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| ECLP > SEC Filings for ECLP > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about our company and our industry. These statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecasted. When used in this report, the words "may," "will," "should," "predict," "continue," "plans," "expects," "anticipates," "estimates," "intends," "believe," "could," and similar expressions are intended to identify forward-looking statements. These statements may include, but are not limited to, statements concerning our anticipated performance, including revenue, margin, cash flow, balance sheet and profit expectations; development and implementation of our software; duration, size, scope and revenue expectations associated with client contracts; business mix; sales and growth in our client base; market opportunities; industry conditions; and our accounting, including its effects and potential changes in accounting.
Actual results might differ materially from the results projected or implied by the forward-looking statements due to a number of risks and uncertainties, including those described in this report under the heading "Risk Factors" and in other filings we make from time to time with the U.S. Securities and Exchange Commission. Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Throughout this report we refer to Eclipsys Corporation and its consolidated subsidiaries as "Eclipsys," "the Company," "we," "us," and "our."
This discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto, which are included elsewhere in this report.
EXECUTIVE OVERVIEW
About the Company
Eclipsys is a leading provider of advanced integrated clinical, revenue cycle and performance management software, and professional services that help healthcare organizations improve clinical, financial, and operational outcomes. We develop and license proprietary software and content that is designed for use in connection with many of the key clinical, financial and operational functions that healthcare organizations require. Among other things, our software:
• enables physicians, nurses and other clinicians to coordinate care through shared electronic medical records, place orders and access and share information about patients;
• helps our clients optimize the healthcare revenue cycle, including patient admissions, scheduling, invoicing, inventory control and cost accounting;
• supports clinical and financial planning and analysis; and
• provides information for use by physicians, nurses and other clinicians through clinical content, which is integrated with our software.
We also provide professional services related to our software. These services include software implementation and maintenance, outsourcing, remote hosting of our software, as well as third-party healthcare information technology applications, technical and user training and consulting.
With the exception of hardware revenues, we classify our revenues in one caption (systems and services) in our statement of operations since the amount of license revenue related to traditional software contracts is less than 10% of total revenues and the remaining revenue types included in this caption relate to bundled subscription arrangements and other services arrangements that have similar attribution patterns for revenue recognition. Our income statement items of revenue are as follows:
• Systems and services revenues include revenues derived from a variety of sources, including software licenses and contractual software maintenance, and professional services, which include implementation, training and consulting services. Our systems and services revenues include both "subscription" software license revenues and software maintenance revenues (which are recognized ratably over the contractual term) and license revenues related to "traditional" software contracts (which are generally recognized upon delivery of the software and represent less than 10% of total revenues). For some clients, we host the software applications licensed from
• Hardware revenues result from our sale of computer hardware to our clients in connection with their implementation of our software. We purchase this hardware from suppliers and resell it to our clients. As clients elect more remote-hosted solutions, clients' need for hardware is reduced and future hardware revenues may be negatively impacted. The amount of hardware revenues, and the proportion of our total revenues that they represent, can vary significantly from period to period. Margins on hardware revenues are generally significantly lower than margins on systems and services revenues.
We market our software to healthcare providers of many different sizes and specialties, including community hospitals, large multi-entity healthcare systems, academic medical centers, outpatient clinics and physician practices. Most of the top-ranked U.S. hospitals named in U.S. News & World Report's Honor Roll use one or more of our solutions.
We continue to focus on expanding our international business, including our operations in India and sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. As of March 31, 2009, our India operations have expanded to include two offices and approximately 700 employees. We believe that India provides access to educated professionals to work on software research, development and support, as well as other functions, at an economically effective cost, and also represents a potential new market for our software.
Business Environment
Our industry, healthcare information technology, is highly competitive and subject to numerous government regulations and industry standards. Sales of Eclipsys' solutions can be affected significantly by many competitive factors, including the features and cost of our solutions as compared to the offerings of our competitors, our marketing effectiveness, and the success of our research and development of new and enhanced solutions. We anticipate that the healthcare information technology industry will continue to grow and be seen as a way to curb growing healthcare costs while also improving the quality of healthcare.
