this by memory. I believe they amounted to approximately $40,000 a month.

LANCE STRINGHAM: Oh, okay. All right. And then moving to the NextGen PDA, is it possible that we might see the full market roll out of the PDA move into the fourth quarter, I'm sorry, either later third quarter or fourth quarter?

PAT CLINE: Yeah, I would say that's possible. Again, it completely depends on the testing process and how that goes with respect to both bugs and usability and requested features and things. We're trying to get it out ASAP, obviously. But, sure, that's always possible.

LANCE STRINGHAM: All right. Okay. And then my last question relates to FASB 142. The company restated the prior quarter in August as well as the same quarter in the year prior, it doesn't look like there was really an impact in the second quarter of this year or last year. Can you comment on that?

PAUL HOLT: Yeah. I'll take that. This quarter, when we adopted FASB 142, what we did was FASB 142 allows you or says good will is no longer to be amortized. So in our first quarter and our second quarter of 2002 we are not amortizing good will. And you'll see on the balance sheet our good will number remains unchanged.

Last year, that would be September of 2000, we were not under FASB 142, and we did amortize good will. So if you -- so if we had adopted it back then in September, you would have added another penny a share to our earnings.

LANCE STRINGHAM: Well, the reason I ask is because I'm looking at my model in the second quarter of fiscal year '01 versus the release from today and what that quarter looks like in the release. It doesn't appear like there are any differences between the two.

PAUL HOLT: That may be because we're not reporting amortization separately, so you wouldn't see that.

LANCE STRINGHAM: Okay. All right. Are there any plans to restate any other prior periods?

PAUL HOLT: Well, what you'll see, if you look into our Q, you're going to see in the disclosures, there are a lot of disclosure requirements related to FASB 142, and one of them is to show exactly the effects of what our numbers would have looked like in the year ago quarter if we had adopted --

LANCE STRINGHAM: Okay. So you guys will do that as each quarter passes?

PAUL HOLT: -- Yes. I would direct you to our 10-Q disclosures.

LANCE STRINGHAM: Okay. Very good. That's all I have.

LOU SILVERMAN: Thanks, Lance.

OPERATOR: Your next question comes from David Rogers.

DAVID ROGERS: Hi, guys.

LOU SILVERMAN: Hey, David.

DAVID ROGERS: Hi. Most of my questions have already been asked as well, but I have a particular fascination with this -- with the commercial introduction of PDA technology to the EMR and EMT segments of the healthcare industry, and, Pat, I was wondering for those of us who are newer to the story, such as me, can you offer a broader conceptual view as to how PDA might represent an enabling tech for the EMR and the EMT segment and then, more specifically, how PDA might facilitate a greater market penetration by fully integrated systems?

PAT CLINE: I can try. For those of you who are unfamiliar with the technology, this is basically a light version of the medical record system that operates on a palm-sized PC. They call them pocket PCs. We've tested the product with the Compaq I-Paq and the Casio line and the HP line. The features include charge capture that allows doctors or other healthcare providers that are outside of their medical practice either at hospitals or nursing homes or at home to enter in data about the services that they perform in those locations, and then that data syncs up to their main applications and main databases so they don't have to sort of chicken scratch on three by five cards as they're used to doing when they're off site. We do medical necessity checking. We do lab orders and results reporting. We do prescriptions, full medical record templates on these devices, appointment schedule synchronization. We maintain patient's problem list, allergy list, procedure list, medication list, and those types of things.

We do have some competitors that have component technologies. Some companies will have charge capture but very little else. Some companies have -- in fact, most of them that do this type of thing have prescription generation but -- and maybe they have a charge capture component but, again, no medical records or a lot of the other things that I pointed out.

This technology allows healthcare providers, docs that are increasingly mobile, to extend their information system outside the practice. We think that this technology, because of the interest in the technology and the things that it does enable the doctors to do outside their office, will help us quite a bit with respect to selling the larger NextGen systems. It's a great added feature, and it's also a feature that will stand on its own.

