Streamline Health Solutions, Inc.
Q2 2014 Earnings Call Transcript

Published: 10 Sep 2014

[Operator:]

Good day and welcome to the Streamline Health Second Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Randy Salisbury, Chief Marketing Officer. Please go ahead.

[Randy Salisbury:]

Thank you for joining us to review the financial results of Streamline Health Solutions for the second quarter of fiscal year 2014, which ended July 31, 2014. As the conference call operator indicated, my name is Randy Salisbury. As Senior Vice President and Chief Marketing Officer here at Streamline, I manage all communications including Investor Relations. Joining me on the call today are Bob Watson, our President and Chief Executive Officer and Nick Meeks, our Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from our company's website at www.streamlinehealth.net or at numerous financial websites. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein. Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K reports for more information about these risks, uncertainties, assumptions and other factors. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, that reflect management’s analysis only as of the day hereof. The company undertakes no obligation to publicly revise these forward-looking statements. On this call, the company will discuss non-GAAP financial measures, such as adjusted EBITDA. Please refer to our website at streamlinehealth.net and our earnings release for reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. These non-GAAP measures do not include certain items of income and expense that affect operations and other companies may calculate these non-GAAP measures differently than us. With that said, let me turn the call over to Bob Watson, our President and Chief Executive Officer. Bob?

[Bob Watson:]

Thank you, Randy. Good afternoon to all of you participating on today’s call. I want to begin this afternoon by commenting on our earnings release and specifically the absence of the balance sheet items. As you know, we pledged to get back on track of timely quarterly reports following the delays we had in our 10-K in first quarter filings. In order to meet our desired Q2 earnings date, we have delayed the publication of our balance sheet as we finalize a couple of items that Nick Meeks, our CFO will address in greater detail. It is our intend to finalize this remaining item within the next five days, so that we will not be required to extend our filing period. That said, I would like to turn our attention now to our bookings renewals performance in Q2. I said last quarter that we would generate more bookings this year than last year and I stand by that statement. As noted earlier today, during the reporting period, we signed a master service agreement with a new channel partner. That partners is a majority owned affiliate of the Fortune 50-company and is quite frankly a competitor. With the MSA signed, we expected to finalize a $7.5 million order very quickly. For a variety of reasons, that did not happen. We expect that order to be completed during Q3. I also want to emphasize that this net new booking was originally in our sales forecast as a perpetual license sale and as such would have contributed approximately $3 million in revenue in the quarter in which the order was signed. However, our sales organization was able to reposition the agreement to a five-year term license. This move to a term license format is completely consistent with my well stated position on nearly every earnings call, that we will always push for a recurring revenue contract, be earnings call and we will always push for a recurring revenue contract, be it software-as-a-service or a term license over a perpetual license contract whenever that opportunity avails itself. Let me give you a little more color on this deal. The contract with this new partner involves are abstracting solution from our HIM coding and CDI suite. Our solution will be integrated with their other HIM and coding offerings. Their first end-user is a nationally known healthcare organization with over 25 hospitals. The contract provides for our abstracting solution to be delivered by this channel partner both, to their existing or new clients whenever the opportunity exist. It won't happen with every one of their clients, but we believe that there are real and meaningful growth opportunities with this partner. The combination of our solutions allows our partner to be a complete replacement option for another of the very, very large vendors in the HIM coding and CDI arena. Interestingly, during this process, we have learned that there are other potential channel partners that could do the same thing. Namely, to license our technology, compare with their existing solutions, to round out their own solutions offerings. This model could be deployed with all our other solutions offerings. In fact, there is a metrics transaction announced earlier this year broadly falls into this category of clients for us. In that instance, our HIM coding CDI suite was paired with their outsourcing strategy. Going forward, we plan to invest in pursuing these opportunities more aggressively. Turning our attention now to revenue, as stated in a press release earlier today, revenue for the second quarter of this year were approximately $7.2 million, an increase of 3% over the same quarter last year when adjusting for the large computer-assisted coding perpetual license transaction we closed with Montefiore Medical Center in the second quarter of last year. Most importantly, however, our recurring revenue was approximately 80% of the total revenue in the quarter comprised of software-as-a-service, maintenance agreements and term licenses which were up 12% over the second quarter a year ago. Our revenue recognition continues to be negatively impacted by a couple of factors, but primarily our professional services revenue line. Professional services revenue for the quarter was down approximately $400,000 from the same quarter a year ago and materially under our own internal forecast for the quarter. This is a challenge that we must and will stall for as we move into the second half of this year, more on that particular point in a moment. As mentioned last quarter, the lag and recognition of professional services revenue is reflective of two things. First, our focus on driving unimplemented software-as-a-service or SaaS contracts to go live as quickly as possible this year. By doing so, however, our professional services revenues are recognized over the life of the contract rather than in the period or periods when the work is completed. Two, as I had mentioned quite frequently over the last year or so, there continues to be material weakness in the availability of IT resources on the client-side. On the positive side, we do see some strength in our professional services organization with additional go lives in the second quarter in five year-to-date. We continue to work as closely as possible with our clients to get our solutions implemented. As you all know, it takes two to tango here. For now, we are getting more attraction in our client's internal IT queues and are working through some of the many projects and implementations that have been in backlog for many quarters. As most of you on this call know, I have been focused on this issue for some time. Frankly, I believe, our company can do a better job of getting our clients to day zero or go lives status. Without getting too down in the [reads] or for competitive reasons, I don't want to get too specific here. I know we have great solutions that our clients want and need or they would not have committed to long-term contracts with us, but we maybe making it harder than it has to be to implement the solutions that our sales team sells. This is one of the primary reasons we have brought David Sides on board as our new Executive Vice President and Chief Operating Officer. For those of you who know David from his days at Cerner or mostly as the CEO of iMDSoft, then you know how successful he has been in organizing and delivering scalable solutions to global clients. I have asked David to come in and lead our team in making our solutions more scalable and to help us get the base solutions that our clients had purchased up and running more quickly. By getting to the day zero more quickly, we can recognize revenue more quickly. Returning to sales for a moment, I am unwavering in my belief that our sales activity is accelerating. The new channel partner relationship announced today is with one of those [avengers] of momentum. Bringing David on board as our Chief Operating Officer is specifically designed to help us better handle the growth we expect to generate in the coming quarters and years. That said, I have asked Richard Nelli, our prior Senior Vice President and Chief Operating Officer to assume the role of Senior Vice President, Strategy and Business Development, to focus his energy leverage as many relationships in our industry to help us grow both, in the area of channel strategies as well as with our clients as they develop ACOs and other care delivery models. Richard has gradually accepted this new role and I am sure he will continue to deliver great value to our company. Now, back to the subject of revenue generation, there is more work to do to recognize much of the unimplemented, committed recurring revenue as possible in the coming quarters. Nick will review the specific changes in this metric from Q1 to Q2 in a few minutes. At the end of Q2, we had approximately $2.6 million of annual, unimplemented, contracted recurring revenue sitting on the shelf. Again, I believe our new COO to have a great impact in helping us recognize this revenue more quick. Additionally, as we noted in Q1 call, we are taking a much larger haircut on the deferred revenue acquired as part of the Unibased Systems Architecture acquisition, which directly impacts anticipated revenue contribution from this solution line. We expect to work through these deferred revenue accounts by the end of the year. Overall, Q2 revenue was negatively impacted by $150,000 in this quarter. Finally, our sales backlog was up 19% over the second quarter of last year to $61.5 million. I will now turn the call over to Nick Meeks, our CFO to review the specifics of our second quarter financial performance.

