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. .

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'll 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 other financial websites..

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 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 date 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 a 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?.

Thank you, Randy, and 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 and 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 intent to finalize this remaining item within the next 5 days, so that we'll not be required to extend our filing period..

That said, I'd like to turn our attention now to our bookings and 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 partner is a majority-owned affiliate of a 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 5-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 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 our 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 exists. 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, to pair with their existing solutions, to round out their own solutions offerings. This model could be deployed with all our other solutions offerings.

In fact, the Cymetrix transaction announced earlier this year broadly falls into this category of clients for us. In that instance, our HIM Coding and 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 our press release earlier today, revenues 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 solve for, as we move into the second half of this year. More in that particular point in a moment..

As mentioned last quarter, the lag in recognition of professional services revenue is reflective of 2 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. And 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 2 additional go-lives in the second quarter and 5 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 2 to tango here.

And for now, we are getting more traction in our client's internal IT cues 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've been focused on this issue for some time. And frankly, I believe our company can do a better job of getting our clients to day 0 or go-live status. Without getting too down in the weeds 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 may be 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 most recently as the CEO of iMDSoft, then you know how successful he has been in organizing and deliverable -- delivering scalable solutions to global clients.

I've 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 0 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 but one of those harbingers 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've 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 and 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 graciously accepted this new role. And I'm 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 have approximately $2.6 million of annual, unimplemented, contracted recurring revenue sitting on the shelf. Again, I believe our new COO will have a great impact on helping us recognize this revenue more quickly.

Additionally, as we noted in the 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 our 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'll now turn the call over to Nick Meeks, our CFO, to review the specifics of our second quarter financial performance. .

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 of the years, but have always worked diligently with our bankers to remedy the issue. We fully intend to pursue the same thing in this instance. The 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 5-day extension period..

Moving now to financial results for the quarter. As reported earlier today, revenues 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 1 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 nonrecurring expenses such as severance cost.

Given the relatively large amount of noncash charges and certain nonrecurring 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 the 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 acquisition and $473,000 in extraordinary charges for the fiscal year 2013 audit..

Moving now to our cash position. As expected, the ending cash balance for the quarter was down at the -- 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, we 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 have 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've 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 as currently planned..

That concludes my remarks. I will now turn the call back over to Bob. .

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 requirement document, or BRD, was recently released by the VA. This document is the first step towards releasing the 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 will participate in this national procurement opportunity.

But like anything run by the federal government, it's 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'll 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, that should we not win this bid, it will not be for lack of trying. .

For those of you who are curious as to who 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, the VA's electronic medical record. Should the contract call for us to have a partner that is listed on a T4 contracting schedule at the time we submit our bid 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 anticipated movement of the channel partner contract discussed earlier in this call is such an example.

The $3 million term license was repositioned to a 5-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 a focus of our sales organization..

As you all should know by now, we continue to build this company for the long run via a planned and 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 levels 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. But to a person, they have delivered. Thank you.

Finally, our vision and plan for the strategic direction this company has not changed. As an organization, and personally, we believe that our vision 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 our Q&A session.

Operator?.

[Operator Instructions] We'll now take our first question from Matt Hewitt from Craig-Hallum Capital. .

This is actually Dillon on for Matt. First one, just real quick. Nick, you didn't address the revenue guidance. I think it was previously 37 -- or excuse me, $35 million to $37 million.

And then, I think, EBITDA, you guys were targeting 6 to 8? Are those still realistic targets? Are you guys still targeting to hit those?.

I'll answer that, Dillon. This is Bob. I think you guys and most of the analysts have pulled down the estimates to slightly less than our low-end number. I think where we're sitting today, we're not in a position to revise those estimates. And in a time when we think we should, we will. .

Okay. And then, secondly, I know, at the beginning of the call, you had reiterated your belief that you guys, 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 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 then kind of parlaying it to the pipeline? Are you guys -- the breadth of the pipeline, is it mostly large channel partners, large hospital systems, or is it a bunch of smaller players? It seems to be that some of you guys have tailored to the large guys.

.

Okay. So let's deal with those, the nature of the large opportunity with the new channel partner first. I mean, that particular transaction, I believe, is probably the largest single transaction this company has had in the 20-plus years it's been around. And it was an outstanding piece of work by our sales organization to deliver that relationship.

And we'll get the order form signed-in 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 the year. It's a normal course and speed. I think the bookings opportunities range from opportunities that are small as $300,000 or $400,000 to as large as $2 million or $3 million transactions.