DAVID ROGERS: Okay. Thank you.

PAT CLINE: Uh-huh.

OPERATOR: Your next question is a follow up question from Andrew Shapiro.

ANDREW SHAPIRO: Hi. A few scattered questions here because these other people filled in very nicely. Someone asked a question on the DSOs. Can you give us a handle on the DSOs of the two divisions? I know that medical DSOs are so much higher, or MicroMed's DSOs are so much higher than dental.

PAUL HOLT: Andy, I'll take that. The current quarter DSOs split out as follows. The QSI division was 81 DSO days, and the MicroMed division was 149 DSO days.

ANDREW SHAPIRO: Right. So as -- and if the NextGen, MicroMed continues to grow faster than dental, if that's the case, that will be a head wind towards your consolidated DSO number that you would try to work down, right?

LOU SILVERMAN: That's how the math works, exactly.

PAUL HOLT: Yeah.

ANDREW SHAPIRO: Okay. The deferred service revenue area, in your deferred service revenue number, in a sense, it's somewhat like a backlog. Can you help me out here in understanding what percent of the deferred service revenue, approximately, is in the sales and system upgrade and supply line and what is kind of in the maintenance and other services line, because I know that they kind of split out. But what's the split look like in the deferred service revenue number?

PAUL HOLT: Yeah. That works out to, and I'm just going to give you an approximate number here because I don't have these in front of me, but roughly 60 percent of that is going to be deferred services, and the remainder is deferred maintenance type of revenue.

ANDREW SHAPIRO: Okay. And the deferred maintenance type of revenue is the second line on your revenue sheet, which is the more of the recurring line?

PAUL HOLT: Yes.

ANDREW SHAPIRO: And so this deferred service revenue, 60 percent of it rolls off and can help us with our modeling in the top line because that comes through as you implement, right?

PAUL HOLT: Yes. It's the backlog of services that have been not rendered yet but have been ordered.

ANDREW SHAPIRO: Right. Right. But they're under contract. It's not as if you have to go cut and close a new deal. You just have to actually implement.

PAUL HOLT: Exactly.

ANDREW SHAPIRO: Okay. That's helpful. There was a new analyst that picked up coverage of the company this week. The Redchip Review and B. Riley are the only analysts that have covered the company for a while. And this new guy, Rogers, who's just on the call, I think a Capital Investment Group, initiated coverage. But considering the $21 million or more than $21 million in cash and no debt at this company, this company still remains one of the lowest valuations in the industry. What are your near term plans or activities to increase the investor awareness of the company and in what particular conferences and what cities are you having road shows and presentations or meetings do you have currently planned?

LOU SILVERMAN: Andy, my answer this quarter is largely the same as it has been in prior quarters. I continue to work with Coffin Communications Group to contact people in the investment community, both from an analyst perspective and from a fund management perspective who -- for whom our story might be compelling. And we continue to spend reasonable amounts of time each quarter pursuing those people.

In terms of specific cities and specific dates, I don't recall exactly what I have planned. I know that we've got a couple of cities targeted, I think two or three cities targeted over the next two or three months, some West Coast, some East Coast. And I'm also in fairly regular contact with analysts from different investment organizations that appear like they're warming to the story, and hopefully we'll have not only David Rogers who was on the call and just asked a prior question, but other new analysts who are covering us on future calls. It would be great to have six or seven analysts on the call. We're not there yet, but I do feel that we continue to make some progress there and certainly are spending I think an appropriate amount of time getting this story out to people that are well positioned to receive the story.

ANDREW SHAPIRO: What were the particular cities that you're targeting, or you don't know?

LOU SILVERMAN: I don't remember off the top of my head. But I -- at least one or two West Coast cities and then my usual East Coast swing some time mid-quarter.