[Nick Meeks:]

Thank you, Bob. Let me start by first commenting on the absence of the balance sheet and cash flow statement in the press release and the delay in the 10-Q filing. We ended the second quarter in violation of our debt covenants with Fifth Third. We have enjoyed a long and mutually beneficial relationship with Fifth Third and frankly we have violated various covenants over the years, but have always worked diligently with our bankers to remedy the issue. We fully intend to do the same thing in this instance as second quarter performance improved over the first quarter and we expect that trend to continue. We have delayed filing until we can be certain we have the appropriate disclosures around the covenant violation and the agreed upon remediation. We fully expect to be able to complete our filing within the five-day extension period. Moving now to financial results for the quarter, as reported earlier today, revenue for the quarter declined approximately 17% over the prior comparable period to $7.2 million. Taking into account the sizable perpetual license deal with Montefiore booked in Q2 last year, revenue grew approximately 3% on an apples-to-apples basis. Adjusting for the decline in professional services revenue as well, total revenue grew 8% over the same period last year. Recurring revenue was approximately 88% of total revenue in the quarter comprised of SaaS, maintenance and term licenses, which is an increase of 12% over the same quarter a year ago. As Bob mentioned each quarter, we will provide visibility into our unimplemented quarterly committed recurring revenue as a means to better demonstrate the potential impact on revenue these unimplemented contracts have. Last quarter, our unimplemented quarterly committed recurring revenue was approximately $650,000 and it increased nominally to $660,000 in the second quarter. From a future visibility perspective, we finished the quarter with approximately $61.5 million in revenue backlog representing a 19% increase from the same period one year ago. In our earnings release and on our website at www.streamlinehealth.net, we have included a table reconciling our net loss to the non-GAAP financial measure of adjusted EBITDA. We define adjusted EBITDA as net earnings or loss, plus interest and tax expense, depreciation and amortization expense of tangible and intangible assets, stock-based compensation expense and non-recurring expenses such as severance costs. Given the relatively large amount of non-cash charges and certain non-recurring expenses, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings. Adjusted EBITDA for the second quarter was $498,000. As mentioned in our first quarter comments, we began the process of capturing cost synergies from the Unibased acquisition in the first quarter and advanced that effort through the balance of the second quarter. We continue to believe the financial impact of these steps will be reflected in adjusted EBITDA numbers for the second half of this fiscal year. In addition, adjusted EBITDA during the quarter was positively impacted by the progress in bringing clients live and the resulting revenue recognized. Significant adjustments for the quarter beyond equity based compensation expense, included $126,000 in severances related to the Unibased and $473,000 in extraordinary charges for the fiscal year 2013 audit. Moving to our cash position, as expected the ending cash balance for the quarter was down from the end of Q1 this year to $5.2 million. The lowest cash balance year-to-date was in June, with July cash increasing and that trend continuing into Q3. In fact, during the first month of Q3, were collected $5.2 million. As discussed last quarter, the increase in the accounts receivable balance we experienced was exacerbated through the first half of this fiscal year as the finance team focused the majority of its efforts on finalizing the annual audit. With that behind us, we refocused our resources to improve our receivables management and are already seeing the fruits of that labor in our improving cash position through August of this fiscal year. As I have said before, we fully intend to generate a modest amount of positive cash flow during the fiscal year and the cash on our balance sheet should increase in both, Q3 and Q4. We believe that we have more than adequate cash reserves to manage the growth of this business is currently planned. That concludes my remarks. I will now turn the call back over to Bob.

