Computer Programs and Systems, Inc.
Q1 2008 Earnings Call Transcript

Published: 25 Apr 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Computer Programs and Systems Incorporated First Quarter Earnings Call. During this presentation, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is recorded on Friday, April 25, 2008. It's my pleasure to turn the conference over to Mr. Boyd Douglas, President and Chief Executive Officer at Computer Programs and Systems Incorporated. Please go ahead, sir.

[Boyd Douglas:]

Thank you, Pama. Good morning, everyone and thank you for joining us. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements are only predictions and are not guarantees of future performance. Actual results might differ materially from those projected in the forward-looking statements as a result of risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including but not limited to our recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. Joining me on this morning is Darrell West, our Chief Financial Officer. Darrell and I have a few minutes of prepared comments, and then we will be glad to take your questions. In the first quarter, we installed our financial and patient accounting system in six hospitals, our core clinical departmental applications at seven facilities. Six hospitals implemented nursing Point of Care, and four customers went live with ImageLink PACS. Add-on sales to existing clients made up 20% of total revenue. At this time, we expect to install our financial and patient accounting system at five facilities in the second quarter. We anticipate four new installations of our core clinical departmental modules, eight nursing Point of Care implementations, and three ImageLink installs. In Business Management solutions during the first quarter we executed eight new accounts receivable management contracts, one of which were for full accounts receivable services, six for private pay collections one for contract management services. During the first quarter revenue from this segment of our business grew 13.5% year-over-year. We anticipated 10% year-over-year growth rate for the second quarter of 2008. Demand for our Business Management solutions remain strong as hospitals continually looking for ways to improve processes and run their facilities in the most efficient manager possible. On the sales front there has been no significant change in the competitive landscape. Our move to the Linux operating system CCHIT approval and our full suite of business management services currently give us a distinct advantage over our competition. Speaking of Linux, we now have completed 31 installations of Linux operating system at our client sites. We anticipate installing an additional 18 by the end of the second quarter. This comparison is gone very smoothly and as you can tell by the number it has been a huge success with our customer base and with potential clients. This is yet another example of our ability to some leading edge of technology, while proving our clients with a robust, but stable platform with which they can run their business most efficiently. At this time I would like to turn it over to Darrell for a few comments on the financials.

[Darrell West:]

Thanks, Boyd. Our DSOs were 45 days for the first quarter, down two days from the fourth quarter and within our range of 45 to 60 days. Cash provided from operations for the quarter was $4.3 million, compared with $3.4 million first quarter of last year. Free cash flow was $4 million for the quarter compared with $3.1 million for the prior year quarter. We defined free cash flow as net cash provided by operating activities, less capital expenditure. CapEx for the quarter was $311,000 compared with $348,000 for the prior year quarter. Depreciation for the quarter was $478,000, compared with $517,000 last year. Cash collections were $29 million for the first quarter, compared with $27.8 million for 2007. We have recognized stock compensation expense of $224,000 in the first quarter of 2008 and anticipate a charge of $230,000 in the second quarter of 2008. Our effective tax rate is expected to be around 39.5% for the year of 2008. Our headcount at quarter end was 887, a decrease of 34 over from year end. Operator, we would like to open the call to questions at this time.

[Operator:]

Absolutely, sir. (Operator Instructions). Our first question comes from the line of Richard Close of Jefferies. Please go ahead, sir. Your line is open.

[Richard Close:]

Yes. Congratulations on the good quarter. I wanted to touch base on the first quarter, the strengths there and then as that sort of falls into the second quarter guidance, which was below of what we were forecasting. Was there anything that you can point to that maybe led to the over achievement in the first quarter, was there something that you expected in 2Q that actually got or was completed in 1Q and allowed you to book higher revenue than originally anticipated?

[Darrell West:]

No, Richard there was nothing unusual in the first quarter. Our add on sales remained strong, but there was nothing that moved forward to create those numbers. It was a little more upside than we had anticipated on revenue.

[Richard Close:]

Okay.

[Boyd Douglas:]

This is Boyd. On out side on the revenues the only thing that and this is little, obviously lot of little things added up to be a bigger upside than what we were anticipating, but we did install a few more. We did a few more Linux upgrades than we anticipated we were going today. So, that was a little bit of the upside, explaining a little bit of the upside.