I mean, you look at the size of some the renewals and the renewals even the last couple quarters, most of them have been multimillion dollar renewals. I think while they're not net new growth, it's important to understand that our clients continue to invest in us and for the long term. We continue to build strong relationships.

Those relationships, over time, turn into new sales. .

Okay. And then, kind of shifting to the end markets.

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

No, no. Our focus is the health systems. I mean, our sales team is focused on the health systems. The opportunity that rose with the channel partner, frankly, came from calling on the health system. And it, going forward, we continue to invest in our direct sales force, whose responsibility is to sell to the hospitals.

The point I was making in the transcript was the fact that now, having 2 essentially channel partner-type relationships in this calendar year, one was in Q4 and obviously this one in Q2, the Cymetrix transaction and this particular opportunity. I mean, I think those are indicators that, that's an area that we should invest more effort in.

And as I noted in the call, we've asked Richard Nelli to step into a role, to spend some more time thinking about how we might deploy our solutions through the channel partners. .

Okay. And then, kind of shifting focus and bouncing around a little bit here. ICD-10, just real quick on that front. It's been a month or so since they've 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 3 years in a row? Are you guys seeing any business in that at all yet?.

No. Look, I think this time, my sense is, one of the benefits, by the way, of getting our filings back timely, as I've been able to back out, talking to our clients, which is helpful for the growth of our business.

And then talking to those clients, it's clear to me that I think this time they think CMS means it and that they're going to stick to the date. And 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, it's quite strong.

And so I think we'll continue to see significant accelerating momentum through that solution set as we move into the first quarter of 2015. .

Okay. And then, just lastly for me. I think you'd noted 2 go-lives in the first quarter. I think it was -- or excuse me, 2 go-lives in the second quarter. I think there was 3 in the first.

Any comments on any go-live activity here in Q3?.

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

And we'll now take our next question from Charles Rhyee from Cowen & Company. .

I wanted to follow back on the channel partner first here. And just -- I might've missed a little bit of details.

Are you saying that if this was done as a perpetual license, you would've seen $3 million in the bookings or you would've seen $3 million in the revenue in the quarter?.

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

Okay. And so as a term license, then we're dividing over 5 years.

Is that kind of how I should think about it?.

It's essentially, you're splitting it over 5 years, your rolling maintenance and all the other items into a 5-year plan. .

Okay.

Do you have a rough estimate what you think that total amount we should be thinking about on an annual basis? Do we take the software piece plus maintenance? What do you think, we're talking like $5 million over 5 years, $6 million?.

Charles, it'll be -- this is Nick. It will be $6 million over 5 years, $1.2 million in recurring revenue a year plus $1 million or so professional services which, unlike SaaS, we will not have to defer. So we'll recognize those professional services as they occurred. .

Okay. And then -- so this is the payor for the master services piece.

But then once you go into a customer of theirs and they sign up for you, how do the economics split them between the 2 of you?.

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

Okay. So once you have this, they can just resell this into any of their clients? Is that... .

If we sell it to other clients and then the agreement provides for what the rate is for them -- I misunderstood the question. So 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, 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 at a 10-hospital system in Kansas, that 10-hospital system will pay out 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. .

And Charles, just... .

Right.

And is there incentives for -- is this so that -- is there incentives built in for their sales reps to really -- to push it for you?.

Yes. It's, again, if I get too much into the weeds here, we'll cross the disclosure line and deal with it. The bottom line is, this particular entity has a opening in its solutions portfolio that we can fill with our abstracting solution, which allows them to offer a full, complete, HIM, coding, medical records department offering to the clients.

Not dissimilar if you go back and think about Cymetrix, Charles. And Cymetrix, that was our HIM portfolio and our coding portfolio all bundled together. So when they outsourced -- in that case, their outsource, in Cymetrix's case, they outsource the back office of the health system.

That health system then gets our entire suite as part of that outsourcing deal. .

Right, okay. That's helpful.

Is there any restrictions on -- I'm sorry, any exclusivity here? I guess, at least with abstracting, your abstracting solution that you cannot find a similar agreement with somebody else? Or you're pretty open to -- are you pretty free?.

The highway's wide open. .

Okay. Then maybe getting back to the earlier question around on the guidance here. So if we would've expected $3 million in perpetual license revenue in the third quarter, now that we're moving it into a 5-year deal here. I mean, that's still a decent amount of delta on probably what you would've gotten.

What's kind of giving us comfort here on the back half of the year? Because it's still -- it kind of suggests that we still have a little bit of these on a steeper ramp that we might've initially thought, particularly if we're not going to get it from that one big perpetual license sale. .

