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Eclipsys Q4 2004 Conference Call
- Highlights -

System Implementations: In 2004 Eclipsys had 54 major system activations of Sunrise Clinical and Sunrise Financial Manager applications, of which 18 occurred in the fourth quarter. 50 of these activations were core clinical applications, including 23 Sunrise XA 3.5 Clinical Manager applications. There are already 50 SCM 3.5 implementations scheduled for 2005. This is even more significant, considering that the 3.5 release has only been available since June 2004. The company expects to activate 4 customers on the new Medication Management system in the first half of 2005, along with 5 on the new Emergency Management system.

2004 was a record sales year for Eclipsys, and 4Q was a record Sales quarter. Sales for the year were 13% higher than 2003, the previous best sales year. 4Q2004 sales were 53% better than 2Q2003, the previous best sales quarter.

Bookings for the year were enhanced significantly by the outsourcing contract with North shore Long Island Jewish, which is the largest sale in company history. Without this contract, the quarter would have been only average. A stronger quarter was anticipated, but several deals did not close in time to make the quarter. The company stressed that these deals have not been lost, just delayed. However, these delays in software sales will affect revenue & margin going forward, particularly in the first quarter 2005.

The company is seeing their competition become more aggressive, both in pricing and sales tactics. The CEO believes that they will prevail over said tactics, but that they could lengthen the sales process. Encouragingly, the company closed 4 Clinical Manager deals in 4Q, all of which were net new core clinical customers. The company also closed 2 IT outsourcing deals in the quarter.

The sales pipeline remains robust. The company intends to aggressively pursue outsourcing contracts in what it calls “Portfolio Deals”, which include both software and IT outsourcing. There were 4 outsourcing deals in 2004, as against 2 or 3 per year historically.

Sunrise Clinical Manager sales gained momentum throughout the year, and did particularly well in competitive displacement situations. Ninety percent of the core clinical sales for 2004 displaced some other systems, or were the customer's first clinical system. This percentage is quite a bit higher than past years, and is expected to remain high. Since 2001, 70% of core clinical sales have been net new customers, and 30% have been upgrades of existing Eclipsys customers.

The company continues to expand the breadth of its product portfolio. 5 additional Ambulatory Care contracts were signed in 2004, for a total of 28 contracts covering 67 facilities. 5 more Emergency Department contracts were signed in 2004, for a total of 26 contracts covering 74 facilities. 11 additional Knowledge based Charting contracts were signed last year, for a total of 21 contracts & 64 facilities. There were 8 additional Medication Management contracts, for a total of 35 contracts & 80 facilities. Partner solutions included 8 Surgical Management systems, 8 Knowledge based Transcription Systems.

In 2004, ECLP's net new core clinical customers included the following mix: 60% Community based hospitals, 25% were Academic institutions, & 15% with hospitals that have Pediatric facilities.

Organizational Changes: Russ Rudish will be responsible for all Sales, Marketing, & Customer Solutions. Sounds like a demotion for John Cooper, who will be “continuing his leadership role in sales”. Mike Ito will move from implementations to sales. John Gomez, CTO will take over Implementations, Training & Customer Support. Now the group that develops the products is also responsible for implementation & training & support. John Adams was hired as Executive VP & Chief Administrative Officer, and Mike Donner was hired as Chief Marketing Officer.

New marketing strategy ~ “A vision of health” has roots in a “connected enterprise”. In a connected enterprise, clinicians, administrators & health care workers have the information they need, through electronic health records and imbedded content, to make the best possible decisions for their patients. This vision aligns closely with the federal initiative to transform healthcare through widespread adoption of interoperable technology over the next decade.

Development ~ World-class development organization called “PERT”. 2004 saw two releases of Sunrise software. The first release, version 3.5 was on time, and the next release, version 3.6, was delivered 5 months ahead of schedule. The second release of the Pharmacy application was also released 5 months ahead of schedule. Now by aligning PERT with the Services group, the company is further fine tuning its development & delivery.

SCM releases scheduled for 2005 include 4.0 in March & 4.5 in Oct/Nov.