[Richard Close:]

Okay. And what on the average did those upgrades sort of cost the customer?

[Darrell West:]

They were somewhere in the $80,000 range.

[Richard Close:]

Okay. And so you did 31, what were those numbers again, 31 in the first quarter?

[Boyd Douglas:]

No. We have 31 total now.

[Richard Close:]

Oh 31.

[Boyd Douglas:]

I don't have the number for what we did in the first quarter.

[Richard Close:]

Okay, but you are expecting…

[Boyd Douglas:]

More from this date between now and the end of the second quarter.

[Richard Close:]

Okay. And then, so then, I guess maybe if you can walk us through the second quarter guidance, you gave us the systems that you are going to deploy, you expect to deploy in the next quarter, and I guess trying to understand how that part lays into the second quarter guidance, which is sequentially down?

[Boyd Douglas:]

Well, first of all there is not as many of them, there is just five installations, and I believe that we will happen to now, yeah did six in the first quarter and the--

[Richard Close:]

Until patient accounted.

[Boyd Douglas:]

Yeah. Which is smaller deals.

[Richard Close:]

Okay. So, you have smaller deals in the second quarter?

[Boyd Douglas:]

It is little bit smaller deals that I would like to emphasize again. We are glad to get the business and those deals will eventually turn in add on sales. If they are only buying a little bit of the software upfront, because there are hardly money right now or for whatever for reason, when you select us as your vendor, 99% % of the time you are --

[Richard Close:]

Becoming better?

[Boyd Douglas:]

Your goal is to move forward and eventually have a full EMR, which means you are going to buy all of our additional products from us. So, we are happy to get the contract, get the business, and do the financial install and the rest will come right.

[Richard Close:]

Okay. And sort of, moving on then, with respect to the competitive environment, I believe you said really no change there. So, I guess the recaps of Dairyland and HMS haven’t necessarily impacted the competitive environment?

[Boyd Douglas:]

We're seeing no change at all based on those recap of those assets.

[Richard Close:]

Okay. And, McKesson, you're seeing them increasingly or?

[Boyd Douglas:]

Just, just like before. We see them a lot early on in the RFP stage, but we, very rarely the deals come down between us and McKesson at the end of the day.

[Richard Close:]

Alright. And then final question for me, and I appreciate the time here is, there has been a lot of chatter, I guess I would call it with respect to the auction rates security market and, maybe trouble in terms of finances for hospitals and all that and speculation maybe that there will be a pull back with respect to IT spending. Boyd, I was wondering if you could just give us sort of your thoughts in and around that what you're seeing in your customer base that might be little bit different and here maybe some of the other vendors that are going after the larger non profits, but just your general thoughts on maybe the current environment for your customers?

[Boyd Douglas:]

Okay. As far as the credit markets and things, I think that's a minor part of it. Certainly that's a factor maybe at some these facilities, but the market really hadn't changed. These hospitals have been struggling now, as I've been saying on these calls for quite a lot. I don't think its any worse now than it was even two or three quarters ago. It's certainly a tough environment, but at the same time I don't see any major impact from the credit issues.

[Richard Close:]

Okay. And, I guess a follow up to that what is your sense -- I mean, obviously you are out talking with your customers. How do they view IT? Is it more a necessity? Is it part of the cost to doing business, part of it the operating expenses in the operating budget on an annual basis, or is it really still more of the capital side? Do we build something, or spend money on IT is it one of those decisions?

[Boyd Douglas:]

Certainly, we have hospitals that look at it both ways. I would say, more of our hospitals look at around operating side. But, I look at, again it's a cost of doing business, and maybe the full suite of all our products within EMR is certainly optional for a lot of them, as you can see with where we are with our client base. Certainly, have enough core financial system. They can get built out actively, so that they can get paid. And, more and more we're seeing obviously clinical applications being deployed, because it's becoming more, more again part of business, and almost have to have clinical applications now. You can see from our numbers in Point of Care's is come on and adds on sales for Point of Care's extremely strong. The positives I see in that are, we have a lot of demand for that. Our customers are willing to meet to significant capital outlook for our Point of Care system, which obviously means we are doing a good job home in the other areas, and they are willing to spend more money with us and expand their IT systems.