Yes. I mean, this particular opportunity, while it would have been a -- it was in 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, in Q3 and Q4 and we've consistently said through the course of the year that they would be back-end loaded into those 2 quarters. Had this gone that way and we signed it in Q3, it would've solidified the year for us, but it went another way.

And I'm 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'm 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 have very significant investments in their own IT infrastructure. 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. .

Okay. Just switching gears. Montefiore, looking -- the analytics with Looking Glass.

Can you give us a status on how -- is that fully integrated? Is the platform here, as we -- as you go to market, is -- can you give us some sort of an update here on where were at? And sort of what kind of sort of sales activity you're starting to see as a result of the rebranding here, now that we've been a few months into it?.

Yes. Yes, we announced on the call a few weeks ago when we're talking about Q1, that in Q2 and in our Q2 numbers, was the first sale of the clinical analytics solution which was unanticipated. Frankly, it was -- we were thinking that our first significant sale in clinical analytics would be third or fourth quarter of this year.

We had a small sale in Q2. One of which we -- yes, I think we've talked about who the buyer was. The buyer was a VA hospital. And it -- 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 any kind of -- you pick up Modern Healthcare or any other trade journal or read HIStalk, 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 other -- in the past, for example, when they all became payors 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 client's go-forward strategy as they look at alternative payment models like an accountable care organization or any other kind of relationship. So it's a significant part of our sales pipeline. .

At this point, and this will be my last question and then I'll jump back in the queue here.

When you're in the market and your sales guys are out there, what is the biggest limiting factor? Is it just bandwidth for you guys? You're still a relatively small company and you're competing against much bigger players, and particularly as we start getting to the analytics area.

How do you differentiate yourselves here? What's the biggest challenge for you maybe even getting in front of clients and then working your way through the process to the -- what do you think is driving the wins that you've seen so far then?.

So first I want to thank you for saying relatively small player in this industry compared to the people we compete against. That was very generous of -- very, very generous of you. So that said, look, we feel the 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 the client base. From a historical perspective, in 2012, it was 50-50. In 2013, it was 60-40.

As we move through this year, it's been a mix, probably 50-50, where we sit today. And I think it -- that's how we win, is inside their client base. We're already a trusted vendor. We already have relationships. We need to do it, frankly, do a better job of leveraging those relationships into additional sales.

Now in the 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 in to talk to the guys at Eskenazi.

That same kind of model is playing out for us in other markets where we have a concentration of clients. Because leveraging our clients to get in the door, that's how we get in the door. I mean, it's hard work.

I mean, I think being a sales person anywhere in healthcare IT, unless of course you're the CEO of a public company, is probably the hardest job in healthcare today. So our sales guys are working hard and diligently to get to decision points with our clients. .

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

So not to belabor the point on the channel partner revenue, how much incremental revenue do you plan to book in the third and fourth quarters?.

From that, current course and speed, the implementation part should start in late September, early October. We don't recognize the license fees until people go live on the solution. So we'll see some professional services revenue in late in Q3 and into Q4. The license revenue should start to appear in the first half of 2015. .

Okay. So just from an overall guidance perspective then, we're still looking at a back-end loaded year for you guys.

Is that correct?.

Yes, that hasn't changed. .

Okay.

And then just generally with ICD-10 and Meaningful Use, what's the interest level right now among your client base? And is this going to be the type of year where they get down to brass tacks on the contracts in the fourth quarter? And does that give you sufficient confidence that we're going to see kind of a bolus of contracts towards the end of the year?.

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. And the percentage of coding opportunities in the pipeline continues to be quite high.

And from our standpoint, we think those decisions, particularly if they're computer-assisted coding decisions, need to be made by Q1 of next year, where the implementation timelines would 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 that move through the conversations we have with everyone. .

We'll now take our next question with Richard Close from Avondale Partners. .

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

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

Can you remind us, was CentraMed included in the previous guidance that you provided?.

No, it was not. .

Okay. In the past, I think you've given us a breakdown, and you were just talking about the pipeline and in coding. And then, in the past, I think you've given us the breakdown of the pipeline based on the various product groups.

Can you do that again?.

Yes, I can. Scheduling in the sales pipeline is about approximately 10% of the pipeline. Computer-assisted coding is about 30% of the pipeline. And I'll call it coding in general. So it's coding and CDI, about 30%. About another 20% of the pipeline is in the HIM portfolio, which is the former accessANYware solution.

And the balance would be in analytics and in both clinical and financial. .

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

No. That was actually -- that would have been a coding -- out of the coding bucket as the 30%. But it's not included in the percentage I just gave. I've already taken it out. .