[Bob Watson:]

Thank you, Nick. In closing, given that I have had numerous conversations with shareholders, I would like to spend a couple of minutes addressing the Veterans Administration Hospital system opportunity has been in a news this summer. The procurement is known as the Veterans Administration Medical Appointment Scheduling System or MASS project. As many of you know, one o the primary issues with the level of care being provided by the VA system, which is by the way the largest healthcare system in the United States relates to access to their care. The bulk of this issue relates to two items. First, the number of physicians and care providers in the system as the demand from veterans grows. Secondly, the availability of the clinical personnel is limited by the very, very high no-show rates experienced in many VA facilities, a high no-show rate artificially increases the personnel requirement. Conversely, a lower no-show rate effectively increases capacity. Our scheduling software solution which is deployed at the VA hospital in Indianapolis has reduced their no-show rates by more than 20%. Effectively, the solution has increased their capacity by reducing the demand for additional clinical staff. The business requirements document or BRD was recently released by the VA. This document is the first step towards releasing a formal RFP that we expected to be issued at the end of this month. The new United States Secretary of Veterans Affairs has stated that the VA has chosen to pursue a full and open competitive strategy as they want this "to be open to all eligible vendors". We are actively pursuing it and we will participate in this national procurement opportunity, but like anything run by the federal government is very hard to handicap the potential winners of a bid like this. We are not going to speculate as to what the outcome might be. Again, I will remind everyone on this call that we have not included any potential revenue from this opportunity in any of our go-forward numbers. Should we be fortunate enough to prevail in partnership with others that will be included in our bid, we will of course revise our go-forward estimates for this year and next year as well. I assure you should we not win this bid, it will not be for lack of trying. For those of you who are curious as to those partners will be, you should be aware that we have a relationship with Document Storage Systems, Inc. also known as DSS of Juno Beach, Florida, and we will continue to work with them. DSS is a well established and trusted partner of the VA and is uniquely qualified to integrate third-party solutions within [Vista], VA electronic medical record. Should the contract call for us to have a partner that is listed in the T4 contracted schedule, at the time we submit our bit and it becomes public, you will know who that partner is. Finally, as previously discussed, the transition from perpetual license-based revenue model to long-term licenses or SaaS-based revenue model has a direct impact on our top-line revenue, which impacts our adjusted EBITDA as well. The intricate movement of the channel partner contract discussed earlier in this call is such an example. The $3 million term license was repositioned to a five-year term license. Every time we have a chance to reposition our sales contracts this way we will do it. This is an ongoing process and focus of our sales organization. As you all should know by now, we continue to build this company for the long run, the plan of measured, sustainable growth to become the world-class healthcare information technology company. I know we can be. I understand that our investor base has expectations so do we, but when we are in a position to thoughtfully make a decision that either normalizes or leveled out so to speak, our revenue recognition or to make a decision that has a positive long-term implications for the business, we will make that call every single time. As always I want to thank our entire team of associates for their hard work, dedication and support of management's strategic plan. The first half of fiscal year 2014, like the second half of fiscal 2013, has been challenging for our associates to a person they are delivered. Thank you. Finally, our vision and plan for the strategic direction of this company has not changed. As an organization and personally, we believe that our vision is to deliver critically important solutions to our clients from our Looking Glass platform is timely, accurate and compelling. I will now turn the call over to the operator for the Q&A session. Operator?

[Operator:]

Thank you. (Operator Instructions) We will now take our first question from Matt Hewitt from Craig-Hallum Capital. Please go ahead.

[Dillon Hoover:]

Good afternoon, gentlemen. This is actually Dillon on for Matt. Thanks for taking the questions. First one just real quick, Nick, you didn't address the revenue guidance. It was previously $35 million to $37 million. Then, I think, EBITDA you guys were targeting $6 million to $8 million. Are those still realistic targets that you guys still are targeting that those?

[Nick Meeks:]

Hi. I will answer that, Dillon. This is Bob. I think you guys and most of the analysts and have pulled down the estimates to slightly less than our low end number. I think where were sitting today, we are not in a position to revises those estimates. At a time when we think we should, we will.