[Richard Close:]

All right. Thank you guys very much. Congratulations on a good quarter.

[Boyd Douglas:]

Sure, thank you Richard.

[Operator:]

Thank you, sir. After this question, continuing on, our next question comes from the line of Corey Tobin of William Blair & Company. Please go ahead sir. Your line is open.

[Jeremy:]

Good morning, gentlemen. It's Jeremy for Corey. Hi Boyd, I was wondering if you could give us some thoughts on the HIMSS conference, it feels like the backlog, and if you can kind of back into, bookings where the net change in backlog first revenue. It's feels like there is some what of stabilization here in terms of business and in terms of the trend here. I am wondering if you can give us your thoughts on the HIMSS conference? How that went for you, and whether that made any difference in the quarter for you from the selling point of view?

[Boyd Douglas:]

Had many difference, yes. I will say traffic was debt only. We got several more leads than we were expecting and that we have historically gotten from HIMSS. Whether those will actually turn into contracts remains to be seen, but we certainly got more leads on future business than we have historically.

[Jeremy:]

Okay.

[Boyd Douglas:]

We are very pleased with HIMSS. But again, we're, I don’t want to withhold judgment, until we see if any of those actually turn into contracts. That's what we are doing.

[Jeremy:]

It's a bit too early to kind of make a judgment on whether there is a sort of an inflection point from a business standpoint that you are seeing.

[Boyd Douglas:]

Yes, definitely.

[Jeremy:]

Okay. In terms of the kind of follow on some of Richard's questions regarding the end market, I am wondering have you seen any change in your customers' ability to pay their bills, or maybe even any bankruptcies in your customer base, I am, wondering if you are seeing anything along those lines in the raw hospital space?

[Darrell West:]

Yes, we have. This is Darrell. We've seen a bit of a slowdown with a few specific customers from a standpoint of collections. Although our collections have remained strong, there have been a few that – things have been tough in form, so we are seeing them slowdown a little bit. There was – I saw only one bankruptcy in the first quarter and it was not – it didn't impact us significantly. We also have – we did have an increase in our bad debt expense. Because, there are a few out there that we anticipate could become a problem.

[Jeremy:]

Okay.

[Darrell West:]

Unless some things turn around for them.

[Jeremy:]

Okay.

[Darrell West:]

So, yes we have seen some decline in their stability from some of our customers.

[Jeremy:]

And any thoughts on sort of your customers' exposure to Medicare and Medicaid relative to sort of the broader hospital market, in terms of serving indigent or elderly. There is some upcoming cuts to the upper payment limits, I am wondering if your customers are more exposed to that relative to broader hospital community, if those aren't feel back?

[Boyd Douglas:]

Certainly, there is certainly some exposure there, not enough. Obviously like everything with Medicare, Medicaid reimbursement remains to be seen what will actually happen, but absolutely there is certainly some exposure there.

[Jeremy:]

Okay. Thanks I'll jump back in the queue. Thank you.

[Boyd Douglas:]

Okay.

[Operator:]

Thank you. Continuing on our next question comes from the line of Del Warmington of Delaware Capital Management. Please go ahead.

[Del Warmington:]

Yes. A quick question. I mean, I think that the first question asked about the landscape in terms of competitors, they said nothing has changed, am I right in assuming that?

[Darrell West:]

That's correct.

[Del Warmington:]

Okay. And, also in terms of your sales cycles, has there been any change in terms of the length of time, it takes us close to deal with what your stocks is. Would you say that the sales cycle in the last quarter, all though it's related to the previous quarter stocks, I mean, they are all previous year in terms of the time it take to close deals?

[Boyd Douglas:]

I don't know in the last quarter if there was any significant change, but certainly over the last several quarters that sale cycle has certainly lengthened. And I talked about that on couple of other conference calls that it's certainly lengthened maybe 20%, if I had to give it a number.

[Del Warmington:]

Okay. And last question. Do you make any joint sales call with someone like a GE or like it Siemens or Toshiba or Philips?