Recent disruptions in U.S. and international financial markets have adversely affected the availability of capital for our clients and potential clients, which could negatively impact our sales. In addition, current economic conditions are motivating some clients and potential clients to prefer software subscription contracting to traditional licensing arrangements and we try to be flexible in accommodating clients' needs, including through structuring transactions as subscriptions. Given that periodic revenue from traditional license arrangements carries high margins and contributes significantly to overall profitability in the transaction period, this client contracting preference may affect our profitability in 2009.
Economic factors contributed to disappointing results for us in the fourth quarter of 2008, and we have responded with various initiatives to reduce and control our expenses, including headcount reductions to better align with current anticipated business conditions. However, the difficult economy, client financial challenges, and significant development requirements, combined with the positive effects of the HITECH Act have resulted in an unusual business environment that makes planning and forecasting challenging.
Initiatives and Challenges for 2009
The HITECH Act
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law. This was an important event for Eclipsys and the health information technology industry in general because a portion of ARRA known as the HITECH Act provides financial incentives for hospitals and doctors that are "meaningful EHR users," which includes use of health information technology systems that are "certified" according to technical standards developed under the supervision of the Secretary of Health and Human Services. In addition, the HITECH Act (i) requires governmental agencies that implement, acquire or upgrade health information technology systems used for the exchange of individually identifiable health information between federal entities and agencies and with non-federal entities to utilize systems that are certified according to such standards, and (ii) requires governmental agencies to require in contracts with health care providers, health plans, and insurers that as the providers, health plans, and insurers implement, acquire or upgrade health information technology systems, they use systems that are certified according to such standards. Although the HITECH Act says that private entities are not legally required to adopt or comply with the standards adopted by the Secretary of Health and Human Services, we believe that the HITECH Act's requirements for Federal agencies and financial incentives for healthcare providers make compliance with these standards a de facto business requirement for us and our competitors.
The HITECH Act provides the potential for aggregate payments over a period of approximately four or five years beginning in 2011 of up to approximately $10 million to qualifying hospitals (based upon a formula that takes into account various factors including total discharges and Medicare and charity patient volumes) and $44,000 to qualifying physicians. These are significant sums for many of those qualified to receive them, particularly in what is otherwise a challenging economic environment, and have provided a strong incentive for many hospitals and doctors to consider implementing HIT systems. We have noticed some increased interest in our offerings in response to this stimulus and we are hopeful that as the regulations to be implemented pursuant to the HITECH Act are written and the practical parameters of these programs come into focus, we will share in a demonstrable increase in market activity.
In order to take advantage of this opportunity, we will need to ensure that our software meets the certification standards described above. This will require additional development investments, which could displace other important initiatives due to the short timeline before stimulus funds become available to meaningful EHR users. If we falter in our efforts to meet the certification standards, we may breach some client commitments and find ourselves at a competitive disadvantage.
CCHIT
The Certification Commission for Healthcare Information Technology (CCHITSM) is a private non-profit organization formed to accelerate the adoption of robust, interoperable healthcare information technology throughout the United States by creating an efficient, credible, sustainable mechanism for the certification of healthcare IT products. CCHIT develops criteria for healthcare IT products based upon standards for such products established by various standards development organizations, and then tests products for adherence to the criteria. Products that pass the test are CCHIT "certified." Certification for a product lasts for two years and must then be renewed, and the standards applicable to products evolve and become more demanding over time. CCHIT has published certification criteria for only a limited number of products to date, but will continue to add products to its certification list. CCHIT certification is an important factor to many clients and potential clients in our target market and we believe that failure to have certified products and to demonstrate compliance plans for products that are not certified could put us at a competitive disadvantage. In addition, CCHIT criteria may be used as, and/or overlap with, standards for certification of health information technology systems under the HITECH Act. Accordingly, we are devoting significant resources to conforming our software to current and anticipated CCHIT criteria. This requires us to allocate scarce resources and may mean that other important development initiatives are delayed or foregone.