[Dillon Hoover:]

Okay. Then secondly I know at the beginning of the call, you had reiterated your - you could hit that sequential year-over-year increase in bookings. Is the shift - whether what may come in as a perpetual, may come in as a term, is that going to affect that the nominal value at the end of the year? Like, are we going to every single quarter be stuck on one of these huge contracts and kind of into the pipeline. Are you guys - the breadth of the pipeline, is it is it mostly large channel partners, large hospital systems or is it a bunch of smaller players? It seems to be you guys were tailing to large guys.

[Nick Meeks:]

Okay, so let's deal with the nature of the large opportunity with the new channel first. I mean, that particular transaction, I believe, is probably the largest single transaction this company has had in the 20-plus years it has been around and it was an outstanding piece of work our sales organization to deliver that relationship and we will get the order form signed shortly. That said, independent of that particular transaction, we had other projects in the pipeline, things rolled a little bit into Q3. I think we continue to see great growth in the pipeline itself and we continue to move items through the pipeline. There are no large contract dependencies through the balance of year. It's a normal course and speed. I think the bookings opportunities range from opportunities that are as small as $300,000 or $400,000 to as large as $2 million or $3 million transactions. When you look at the size of some of the renewals and renewals even the last couple of quarters most of them have been multi-million dollar renewals. I think, while they are not net new growth, it is important to understand that our clients continue to invest in us for the long-term. We continue to build strong relationships. Those relationships over time turn into new sales.

[Dillon Hoover:]

Okay. Then kind of shifting to the end market, are you targeting more channel partners or are you - I mean, you kind of commented where some of your solutions can be applied across the board when it comes the channel partners. Are you shifting more of a sales focus to them or you are still sticking to the health systems?

[Bob Watson:]

No. Our focus is the health system. Our sales team is focused on the health systems. The opportunity there was with the channel partner frankly came from calling on health system. Going forward, we continue to invest in our direct sales force whose responsibility is to sell to the hospital. The point I was making in the transcript was the fact that now having two essentially channel partner-type relationships in this calendar year, one was in Q4 and obviously this one in Q2, Cymetrix transaction in this particular opportunity. I think those are indicators that that's an area that we should invest more effort in. As I noted in the call, we have asked Richard Nelli to step into a role and spend some more thinking about how we might deploy our solutions through the channel partners.

[Dillon Hoover:]

Okay. Then kind of shifting focus and bounce around a little bit here ICD-10, just real quick on that front. It has been a month or so since they established their formal deadline. Are you guys seeing anything? Are customers kind of reluctant to pick up dual coding solutions or anything along that front now that the line has been pushed out three years in a row, are you guys seeing any business in that all yet?

[Bob Watson:]

Yes. Look, I think this time - my sense is that one of the benefits by the way of jabbing our filings that timely have been able back out talking to our clients, which is helpful for the growth of the business. Talking to those clients it has cleared to me that I think this time they think CMS means it if they are going to stick to the date. As a consequence, inside our pipeline, the activity around the various pieces of our coding portfolio whether it's abstracting, CDI or computer-assisted coding is quite strong, so I think we will continue to see significant accelerating momentum through that solutions set as we move into the first quarter of 2015.

[Dillon Hoover:]

Okay. Then just lastly for me, I think, you had noted two go lives in the second quarter. I it was three in the first.

[Bob Watson:]

Yes.

[Dillon Hoover:]

Can you comment on any go live activity here in Q3?

[Bob Watson:]

There are several go lives planned for this quarter. I am not quite sure if we have had one in the last month or not, but we had several go lives planned this quarter.

[Dillon Hoover:]

Thanks, Bob. I will get back in the queue.

[Bob Watson:]

Thanks, Dillon.

[Operator:]

We will now take our next question from Charles Rhyee from Cowen & Company. Please go ahead.

[Charles Rhyee:]

Thanks, guys. I wanted to follow-up back on the channel partner first here. I might have missed a little bit of detail. Are you saying that if this was done as perpetual license, we would have seen $3 million in the bookings or we would have $3 million in the revenue in the quarter?

[Nick Meeks:]

In the quarter in which the order was signed, which will be Q3, it would have been $3 million in revenue. The bookings number would have been as a perpetual license deal slightly smaller than it is as a term license.

[Charles Rhyee:]

Okay. As a term license, then we are dividing it over five years. Is that kind of how I should think about it?

[Nick Meeks:]

Essentially you are splitting it over five years, you are [maintenance] and all the other items into a five-year plan.

[Charles Rhyee:]

Okay. Do you have a rough estimate what you think that total amount we should be thinking then on an annual basis, so we take the software piece plus maintenance or do you think we are talking like $5 million over five years, $6 million?

[Nick Meeks:]

Charles, this is Nick. It will be $6 million over five years, $1.2 million in recurring revenue a year, plus $1 million or so professional services which unlike we will not have to defer, so we will recognize those professional services as…

[Charles Rhyee:]

Okay. Then this is paying for the master services pieces, but then once you go into a customer of theirs. Then how does the economic split then between two of you?

[Bob Watson:]

What we are talking about is the economics are what we receive.