Sales highlights of 2004 ~ Significant wins include the outsourcing contract with North shore LI Jewish, where 180 NSLIJ employees have already transferred to Eclipsys per the agreement. NSLIJ plans to implement Sunrise Clinical Solutions over a time frame yet to be determined. NIH selected Sunrise Surgical Manager. Other sales include749 bed Trillium Health Center in Ontario, Provincial Health Systems Authority of BC, Hospital for Special Surgery (HSS) in New York City, McKenna Health System in Brunsfield Texas. Also new 3 year extended agreement with VHA.

2004 Revenue of $309.1M represents an increase of about 21.4% YoY. Fourth Quarter Revenues of $87.2M were up 31.6% over the year earlier quarter. 2004 Loss per share was $(.70) as opposed to $(1.23) for 2003. Loss for Q4 2004 was $(.06) per share, in line with expectations.

Previous guidance called for profitability in 2005, with break-even expected in Q4 2004. This goal was not attained, however, and the company now forecasts a loss of $(.18) in Q1 2005 due to costs associated with the NSLIJ contract, and the “slippage” of two major contracts into the new year. Guidance still calls for 20% revenue growth for the foreseeable future, along with improving profit margins. Because of the subscription pricing, 85% to 90% of this growth is already contracted.

Fourth quarter and year-end results:

Fourth quarter 2004 revenues were $87.2 million compared to revenues of $79.8 million in Q3'04. Net loss for the quarter was $(2.9) million compared to a net loss of $(6.7) million in Q3'04. Basic and diluted net loss per share was $(0.06) compared to $(0.14) in Q3'04.

For the year, revenues were $309.1 million compared to revenues of $254.7 million in 2003. Net loss for the year was $(32.6) million compared to $(56.0) million in 2003, this represents a $23.4 million, or 41.8%, improvement over last year. Basic and diluted net loss per share was $(0.70) compared to $(1.23), a $0.53 improvement over 2003.

Operating activities generated $7.5 million of positive cash flows in Q4'04, this represents an $11.3 million improvement compared to Q4' 03. Cash, cash equivalents and marketable securities were $122.0 million as of Dec. 31, 2004, a decrease of $29.7 million from $151.7 million as of Dec. 31, 2003. Days sales outstanding (DSOs) were 67 days as of Dec. 31, 2004, a decrease of 3 days from the preceding quarter and a decrease of 8 days compared to last year. Deferred revenue (including current and long-term) was $122.7 million as of Dec. 31, 2004, an increase of $21.5 million from $101.2 million as of Dec. 31, 2003.

Recurring Revenues, including software, software maintenance, remote hosting & outsourcing were $198M, an increase of 18.6%, or $31M compared to last year.

Guidance for 2005:

Revenues are forecast to range from $370M to $385M, or an increase of 20% to 25%. With respect to the midpoint of revenue guidance, Systems & Services Revenue is expected to range from $343M to $347M. Hardware revenues are expected to range from $30M to $34M. Approx. 90% of the expected Systems and Services revenue is already under contract. On an overall basis, approx. 85% of all revenue is already under contract. EPS for 2005 is expected to come in between $.05 and $.10. Positive cash flow is also in the forecast for 2005.

A loss of $(.16) to $(.19) per share is forecast for Q1, due to higher FICA payments, costs associated with relocation and realignment, and the upcoming HIMMS conference, and the fact that Q1 2005 won't match Q4 2004. Cash flow for Q1 will likewise be impacted. Q1 & Q2 sales bookings will be a major factor in achieving the financial objectives for the year.

SM&A and R&D Expenses are expected to decrease as a percentage of revenue in the future. Software capitalization, as a % of gross R&D is expected to range from 18% to 20%. Capex is expected to range from $18M to $20M. This could increase, however, if a higher percentage of customers opt for remote hosting. The company prefers remote hosting whenever possible.

DSOs are expected to stay in a range of 65 to 75 days.

Long-term target: The target for annual revenue growth is 20%, and the target for gross margins is 50% plus.

Backlog: This will be reviewed only on an annual basis for comparative purposes. The backlog only reflects contracted revenue related to outsourcing, remote hosting, software licensing & subscription fees, content fees, and one year of software maintenance. Professional Services, Networking Services, and Hardware revenues are not reflected in the backlog.

As of year-end 2004, the backlog is about $850M. This compares to $685M at the end of 2003, and represents a 24% increase. The backlog is realized over the life of the contracts outstanding.