ANDREW SHAPIRO: Right. I think this might be Pat. There was some question here on the call that talked about possibly implementation of HIPAA rolling back or being modified, you know, due to circumstances. One of the other factors some of the analysts have cited fueling the growth or demand for your products is -- I guess it's at the state level and maybe it's federal as well, but in the state levels there's a variety of medical errors legislation pending. Do you have any feel for how many states that is and if the legislative efforts on medical errors liability, etc. is one of the motivating reasons for growth in your industry?

PAT CLINE: I don't have an idea about the number of states that have pending legislation in the medical errors area. But I do think, I'm fairly confident, as others in our industry are, that HIPAA will be one of the drivers for sales on the EMR side. Right now HIPPA is not in the forefront of the minds of most smaller practices. HIPAA and security issues are very important to the more sophisticated practices and the larger practices and groups that we tend to target. And, frankly, whether HIPAA is pushed back a few months or a year, those organizations still have security and patient privacy and EDI transaction standards high on their lists. So whether HIPAA gets pushed or this legislation happens or not or when it happens, I think both HIPAA and that legislation, and even outside the legislation, the issues will continue to be drivers. So as a company we are aggressively building features that will help our customers comply with either these laws or deal with the issues. Our fall release, I may have mentioned on the last call, but the release that is just coming out does have a number of enhancements that are targeted in that direction.

ANDREW SHAPIRO: You also mentioned in the last call some headway in the RFP process when several competitors I guess were sunsetting their competitive products to NextGen and some financial troubles of other competitors. Have those trends continued? Is the competitive landscape becoming clearer and easier?

PAT CLINE: I would say clearer, yes. Easier, probably no. When a competitor goes out of business or has difficulty, there seems to be another one or two competitors that are, you know, coming out of the ground. And usually when a new competitor comes out of the ground they have a lot of money to invest or throw down a hole. But I would say, no, those trends haven't changed. We did see in last quarter since the last call another very large competitor on the practice management side sent a letter to all of their customers on one of their particular products saying that as of a particular date, I think it might be coming up here in a few months, we're no longer going to provide support for that product. And a lot of their customers, customers of that product or users of that product are up in arms, and they see that as an opportunity or a need to go shopping. They'll look at that competitor's follow on product, but they'll also go out and look at the marketplace, and that's good for us.

ANDREW SHAPIRO: Right. Your upcoming trade show schedule appears to have expanded. Is this a larger list than last year at the same time?

PAT CLINE: No. I think it's about the same.

ANDREW SHAPIRO: Okay. Just a few more. I know they're jumping around here. This is dental. Lou or Greg, the cost cutting process you are going through on the clinical product, you're trying to scale it down into a manner that would accelerate adoption. Is that process done and now it's an issue of the financial health of the consolidators steadily improving that moves this forward, or are there more items and milestones for you in the clinical product?

GREG FLYNN: We've actually devised two new pricing models, one of which is software only, the other which is an actual enterprise licensing model. So in terms of packaging of the product that's completed, the issue now is obviously to be more successful marketing, and that's certainly our attempt.

ANDREW SHAPIRO: Okay. And you also mentioned the last call a large national enterprise, I'm assuming a consolidator, you're gaining implementation of CPS on a pilot basis in one state. You mentioned a little bit on here. Can you give a little bit more color on the status of the pilot, the feedback you're getting? Is there a quantifiable pay back return on investment that you can then use to market this in that enterprise as well as to other customers?

GREG FLYNN: I'll take the questions in the order you gave them, I believe. I, due to issues of confidentiality which are in our contract, can't identify the client. I can tell you it's actually not a consolidator. It is a client that is also a MicroMed client. My initial feedback directly with their project manager, the individual who signed the contract as recently as two weeks ago is that the pilot project is going extremely well. That doesn't assure other sales, but it certainly does encourage me, and they are looking at other states. On a state by state basis, the timing issue for them, and consequently for Quality Systems, really is the approval process for their projects is not trivial.