[Charles Rhyee:]

Okay. Once you have this then they can just resell this into any other clients…

[Bob Watson:]

They can sell it to another client then agreement provides for with the rate is for them. I misunderstood the question. As it relates to the channel partner reselling to other of their clients, each of those clients if they choose to take this path with abstracting, we will sign an order form. The pricing for that order form is laid out in the Master services agreement so we they know, our channel partner knows when they sell a 10 hospital system in Kansas that that 10 hospital system will pay us x amount of dollars, so we think that that relationship as I said in the call should generate several other opportunities for us over the near-term.

[Charles Rhyee:]

Is their incentives built-in for their sales to really push it for you?

[Bob Watson:]

Yes. Again, as I get too much into here, we will cross the disclosure line. The bottom-line is this particular entity has a opening in its solutions portfolio that we can fill with our abstracting solution, which allow them to offer a full complete HIM coding medical records department offering to the clients.

[Charles Rhyee:]

Okay.

[Bob Watson:]

If you go back and think about Cymetrix, Charles.

[Charles Rhyee:]

Yes.

[Bob Watson:]

Cymetrix, that was our HIM portfolio and our coding for portfolio all bundled together, so when they outsource in that case they outsources in Cymetrix case, they outsource the back office of the health system that health system then gets our entire suite as part of outsourcing deal.

[Charles Rhyee:]

Right. Okay. That's helpful. Is there any restrictions any exclusivities here I guess at least with your abstracting solution that you cannot find a similar agreement with somebody or you are pretty open - are you pretty?

[Bob Watson:]

The highway is wide open.

[Charles Rhyee:]

Okay. Then maybe getting back to the earlier question around the guidance here, so if we would have expected $3 million in the perpetual license revenue in the third quarter, now we are moving it into a five-year deal here. There is still a decent amount of Delta on the probably what you would of gotten. What is kind of giving us comfort here in the back half of the year, because it kind of suggests that we still have a little bit of steeper end that we might have initially, particularly if we are not going to get it from that one big perpetual license sale.

[Bob Watson:]

Yes. I mean, this particular opportunity while it would have been within our sales pipeline as perpetual transaction was not in our original forecast for the year. Now, that said, we still have some work to do to get some perpetual license deals in Q3 and Q4 and we have consistently said through the course of the year that they would be back end loaded into those two quarters. Had this gone that way and we signed it in Q3, it would have solidified the year for us, but one another way and I am going to restate what I said on the call, every chance I have to take one of these opportunities and normalize the revenue recognition, I am going to do it. That said, we believe that we have certain clients and certain sales opportunities where it is highly unlikely that the buyer would do anything other than a perpetual deal with us. If you think about large health systems for example, they had very significant investments in their own IT infrastructure. If you look at our client base, we have very, very large health systems. It's unlikely that those large multibillion-dollar health systems are going to go down a SaaS or a term license path with us.

[Charles Rhyee:]

Okay. Just switching gears, Montefiore looking, the analytics with the Looking Glass, can you give us status on is that fully integrated, is the platform here as you go-to-market. You know, can you give us sort of an update here on where we are at and sort of what kind of sales activity you are starting to see as a result of the rebranding here now that we have been a few months into it. We announced them on the call a few weeks ago, we are talking about Q1 that in Q2 and in our Q2 numbers was first sale of the clinical analytics solution which was unanticipated frankly. We are thinking that our first significant sale and clinical analytics would be third or fourth quarter this year. We a small sale in Q2, one of which we - I think we have talked about who the buyer was, the buyer was the VA hospital, so the status of that solution is commercially available. Our sales team has it in the bag. I will tell you that 90% of every conversation I have with a client or a net new prospects involves talking about that solution and how it plays into the future of those health systems. You can pick up modern healthcare or any other trade journal or read his talk, you'll hear about some health system entering into an ACO agreement or some other kind of relationship. Hospitals historically have entered into those relationships in the past. For example when (Inaudible) became payers 15 years ago with limited understanding of the technology or other resources needed to deploy those new strategies. Our analytics platform can be and should be a critical part of our clients' go-forward strategy as they look at alternative payment models like kind of a care organization or any other kind of relationship, but it's a significant part of our sales pipeline.

[Charles Rhyee:]

At this point, and this will be the last question then I will jump back in the queue here. When you are in the market and your sales guys are out there, what is the biggest limiting factor? Is it just bandwidth for you guys? You are still a relatively small company and you are competing as much bigger players and particularly as we start getting to the analytics area how do you differentiate yourselves here? What is the biggest challenge for you maybe even getting in front of clients? Then you know working your way through the process. What do you think is driving the wind that you have seen for Florida.