[Boyd Douglas:]

No we do not.

[Del Warmington:]

Okay. Thank you.

[Boyd Douglas:]

Sure.

[Operator:]

Thank you. Continuing on, our next question comes from the line of Jeff Schmidt of Sidoti & Co. Please go ahead, sir. Your line is open.

[Jeff Schmidt of Sidoti & Co:]

Good morning guys. I was wondering if there is any update on your target for installations during the quarter maybe how that relates to 2008. I think, you guys said you are between six and ten. Is that still, does that will still work?

[Boyd Douglas:]

As far as our target for any given quarter?

[Jeff Schmidt of Sidoti & Co:]

Yeah.

[Boyd Douglas:]

Yeah, sure. That would certainly be our goal in our target in these markets and obviously for the second quarter, we are only anticipating that.

[Jeff Schmidt of Sidoti & Co:]

Okay. And, what about the reimbursement environment for hospitals? Are you seeing any major changes there or any affects from that?

[Darrell West:]

We're not seeing any changes at all from that.

[Jeff Schmidt of Sidoti & Co:]

And, then outsourcing, I know you said you're expecting 10% year-over-year growth in the second. That's down a little bit from I believe, guidance previously for 20% year-over-year growth. Are you seeing a little bit of slow down there?

[Boyd Douglas:]

We are, we're seeing and we think that's just a result of the market and everything else. As I mentioned, we still got lot of people interested in it, but when it get downs to the Board making decision, it actually pull the trigger. People are kind of, I hope now, I guess seeing what this economy is going do.

[Jeff Schmidt of Sidoti & Co:]

Is 20% growth in '08 still realistic?

[Boyd Douglas:]

It's going to be tough to hit with only 10% coming next quarter. So, I think that's probably a little bit out of where we will be able to bid.

[Jeff Schmidt of Sidoti & Co:]

Okay. And then just my last question, is there any unusual margin pressure you are seeing? Is there, you mentioned that bad debt expense picking up a little bit. It just seems that your top line guidance and bottom line guidance don't really match up from the, according to my model, is there anything unusual in there?

[Darrell West:]

The biggest item was the bad debt. Our bad debt expense for the quarter was slightly more than $0.5, which is up significantly from previous quarters?

[Jeff Schmidt of Sidoti & Co:]

Okay thanks guys.

[Operator:]

Thank you. Continuing on our next question comes from Leo Carpio of Caris & Company. Please go ahead sir. Your line is open. Leo Carpio - Caris & Company. Good morning gentleman. Following back in terms of the comments you made on the outsourcing side, where the Boards are holding back on their purchasing decisions. What items are they intending to hold back on, and what items are they going forward or executing purchases on.

[Darrell West:]

Holding back to the AR management services when actually turned in a portion of their business office ever to us, typically not holding back on the statement out, statement processing and electronic claims processing, I mean those pretty much are, I guess the (inaudible) for the astra. They have got to have a vendor that does that form, whether it's us or some third party. Just because of the efficiencies of the third party doing the statements on the electronic claims, but on the business office side, then they tend to look a little bit harder at that. Leo Carpio - Caris & Company. Okay. And, then could you talk about the financing element that’s involved in a typical customers purchase? I mean, do they finance us internally on to current operations or maybe go to a local bank to receive financing for purchase?

[Darrell West:]

They typically go to third party financing, not necessarily local bank. There are several companies out there that finance for health care in general, whether its capital projects building new buildings or IT purchases. There are several companies out there and that's the way we'd prefer if they're going to finance it for them to do it. We do as you know some financing ourselves, but we try not to. Leo Carpio - Caris & Company. Okay it sounds like, so far from what you've been saying, that the credit crunch hasn’t impacted significantly or majorly in your space, so far, is that correct?

[Darrell West:]

Yes.

[Leo Carpio:]

Okay. And then, if it's impacting on the tangents, who is being affected on the tangents? Is there like they're particular profile for those customers?

[Darrell West:]

I'm not sure, not that I know of.

[Leo Carpio:]

Okay. And then, lastly on the proposed Medicare, fiscal '09, in patient [PPS roll], what's been your customers feedback? Has it been positive or?

