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Eclipsys (ECLP) reported third quarter earnings in a press release on October 20. Concurrently, they reported “response time issues” with the Sunrise XA product, along with a $1.2 Million “impairment charge” related to the problem.

The company reported their strongest revenue quarter ever, up over 43% year over year and 7.6% Q over Q. There was a loss of $.24 per share, 3 cents worse than expected. This was due entirely to the impairment charge.

Investors reacted with characteristic thoughtfulness, dumping more than 5 million shares at prices as much as 40% lower than the previous day's close, and whacking off a quarter of a billion dollars of market cap.

The response time issue is quite serious, but confined to the Sunrise XA workflow engine. Currently there are 36 Sunrise XA systems in implementation and 2 that are already live. The company says the problem is an architecture issue with the XA client, and not Microsoft .NET related. Their strategy will be to temporarily replace the XA workflow engine with the older SCM 3.04 engine, which is currently live in over 100 accounts. This component is tried and true, and performs all the same functions - it just isn't web enabled. The company hopes that this strategy will allow XA customers to continue with their development until the problem is corrected.

If Eclipsys can keep their XA customers reasonably happy and report solid progress on correcting the problem soon, there should be little impact on revenues going forward. To the extent that the problem results in lost sales, it could have an impact on current bookings and future revenue.

Like most investors, I was very disappointed with the announcement of the response time problem. But I think that openly acknowledging the problem, as they have done, is the best course of action. I was impressed with the ensuing conference call, in which the CEO, COO, CFO, and CTO patiently explained their strategy and fielded every question thrown at them by the analysts. It's a setback, but not one that they can't recover from.

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