[Bob Watson:]

First I want to thank you for saying relatively small player in this industry compared to the people we compete against. That was very, very generous. You know that said, look, we feel that's sales team that's around 10 or so quota-carrying individuals, our competitors field sales teams with hundreds of people. Our model and where we believe that we have the most success is working inside our client base. I repeatedly challenged our sales force that our bookings number should come 70% from inside our current client base and 30% outside client base. From our historical perspective, in 2012 that was 50-50 in 2013 it was 60-40. As we moved through this year it has been a mix probably 50-50, where we sit today and I think that's how we win. It's inside the client base. We are already a trusted vendor. We already have relationships. We need to frankly do a better job of leveraging relationships into additional sales. Now in net new front, our approach has been fairly targeted. We announced the sale to Eskenazi a few weeks ago which is in Indianapolis. A year prior to that, we announced community health network in Indianapolis. We leveraged our relationships with community health to get us them to talk to the guys with Eskenazi..That same kind of model is playing out for us in other markets, where we have concentration of clients is leveraging our clients to get in the door that's how we get in the door. I mean, it's hard work. I think being a salesperson anywhere in healthcare IT, unless to see "companies probably the hardest job in healthcare today, so our sales guys are working hard and diligently to get to decision points with our clients.

[Charles Rhyee:]

Great. Thanks a lot guys.

[Operator:]

We will now take our next question from Bruce Jackson from Lake Street Capital Markets.

[Bruce Jackson:]

Hi. Thank you for taking my questions, so not to live with the point on the at the channel partner revenue, how much incremental revenue to plan to book in the third and fourth quarters. Current course and speed, the implementation part should start in the late September or early October. We don't recognize the license fee until people go live on the solution, so we will see some professional services revenue late in Q3 and into.. The license revenue should start to appear in the first half of 2015.

[Nick Meeks:]

Okay. Just overall guidance perspective then we are still looking at a back end loaded year you guys. Is that?

[Bob Watson:]

Yes. That hasn't changed.

[Bruce Jackson:]

Okay. Then just generally, with some ICD-10 meaningful use what's the interest level right now among your client base and is this going to be the type that you are aware they get brass tacks on the contracts in the fourth quarter and does that additional confidence that we are see kind of boluses of contracts towards the end of the year.

[Bob Watson:]

Yes. Again, I think, Dillon asked this earlier too and I think that it's, we do see acceleration in the movement of coding related opportunities in the pipeline. The percentage of coding opportunities in the pipeline continues to be quite high. From our standpoint, we think those decisions, particularly if their computer-assisted coding decisions need to be made by Q1 next year of next year or the implementation timelines will be just too aggressive to get them up and running by October, so that sense of urgency among the client base, I think we see that as things move through the conversations he had with everyone.

[Bruce Jackson:]

Okay. Great. That's very helpful. Thank you.

[Operator:]

We will now take our next question with Richard Close from Avondale Partners. Please go ahead.

[Richard Close:]

Yes. Thank you. Can you give us an update on CentriMed. I'm not sure if you talked about that yet today or put it in the press release?

[Bob Watson:]

We didn't put in the press release and you are the first person to ask, Richard. We are still closing additions that not yet been met. We continue to work with them and we attempt to get to a point where we can close.

[Richard Close:]

Can you remind us was CentriMed included in the previous guidance that you provided?

[Bob Watson:]

No. It was not.

[Richard Close:]

In the past, I think, you have given us a breakdown and you were just talking about the pipeline and encoding. Then in the past, I think you have given us the breakdown of the pipeline based on the various product groups. Can you do that again?

[Bob Watson:]

Yes. I can. Scheduling in the sales pipeline is approximately 10% of the pipeline. Computer-assisted coding is about 30% of the pipeline. I will call it coding in general, so it's coding and CDI of 30%. About another 20% of the pipeline is in the HIM portfolio, which is the former access anywhere solution and the balance would be in analytics both, clinical and financial.

[Richard Close:]

Okay. In the 20%, in HIM, is the channel partner the, $7.2 million is that included in pipeline or?

[Bob Watson:]

No. That would have been out of a coding bucket as a 30%, but it is not including the percentages I just gave I have already taken that out.

[Richard Close:]

Okay. That's not in the pipeline, okay. With respect to the that channel partner, just to just to be clear on it I think that's at $7.2 million, $7.5 million, is that revenue coming from the channel partners themselves or from their customer, I guess I am a little confused in terms of your talking you can't recognize revenue until it's implemented and that's not till October or something like that that you said and correct me if I'm wrong there, but is that coming from the actual hospital their client or is it coming from the channel partners themselves?

[Bob Watson:]

The hospital pays them, they pay us.

[Richard Close:]

Okay. You recognize revenue still on the, you have to get it all up and live before begin get it recognized in revenue.

[Nick Meeks:]

Yes.

[Richard Close:]

Okay.

[Nick Meeks:]

We agreed to as the negotiations rather than a lump sum, you know, here is the rate, here is the deployment, we are spreading it out as each individual hospital has its own individual implementation plan.

[Richard Close:]

Then just to go down this a little bit further, you said this is actually a competitor of yours that has a whole with respect to this abstracting business, so I'm curious why couldn't you just target the companies - your channel partner now? Why couldn't you just target their customers and try to get those customers flip to your full solution?

[Bob Watson:]

If I answer that question, I can violate the disclosure requirement, but I will try to answer the question as best I can.

[Richard Close:]

Okay.

[Bob Watson:]

Like with Cymetrix, the client who selects Cymetrix to outsource their back office to is a client that would never be a potential client for Streamline. In the case of this new channel partner, their clients, because of the nature of their relationship with those clients are entities, there would not be an opportunity for us to sell our coding solutions or HIM solutions. Now, will there be an opportunity for us to sell other solutions? Yes, but not from our HIM coding and CDI portfolio.