[Darrell West:]

Oh yeah in general they certainly want to see more of an increase, because they've been struggling now here for quite a while. While they show these little increases, it's certainly not enough to keep up with their ongoing expenses, our expenses and things like that.

[Leo Carpio:]

Okay. But is the increases here enough to maybe show them to become potentially new sales in the coming quarters, or are they just waiting until to see what the final role come?

[Darrell West:]

I think, right on the final role, I think, it's more of the status-cuo for right now.

[Leo Carpio:]

Okay. Well, thanks.

[Operator:]

Thank you. Continuing on, our next question comes from Tom Carpenter of Hilliard Lyons. Please go ahead, sir. Your line is open.

[Tom Carpenter:]

Good morning, Boyd. Good morning, Darrell.

[Boyd Douglas:]

Good morning, Tom.

[Tom Carpenter:]

Has there been any change to the sales headcount in the last quarter or two?

[Boyd Douglas:]

No, there has not.

[Tom Carpenter:]

Okay. I know around one and half or three years ago, you guys, you were out their moves and sales folks out west and you may have added an installation team. Is that accurate?

[Boyd Douglas:]

We moved some sales folks out west. We did not do an installation team out west.

[Tom Carpenter:]

Okay. The installation team is still the same from a couple of quarters ago.

[Boyd Douglas:]

Yes. With our head count being down, they are all down a little bit, but certainly we start the same number of teams that we've always had.

[Tom Carpenter:]

Okay. If there was an area to where that had the changes in headcount, what would those predominantly be?

[Boyd Douglas:]

Actually, we did see a decrease in our outsourcing headcounts. Part of that was from really in general there is a large turnover in that department.

[Tom Carpenter:]

Sure

[Boyd Douglas:]

So, we did see a lot of turnover there. So, there is some timing of differences and people leaving and hiring new employees. And also, as we improve some of our systems, we see some efficiencies there, at times that don't require as many people.

[Tom Carpenter:]

Okay. On the customer side, any flips from competitors you want to tell us about, or did you have any successes on the 150 bed hospital or bigger markets.

[Boyd Douglas:]

No, we are really, not too many successes in the bigger hospital market and then as far as any fillips, nothing significant. Every now and then, we'll have one or two that go elsewhere, and every now and then we'll have one or two that come to us from one of our main competitors. But, as we've talked about before, it’s a very sticky business and really no change there.

[Tom Carpenter:]

Okay. On the business outsourcing side, you guys have introduced quite a few products, some in the past there. Are there any new ones on the horizon like radiology or pharmacy?

[Boyd Douglas:]

There are not at this time. There is a couple we are looking at, but add rather for competitive reasons not go into that but we are certainly obviously we're always looking, and we do have a few things that we are working on.

[Tom Carpenter:]

Historically, you've guys bided some of the new services with customers and then announced maybe a couple of quarters later, once you start getting some traction, has that been ?

[Boyd Douglas:]

Yes. That's exactly how we are doing.

[Tom Carpenter:]

Okay. So you probably bidding some right now, we just have heard about them.

[Boyd Douglas:]

That's correct.

[Tom Carpenter:]

That’s fair. Okay.

[Boyd Douglas:]

That's correct, yeah.

[Tom Carpenter:]

Okay. To touch on the question from the last call, do you have an early read on the magnitude about the Medicare or Medicaid reimbursement change for fiscal year '09, I know it's mostly flattish this year, is there an early number they'll be entering about?

[Boyd Douglas:]

That's about all we knows, relatively flattish. So, we don’t have any more reason there.

[Tom Carpenter:]

Okay and one final question, Boyd you have been in the business 20 plus years and this has been a longer spending slowdown, and you probably seeing in some time. If there is one silver lining that maybe we're grasping here, is that the longer the slowdown, hopefully the bigger and the more pronounced rebound down the road. I know there is a couple of things impacting the market right now, a lower Medicaid, Medicare reimbursement for this year, credit crunch and election year uncertainty. When you look out to the future, and when you are drawn your experience in the business here, is there any indication of a timing of a rebound later this year? It's an '09 event or is it too uncertain to call?