Q: Expand on the impact of the NSLIJ contract, and when can additional add-on sales be expected?
A: It is purely an outsourcing transaction, and no add on sales are expected in 2005. The opportunity exists for advanced clinical sales down the line.

Q: Provide more information on the expected loss in Q1.
A: There were content related fees in Q4 2004 that won't be recurring in Q1, and expenses that relate to reinvestment in our business that will carry over into Q1.

Q: when will expensing of stock options begin?
A: in Q3 as required be FAS. This is not included in the guidance.

Q: what is the size of NSLIJ and what impact will it have on the next quarter?
A: it is an employee only transaction; we're not taking over data centers or that type of thing.

Q: what are the transition costs relating to NSLIJ and what are the severance payments?
A: Can't disclose the specifics, but the transition costs are on the cash flow side, and won't be a significant drain on Q1 results. Severance costs amount to less than 2 cents of the Q1 eps.

Q: What about the contract delays?
A: We had a good Q4, but not as good as we hoped. These contracts have not been lost, just delayed.

Q: What will be the ramp of the LIJ revenue?
A: We took over the employees in mid-January, and are moving ahead on the contract.

Q: What is the distribution of revenue for next year?
A: It should ramp gradually throughout the year.

Q: What are the “content fees” that made such an impact in Q4?
A: We have another company that is remarketing our content, and there was a significant transaction in Q4.

Q: Why are you excited about the outsourcing business segment for the long term?
A: It's the bundling of outsourcing with our other software products, or “portfolio”, as we call it. With LIJ, there's both the opportunity for additional outsourcing and for software sales as well.

Q: What is the expected timing of the deals that slipped in Q4?
A: We expect them to happen in 2005.

Q: Please expand on the “content” sales. Doesn't selling content reduce the demand for your software?
A: We have some very valuable evidenced based interdisciplinary material from the acquisition of CPMRC for which there is a big demand outside of our customer base, and we are trying to take advantage of that. We still have an advantage by way of how we manipulate the content within our own products.

Q: Please expand on the “tougher sales environment” alluded to earlier.
A: Our competitors appear to be very hungry, and are using more aggressive tactics and pricing. We don't think that it will cause us to lose deals, but it may add steps to the sales process.

Q: Please elaborate on the personnel reductions mentioned earlier.
A: Looking at what was important and what was not, we reduced staff in the less important areas, while adding to the others. Overall, we expect headcount to increase in 2005. None of the reductions were in the sales or development forces.

Q: Who is the third party marketing your content, and to whom are they selling.
A: Can't disclose the information, but it is the third party's customer base that's buying.

Q: What is the count of the sales force, and what has been the turnover in 2004?
A: We consistently have about 300 people in S&M, and turnover is normal. We have done selective upgrading, and repositioned a layer of management, so there are more feet on the street now.

Q: Elaborate on why the 4Q deals were pushed out, and what the profitability of those deals will be like now.
A: Primarily the more aggressive marketplace. Competitors are going to great lengths to hang on to their customers.

Q: Regarding he content boost in Q4, should we look for a down tick in this line item in Q1?
A: We covered how much our software licensing will be for the year, but it will be down in Q1. For the year it will be at a similar level as 2004 or slightly less.

Q: That's about $4M in revenue and $4M positive contribution to gross profit. Projecting that out, I get a gross margin of about 40%. Is that about right?
A: Yes, high thirty's to 40%.

Q: Regarding the deals that were pushed out, just how far along are these deals, and are they pivotal to the results for next year? We know that 90 percent of the guidance is already contracted. Do these deals make up the other 10%?
A: They are pretty far down the pipeline. Since sales tend to ramp throughout the year, we need for the first two quarters to be reasonable, but our guidance is not dependant on any single deal.

Q: How much of the increase in S&M expense was due to commissions as opposed to the user conference and other activity?
A: Most of it was commission related.

Q: Do you pay commission at the time a deal is booked, or when the revenue starts to flow?
A: The majority of the commissions are paid when the deal is booked.

Q: Any comments on the significant increase in deferred revenue?
A: We have had nice growth in deferred revenue for the past 2 years. It reflects the revenue backlog as the various deals are booked and come on line.