[Richard Close:]

Okay. With respect to the clinical analytics and development, where you think that should be now that you're about a year into that or coming up on a year into that, where do you think that should be in terms of the percentage of the pipeline? You mentioned all your conversations with customers about other products often includes the analytics side of things. Do you think it should be a greater percentage of the overall pipeline or are you happy with that is today about a year down the road?

[Bob Watson:]

Yes. If you remember when acquired the asset, the challenge with that particular asset was that it was purpose-built for Montefiore. We need to invest significantly in research and development to commercialize it. That investment has been underway. We didn't even release it to our sales team until around HIM's earlier this year this earlier, so it's been bag for about six or seven months of the outside. I think where we are at today with that particular solution is at worst-case is that expectation, in best is we are ahead of plan. I mean it will really - vary there for me so if they can pull some of these opportunities into Q3 or everything ends up in Q4 yes, but sort of timing issues on those. In terms of where we sit in the pipeline, we sit where I thought where we would be. Again, I want to remind that we think the only buyers of this particular solution will be large academic medical centers rather than community hospitals in North Dakota, not to pick on North Dakota, but it's going to be large, complex, diverse, organizations probably with a research spent. We think that will be the first set of buyers. The second set of buyers will be the a community hospital systems that have enter into relationships to develop ACOs with Walgreens, or CVS or if somebody of that form and functioning, so and our first client was VA, so I think we have made pretty good progress with that asset.

[Richard Close:]

Okay. With respect to the professional services, you seem disappointed. In the quarter's performance, it's been an issue I guess going back about a year now. Can you just update us on what exactly is going on the professional services side and what is the timeline to getting this, I guess, under control or improved or whatever you want to classify it as not being I guess a negative issued for you guys.

[Bob Watson:]

Yes. Look, I am not happy by any of imagination with our performance in our professional services organization. I think, to some extent some of the impact has been that as I mentioned in the prepared remarks that we continue to press the go lives on our SaaS-based clients that are in the backlog. As a result, those professional revenues don't get recognized in the period in which we incur the cost, but they are recognized over the life of the contract, so that creates some drag on professional services. I think, when we had the opportunity to add David Sides to our team and given his experiences of working through the implementation challenges that he has had in his career. We feel like we are on a path to make some headway. It's going to take us a couple of quarters to get back to where we should be, but we were $400,000 short compared to last year this quarter. We were significantly off our own internal plan for the quarter. We have got to address that issue and we will be part of its leadership, just making sure that we have the right clients in the right stage of implementation process. There is something close to $7 million sitting in backlog in that particular area, so.

[Richard Close:]

How much $7 million?

[Bob Watson:]

About $7 million in professional services, we need to turn that into dollars.

[Richard Close:]

Okay. You mentioned something and I'm not sure exactly what this means, so maybe you can help me with it. We are not in were not connected. With respect to the guidance and the targets, we are not in a position to revise estimates. Why are you not in a position to revise estimates?

[Nick Meeks:]

This is more complicated question I can't respond as quick I normally would, but the answer I think there is an expectation from you and others for us to revise things downward. I think the average from you and your colleagues has come down materially. I am not fighting with that number that has come down to. On the other hand, we have some visibility that's meaningful into opportunities that we think get us in the ballpark at the low end of the range. The minute I don't think that's a possibility, I will say something unit is outside the quarter. That's where I am at today. Maybe that's a wrong decision, maybe I should take a hall pass and write it down.

[Richard Close:]

I guess my position is we come in, we have $0.8 million in new bookings, and we have the professional services stuff. We are talking about a channel partner that could have been a perpetual license deal, which would have you know obviously blown our numbers away. I understand you signing it over a five-year period and that's good. That's what we want the transition to assess. I mean, there comes a point where doing the stair step down and if there's certain issues then let's go ahead and talk about those issues, get those out there and say okay for that reason may let's go ahead and take down our guidance for the year. We will do that once and then hopefully we outperform and then we can get things moving in the right direction. That's the only reason why I bring that up. I mean, we don't want to be here in one more quarter talking about some of these moving parts that led us to not hit $8 million or $9 million number for the third quarter so.

[Bob Watson:]

Richard, I understand your position and I think you are absolutely spot on and if in the next couple of weeks in the middle of quarter, we feel a need to revise because something went different direction, I'll revise it. I think it's the right thing to do. Just where I sit today, I'm not prepared to do it.

[Richard Close:]

Okay. All right. Well, thank you very much. I will probably be following up with you guys once the balance sheet and cash flow are filed, so that should be within the next five days?

[Nick Meeks:]

Yes.

[Richard Close:]

Okay. Thanks, Nick.

[Nick Meeks:]

Thanks, Richard.

[Operator:]

(Operator Instructions) We will now take our next question from Jack Wallace from Sidoti & Company.

[Jack Wallace:]

Thanks. Just quickly guys, could you just talk about some of the other IT projects that your customers choose that are causing a little bit of the backlog there as well?