[Boyd Douglas:]

I would certainly want to say it's too uncertain to call, because we just note, we've seen it especially in the small hospital market, it can happened pretty quickly. But, who knows when that pretty quickly it's going be. We typically would just say, we typically don't have a whole lot of warning that it's coming, but all of a sudden something will pass in congress or whatever for small row hospitals, and then we're back. And I do agree with your statements though. It seems that the rebound afterward is always relative to how long it last, because there is a lot of pent-up demand. And, we're seeing that now. And, I mentioned that in the sales cycle and everything else. There is a lot of people looking. There is lot of people who want to move forward with an EMR, but they just don't have the funding right now.

[Tom Carpenter:]

Okay. At some point we'll get back to the 10 to 12 hospitals per quarter but with this slowdown there it seems to going to pent-up demand?

[Boyd Douglas:]

Yeah, our goal and our hope is to get back to the 10 or 12, absolutely.

[Tom Carpenter:]

Okay. And, I may spoke of one last question. You guys have done a good job in the past couple of years growing cash and the cash flow is fine. I know, at some point there is been quarterly fluctuations that people might get concerned about the dividend, but at this point is it you're in a broad's expectation that you guys would like to maintain the current dividend, even if you can draw down cash, a million or two?

[Boyd Douglas:]

No. absolutely. As far as that goes and may be we can talk about this in a couple of quarters, that might be the good time to mention it. We really only need about $5 million to run the company on a day-to-day basis.

[Tom Carpenter:]

Right.

[Boyd Douglas:]

And we've got -- what $22 million, I think in the bank right now. So, we've got over years what the dividends, now saying that I am not saying we are -- if we really had hard times, that we would run it all the way down to $5 million, but certainly with that cash cushion there, and that's why that's there, it gives us the ability to dividend it now. Basically, our free cash flow are even little bit more, in times when we had these fluctuations. Even if there are two quarters of a fluctuation or up to a year, as long as we feel like our outlook is good, and we are going to get back to 10 to 12, and we are going to at least maintain cash where it is, then we're absolutely are planning on paying that dividend to our share holders.

[Tom Carpenter:]

Okay. Thanks for the info, I was surprised this was an extra deal or two in the second quarter.

[Boyd Douglas:]

Okay, great we're working hard at it.

[Operator:]

Thank you continuing on, our next question comes from the line of Bret Jones of Leerink Swann. Please go ahead sir. Your line is open.

[Bret Jones:]

Good morning I was wondering what percentage of your customers that are currently under the hosting ASP model? Are you seeing that tick-up given the financial strain your customer are under?

[Boyd Douglas:]

No, that's stand relatively constant.

[Bret Jones:]

And with new deals?

[Boyd Douglas:]

With new deals, we probably get one a year. That's ASP, maybe one or two a year. And in general, I really had that number in front of me, but it's somewhere probably around. We only have one ASP customer last year, do you have a number of how many we had, how many of our customers are there? I think it's around 20 of our customers are ASP. So it's a very small percentage.

[Bret Jones:]

Okay. So that's not how they are choosing to deal with this, with the credit crisis necessarily or you're with your own financial operational issues?

[Boyd Douglas:]

It is not. How they are choosing to deal with now, as I mentioned earlier in the call is third parties most of the time, or in some cases will lease the system. We would rather lease system too typically then doing ASP, but if the conditions are right in ASP, that's this hospital, then we certainly can offer that model doing as well.

[Bret Jones:]

Alright, and I was wondering if you could go into a little bit more on a bad debt? Is that primarily associated with service and maintenance fees that the bills that have formed by hiring nurses and outsourcing or is this an outsourcing or is this financing of systems you've done?

[Boyd Douglas:]

The largest one that is a potential problem is the financing that we have done. But, we are seeing a slowdown on a few facilities with the outsourcing and the monthly support maintenance. It's really across the board, but the, I guess the largest potential there is with one financing arrangement that has slowed down significantly on the payment end.

[Bret Jones:]

And, can you us an idea of how much of system financing you've done in terms of dollars? Should [most of them are third party]?

[Boyd Douglas:]

Oh, third party.

[Bret Jones:]

No, no, I was just saying most of them are third parties. So, I didn’t take them as a big component.