Q: Any guidance for 2006?
A: We have projected continued 20% growth in revenue, and we expect to gain further leverage in our expense items and improvements in gross margin, so you can project it from there.

Q: Does the LIJ deal include any software at all, and if not, when might you expect to add that component?
A: Right now, it's just an outsourcing contract for 180 people, and it's really NS's call on when to move ahead with the clinical applications, but the first step is to get the technology in place. We will be working with them this year to determine when they will start on their clinical transformation.

Q: Do you see a trend toward outsourcing, and if so where do you see your business down the road in terms of software vs. outsourcing revenues?
A: We think the outsourcing business will get slightly richer, but that will contribute to the software side as well, so there are benefits in both areas. When the outsourcing and software are packaged together, the customer can get an outcome that they can't get from anyone else. Look at outsourcing as a value added proposition that will perform better for us.

Q: Is this reflected in your 50% long-term gross margin guidance?
A: Yes

Q: What is a stock option buy-back?
A: We repurchased some stock options from certain employees during the quarter, and they are now in our stock option pool. The impact was less than $1M.

Q: And why did you do that as opposed to buying stock: Did the board authorize a stock option buy-back after they refused to buy the stock on the open market at $4 per share? That's questionable. Don't answer.

Q: Can you talk more about 2006? From your guidance, you're talking about adding $80M to $100M in revenue for '06. That's anywhere from $1.60 to $2 per share in revenue, so how much of that can fall to EBIT? Because when I look at the business, I don't see any reason why you can't drop $1 of that, unless you guys continue to raise expenses. I guess I'm having a tough time understanding how, even this year, how adding $1.40 from roughly a break even Q4, we're going to drop $2.5M to 5M to EBIT, so can you give us some concrete guidance based on this $1.60 to $2 per share, how much can this company earn?
A: We are doing things to leverage what you're describing, but at this point, we can't give specific guidance for 2006. We do plan to focus more than ever on controlling our expenses, so from that standpoint, we're in the same camp that you are.

Q: One last thing; I understand that the company is in a much better position than ever before, but just consider this. You've hired a lot of very expensive people, this company is not going to earn this year what it could have if different decisions had been made two years ago, and I frankly it's not good enough to sit there and tell us that we don't want the stock to go, we want the value of the company to be maximized. You've gotten away with not putting out targets for two years, and it looks to me like you've overspent. I think you should have some real goals, and to me, earning $1 or more in 2006 has to be your target. But at least we're headed in the right direction so that's all I'll say, except get out there and sell.
A: Thanks.

Q: What's headcount at the end of 2004:
A: A little over 2000 people.

Q: What % of 2004 revenue was from licensing, and what do you see for 2005?
A: For last year it amounted to about 3% of revenue. It will be down as a percentage of revenue in 05.

Q: R&D expense came down and Capitalized Software went up. Why?
A: We we're working on release 4.0 that's coming out in March, and we had a spike up in those activities.

Q: Do you ever compete with the party with whom you have the software license agreement?
A: Yes

Q: Would you say that you got to a different end customer by using a third party than you would have normally?
A: Absolutely. Yes.

Q: Why didn't you amortize the content deal over the life of the contract instead of recording it all this quarter?
A: It is not structured as a subscription contract. With a reselling arrangement, it doesn't make sense to package it as recurring revenue.

Q: Were there a certain number of seats stipulated, or just how was it sold?
A: It was for a certain size organization, yes. The ultimate user is a hospital, which will always be the case. It's not sitting there in some company's inventory.

Q: Can you quantify the slippage of new business? How many deals, and how big?
A: It's just a couple. We had a record breaking Q4 as it was; we just expected it to be even better.

End of call.

Additional notes:

·Guidance for 2004 was for Revenues of $305M – 320M. Eclipsys reported $309.

·The guidance for new sales bookings being weak in the first half of the year and stronger toward the end is consistent with previous years guidance.

·EPS guidance was for a loss of $.60 - .70 share, but approaching break-even by year-end. The actual figure was $(.70).

·The guidance for Gross Margins was to gradually improve to just over 40%. The actual figure was 38.1%

·Operating Cash Flow was expected to by positive by fourth quarter. It was. Overall, the company expected to use $30 - $35M of cash during 2004. The actual figure was $29.7M.


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