Performance Management
To help clients address their needs to operate more efficiently in today's challenging environment, and to differentiate our capabilities, we plan to emphasize development and marketing of our performance management suite of solutions, comprising of Sunrise EPSi TM, Sunrise Patient Flow TM and Sunrise Clinical Analytics TM. These solutions help healthcare organizations streamline and automate manual processes required to gather, analyze and display enterprise-wide information. They also enable hospital senior and department level management to more easily identify areas requiring intervention and to improve clinical quality, regulatory compliance, cost-efficiency, resource utilization and patient satisfaction. We think an integrated performance management offering can be a competitive differentiator for us, but it will require an investment to develop what were designed as independent applications into an integrated solution.
Speed to Value
Some of our software is complex and highly configurable and many clients value our ability to adapt the software to their specific needs. However, this high degree of configurability can result in significant implementation costs, which can make our offering too expensive for some clients. Our ability to reach our goals for expansion into smaller clients and in the international market, and to sell to clients with budgetary constraints, depends upon our ability to develop less costly ways of implementing our most complex software. We are currently deploying a new "speed to value" implementation methodology that we have recently developed to address this issue.
International Initiatives
We continue to focus on expanding our international business, including our operations in India and sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. We achieved some initial success with our sale of Sunrise Clinical Manager to SingHealth, the largest healthcare provider in Singapore. Our performance at SingHealth is being closely monitored in the region, and could prove to be a catalyst to help us drive business in new international
markets. These international initiatives are important to our ability to grow our business and require that we oversee development and client support capabilities in a high quality and cost-effective manner. We expect to face challenges building brand-name recognition and adapting our software solutions to new international markets.
Acquisitions Integration
Integrating the three companies we acquired in 2008 will present challenges. The anticipated benefits from these acquisitions may not be achieved, and the diversion of management's attention and any difficulties encountered in the transition process could negatively impact our business. These companies are relatively small and the Peak Practice and Patient Flow offerings in particular are not yet well established in the market, so additional investment is required and there is risk that our expectations for these companies may not be met. However, with Peak Practice, we now have a solution for the independent physician practice market, which we believe has potential to be a high growth area for us, especially given the ARRA, as discussed above.
Recent Performance and Outlook
We recorded $11.0 million of software license revenues in the quarter representing a 32.1% increase compared to the first quarter in 2008. These positive results were impacted by large enterprise deals closed in the quarter and by $2.1 million of contribution from our 2008 acquisitions. This revenue stream can fluctuate dramatically from quarter to quarter depending on whether we are able to record the license revenue at contract signing, which is dependent on each individual customer's contract terms. Therefore it is difficult to project license revenues in future quarters.
Due to the strong license revenues noted above, we had a great mix of higher margin sales activity in the quarter. Our sales team produced in the quarter as we signed new enterprise clients, closed significant renewal contracts, and added many new performance management clients. In terms of the new contracts we signed in the quarter measured in dollars, 52% were from new clients and 80% in our core clinical business.
We had a very strong collections quarter which sequentially decreased our days sales outstanding by 8 days to 78 days. Operating cash flows were $19.7 million compared to $6.9 million in the first quarter 2008, which was negatively impacted by payouts from our corporate bonus plan.
We continue to improve our customer ratings as evidenced in April 2009 when KLAS released its CPOE Digest for 2009 which highlighted Eclipsys leadership position in: (1) total number of physicians who utilize our computerized physician order entry ("CPOE") solution (2) percentage of our CPOE client base using the solution and (3) the highest physician satisfaction from clients who use our CPOE solution.
Our total revenues of $130.2 million in the first quarter 2009 were 4.7% higher than the first quarter 2008. The net loss for the quarter of $0.9 million includes a $5.4 million restructuring charge. Overall, we are pleased with the results and remain cautiously optimistic about results for 2009. Although we were pleased with the quarter, we note results by quarter can vary due to the timing of license revenues and capitalized software labor deferrals, which also can fluctuate based on project activity and release dates. We expect the positive impact of these two areas in the first quarter to decrease in the second quarter 2009.
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