In terms of return on investment via their new model, I think it's a little too early to tell, but I did get encouraging words on that. Quantifiable, no. I think we'll get that. Would the proof be in the pudding as they deployed it in other states? I think that would speak for itself, Andy.

ANDREW SHAPIRO: Great. Thanks. I'll pass and let more in the queue.

OPERATOR: Your next question is a follow up question from Neil Bradsher.

NEIL BRADSHER: Yeah. I missed something a little while ago. Lou, you said that your deferred revenues are actually included in AR, and you mentioned that's abnormal and certainly is abnormal. Is the entire $6.1 million deferred service revenue line, does that match to a similar size portion of the AR line?

PAUL HOLT: Neil, I'll take that. No, not all of it. Some of that deferred revenue has already been paid for. I'd say roughly a third of it's been paid for already, so I wouldn't match it dollar for dollar back into AR.

NEIL BRADSHER: But it's four million we should really take out of the AR, so you're DSO is really more like, whatever, 90 days or something.

PAUL HOLT: If you wanted to -- if we looked at it that way, yes.

NEIL BRADSHER: Well, I mean, I don't understand why it would be in the AR in the first place. I mean, if it's -- frankly, it shouldn't be on either side of the balance sheet.

LOU SILVERMAN: On that point, Neil, we're having those same discussions internally at this point. But up until this point we've elected to keep the numbers consistent with historical convention which have been approved by auditors. But there's certainly some logic to what you're saying, and it's certainly logic that we're exercising internally here and trying to figure out whether or not we want to change and, if so, what we want to change on a go forward basis.

NEIL BRADSHER: I mean, this is an irrelevancy because it doesn't affect the income statement until you actually book it as real revenue, and it has no affect on the book value so long as there are offsets. But it's passing strange.

PAUL HOLT: Well, I'll tell you what. We can immediately bring our DSOs down. You're correct. Yeah.

NEIL BRADSHER: Well, I mean, the point is the DSO number is just not a real number because of that, and I hadn't realized that. And, okay, well, I guess that's yet another artifact of the previous management. Thanks.

OPERATOR: Your next question is a follow up question from Andrew Shapiro.

ANDREW SHAPIRO: Yes. I probably missed it because you'd probably have it in here, but what was the depreciation amortization number for the quarter again, Paul?

PAUL HOLT: Okay. Total amortization is $311,000. Total depreciation is $196,000. Do you want those, the break-outs, for MicroMed's $206,000 amortization; QSI, $105,000, that makes a total of $ 311,000. Depreciation expense on MicroMed: $134,000, and $62,000 on the QSI side. There's your $196,000.

ANDREW SHAPIRO: Which gives us an EBITDA for the quarter of --*

PAUL HOLT: Two point four. *

ANDREW SHAPIRO: -- 2.4, which makes your trailing EBITDA somewhere north of nine million.*

LOU SILVERMAN: Trailing twelve is $9.2*

ANDREW SHAPIRO: Nine point two million. You have over $21 million in cash and a total asset of about $46 million, meaning non cash assets are $26 million, right?*

PAUL HOLT: Yes. Fairly nice return on non-cash assets.

ANDREW SHAPIRO: United States Mint. Thanks. Have a good one.

PAUL HOLT: Thank you, Andy.

OPERATOR: There are no further questions at this time.

LOU SILVERMAN: I'd like to thank everybody for their participation on the call. Feel free to call if you have any questions down the road, and we'll see you next quarter.

OPERATOR: Thank you for participating in today's teleconference. You may now disconnect.

[END OF CALL]

*Note: subsequent to the call an administrative error was discovered which resulted in September quarter EBIDTA and LTM EBIDTA being misquoted on this call by $200k. Correct numbers would have been: September quarter EBIDTA at $2.2 million and LTM EBIDTA at $9.0 million. The financial statements issued by the Company were correct.