[Bob Watson:]

Depending on the solutions that we are trying to install it varies across the client base. I mean, a large portion of our clients that are not in our backlog for something from our HIM and coding suite are in the middle of their CAC implementations or the CDI implementations. We still have clients that are in the middle of their epic installs. The primary hurdle inside the client base tends to be inside our Epic clients that are moving to Epic 2014, and that creates challenges for us in our processes with them.

[Jack Wallace:]

Okay. Thank you. That's helpful. Then just going back to the channel partner opportunities kind of from a macro level, is it kind of the way we should think about this opportunity and certainly - I guess, potential opportunities to come is that they are opening up new addressable opportunities that otherwise would not have been addressable. Is that the understand these?

[Bob Watson:]

Yes. That's the way I look at it. In either [case] of this particular case, the end user, the hospital at the end of the money trail is a hospital that would never had been our client for that particular solution, because they made another set of decisions already, so to essentially get a piece of somebody else's pie is pretty good deal from where I am sitting. Now that we have invested in getting the MSA in the same place, our investments in the sales process is frankly de minimis. It's their sales team, selling their business. When they get an account that has the need for our solution, not everyone will, but when they have a need for our solutions, the construct of the agreement through an order form processes in place and those contracts get added to our system.

[Jack Wallace:]

Okay. Great. That will be it for me.

[Bob Watson:]

Thanks, Jack.

[Operator:]

We will now take our next question from Charles Rhyee from Cowen & Company.

[Charles Rhyee:]

Hi. Thanks for taking the follow-up. I had a question about the VA. I don't know if you had mentioned this maybe last quarter, but how many VA hospital do you count as clients today?

[Bob Watson:]

On the scheduling side, we have VA in Minneapolis as a client and we in Q2 sold the Clinical Analytics Solution to The JJ Peters Veterans Hospital in Bronx, New York so we have VA Hospital clients there.

[Charles Rhyee:]

Okay. You how does that kind of incumbency help you as you understand how the bid process is working given what they are looking for in general or is it kind of we shouldn't really think of it that way?

[Bob Watson:]

I've learned a lot more about the government in VA bidding process and I care to know in the last three months. You know, you would like to believe that incumbency matters, but honestly, Charles, I don't know how to handicap it, that's why we don't put any of the numbers in. We never talked about it being anything we had, any projection or any forecast or anything we put out. It is a complicated process, it is competitive, we are investing as I said on the call few weeks ago we have tried to compartmentalize our investment, so it's not distracted our organization from an opportunity of that size. Our investment has been 1.5 FTE's and a fairly significant portion of my time when it is available, but we continue to work with various partners and partner opportunities. The team from DSS done a great job for us. I think we are if Secretary McDonald sticks to his guns and are fair and open competition we are going to have our shot to compete. Getting the net back, it's something of that size for a company like us is a big deal, so we are happy to get DSS. We are going to make it makes a good effort at it and if it goes our way, it goes our way.

[Charles Rhyee:]

Is it fair to think of the timeline as similar to the [DoD], right? I mean, I think they put up their RFP last month. They were talking about precision time somewhere in the early mid-2015. Is that the VA kind of moving along those kind of timelines as well.

[Bob Watson:]

The published position in the communications we had the VA is a much more aggressive timeline. Given what I've learned in the last couple of months, I think a end of year decision would be remarkable. First quarter decision next year, probable. Second quarter next year likely kind of to take the progression, so they continue to tell us they are going to go fast and go hard, but they did do some of the things very fast. They did they vendor days, they did the demo days with light speed. I mean, honestly, light speed. We originally anticipated the RFP to be released by now. They went back and did some additional work and visits to some sites to understand the problem a little better. I think it's our understanding that the new Secretary personally has his hands on the mix on this particular decision. He does come from the commercial sector, so there's potentially some likelihood of quicker decision. Like I said in the prepared remarks, I have no idea how to handicap it Charles, I just don't. I mean, it's -

[Charles Rhyee:]

That's fair. I was just thinking more about the time line. That's all.

[Bob Watson:]

Yes. I don't have it handy.

[Charles Rhyee:]

Okay. Perfect. Thanks a lot, guys.

[Operator:]

We will take our next question of Bob Evans from Pennington Capital.

[Bob Evans:]

Hi. Good afternoon. Thanks for taking my question. Most of my question were asked and answered. One question left though. We saw back in August, I believe, insider buying and in the past you have indicated a willingness by you and the management team to do so. Once the window open, should we expect that convictions to occur?

[Bob Watson:]

Yes. In periods when we have been allowed by counsel to purchase, we have generally been buyers and that I think I see no reason why that pattern will continue.

[Bob Evans:]

Okay. Thank you.

[Bob Watson:]

All right. Thanks, Bob.

[Operator:]

There are no further questions in the queue. I would like to now turn the call back over to Randy Salisbury.

[Randy Salisbury:]

Again, we thank you for your time and interest and support of Streamline Health today. If you have any additional questions or need additional information, please contact me directly at [e-mail]. We look forward to speaking to you all again in early December, when we report our third quarter 2014 earnings. Good day.

[Operator:]

This does conclude today's conference. Thank you for your participation.