[Boyd Douglas:]

Third party, we have on our books currently, about 3.8 million on the balance sheet that is financing receivable.

[Bret Jones:]

Okay. Alright. And then, the percent of your customers that are running your financial administration systems that are also running core clinical, and I am just trying to think of what the add on opportunity that's still out there?

[Darrell West:]

I believe that's around 60 – 65%.

[Bret Jones:]

Are running both.

[Darrell West:]

Are running both, right. Of course a 100% are running the financial application.

[Bret Jones:]

Absolutely. Okay and generally how long does it take, when you are looking at you make a new sale, how long does it generally take before doing add on for the average customer.

[Darrell West:]

You know, I guess if I have to give you an average I would say a year. But, you know a lot of customers go in upfront, of course we hadn’t seen a lot of that lately, but lot going upfront with everything. And, some way, we have some customers that have been customers since the 1980s that are just now adding the clinical.

[Bret Jones:]

Okay. And if I can go back to bad debt just for a second, I have one more question on that. When you were evaluating the bad debt expenses, is this a matter of the bills of form behind or you actively monitoring the financial system within the hospitals, for situation within the hospitals?

[Darrell West:]

This is a matter of falling behind.

[Bret Jones:]

Okay. Alright. And so you, is it your few of these accounts, you sounded like it was across the board. So, a few of these accounts have aged or is pretty much your entire AR aged?

[Darrell West:]

The entire AR has not aged. It's really some specific accounts, more than globally.

[Bret Jones:]

Okay. Great. And then the last question, I was just wondering if you could break out the stock option expense, as far as the components?

[Darrell West:]

You are looking for the first quarter or second quarter?

[Bret Jones:]

First quarter. Please?

[Darrell West:]

First quarter? We had 76,000 in system sales and support, 49,000 in marketing and 99,000 in G & A.

[Bret Jones:]

Alright. Thank you very much.

[Operator:]

Thank you. Gentlemen, our final question is a follow-up from Richard Close from Jefferies. Please go ahead, sir. Your line is open.

[Richard Close:]

Great, thank you. Just on the bad debt again, I think I missed the detail on, some of details on that. The 500,000 that was in the first quarter, is that correct?

[Darrell West:]

Yes.

[Richard Close:]

And, how did that compared to the fourth quarter?

[Darrell West:]

Fourth quarter, I don’t have my model in front of me. I'm sorry. Fourth quarter was 73,000.

[Richard Close:]

Okay. And, then so, did you mention what the expectation for that in the second quarter would be?

[Darrell West:]

I did not. But I'm projecting around a 135,000 for the second quarter.

[Richard Close:]

Okay. And, then as you look out, obviously you guys only give us one quarter, one forward quarter's guidance. Should we be thinking of that number in the 150,000 level for the remainder of the year in each quarter that is?

[Darrell West:]

That might be a little strong

[Richard Close:]

Why

[Darrell West:]

It's hard to project that out, but historically it's sort of been all over the Board and it's real hospitals specific. Sometimes, we have an indication that a hospital has a financial problem, and then other times it is we may see a bankruptcy, but they have been paying us fairly current, so there is not a large impact.

[Richard Close:]

Okay and then is the 500,000 I mean, I guess Boyd you could speak to this. Is that level, that was achieved here in the first quarter is that the highest in the company's history or ?

[Boyd Douglas:]

No that is. We had back in let's see what was that 2004. We had a bankruptcy that occurred with a financing arrangement. I guess, hospital had opened up, new installation, new hospital and they ran along for about six months and then closed the doors. And we took a hit for about $1 million on that.

[Richard Close:]

Okay great. Thank you so much and have a good day.

[Boyd Douglas:]

Well thanks.

[Operator:]

Thank you for taking that question gentleman. I will now be turning the conference back to you, to continue or for your concluding remarks.

[Boyd Douglas:]

We appreciate everybody signing the conference call. Thank you and have a good weekend.

[Operator:]

Thank you, sir. Ladies and gentleman, that does conclude the conference call for today. We thank you all for you participation and ask that you please disconnect. Thank you once again. Have a fantastic weekend.