Okay. That's not in the pipeline, okay. With respect to that channel partner, just to be clear on it, I think I said $7.2 million, $7.5 million.

Is that revenue coming from the channel partner themselves or from their customer? I guess, I'm a little confused in terms of you're talking about 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 that coming from the channel partner themselves?.

The hospital pays them, they pay us. And... .

Okay.

So you recognize the revenue still on the -- you have to get it up and live before you begin -- get it recognized in revenue?.

here's the rate, here's the deployment. We're spreading it out, as each individual hospital has its own individual implementation plan. .

Okay. So -- and then, just to go down this a little bit further, you said this is actually a competitor of yours that, I think, has a hole with respect to this abstracting business.

So I'm curious, why couldn't you just target the companies, that you're a channel partner now? Why couldn't you just target their customers and try to get those customers to flip to your full solution?.

I -- if I answer that question, I can violate a disclosure requirement. So -- but I'll try to give you a little -- I'll try to answer the question as best I can. 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 that would not be an opportunity for us to sell our coding solutions or HIM solutions. Now will they be an opportunity for us to sell other solutions? Yes, but not from our HIM Coding and CDI portfolio. .

Okay.

With respect to the clinical analytics and -- where do 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? Do you think that it's -- you had 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? Are you happy with where that is today about a year down the road?.

Yes. If you remember, when we acquired the asset, the challenge with that particular asset was that it was purpose-built for Montefiore. We needed to invest significantly in research and development to commercialize it. That investment's been underway.

We didn't even release it to our sales team until around HIMSS last year or this year, early this year. So it's been in the bag for about 6 or 7 months at the outside. I think where we're at today with that particular solution is, at worst case, is at expectation. At best case, it's we're ahead of plan.

I mean, it will really -- and the variance there for me, we'll see if they can pull some of these opportunities into Q3 or everything ends up in Q4, but sort of timing issues on those. But in terms of where we sit in the pipeline, we sit where I thought we'd be.

I think that, again, I want to remind that I -- we think the early 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 bank. We think that'll be the first set of buyers.

The second set of buyers will be the community hospital systems that have entered into relationships to develop ACOs with Walgreens or CVS or somebody of that form and function -- functioning. So -- and our first client was the VA. So I think we've made pretty good progress with that asset. .

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, as not being a, I guess, a negative issue for you guys?.

Yes. Look, I am not happy, by any stroke of the imagination, with our performance in our professional services organization. I think, 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 they're -- we incurred a cost, but they're recognized over the life of that 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 experience at working through the implementation challenges that he's had in his career, we feel like we've -- we're on a path to make some headway. It's going to take a couple of quarters to get back to where we should be.

But we were $400,000 short compared to last year in this quarter. We were significantly off our own internal plan for the quarter. We've got to address that issue, and we will. I mean, part of it's leadership, part of it's just making sure we have the right clients in the right stage of the implementation process.

There's something close to $7 million sitting in backlog in that particular area. So... .

How much? $7 million?.

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

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

Why are you not in a position to revise estimates?.

I could -- look, we -- yes, I'm right here, Richard. I'm trying to think kind of the answer. Okay. This is a more complicated question, I can't respond as quick as I normally would. But the answer is, I think there's 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'm not fighting with that number that it's come down to. On the other hand, we have some visibility that's meaningful into opportunities that we think get us in the ballpark of the low end of the range.

And the minute I don't think that's a possibility, I'll say something, even if it's outside the quarter. I mean, it -- that's where -- I mean, that's where I'm at today. And maybe that's the wrong decision, maybe I should take a hall pass and write it down. I'm just not... .

So I guess, my position is we come in, we have $0.8 million in new bookings. We have the professional services stuff. We're talking about a channel partner that could have been a license deal, perpetual license deal, which would've been obviously blowing our numbers away. But now, it's -- and I understand you signing it over a 5-year period.

And that's good, that's what we want, to transition to a SaaS. So -- but, I mean, there comes a point where we're doing this 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, maybe let's go ahead and take down our guidance for the year.

We'll do that once and then, hopefully, we outperform that. 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 and talking about some of these moving parts that led us to not hit the -- what's an $8 million or $9 million number for the third quarter. So... .

So Richard, I understand your position. And I think you're absolutely spot on. And if in the next couple of weeks, in the middle of the quarter, we feel a need to revise because something went a 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. .

Okay. All right. And we'll probably be following up with you guys once the balance sheet and cash flow were filed.

And so that should be within the next 5 days?.

Yes, sir. .

[Operator Instructions] And we'll now take our next question from Jack Wallace from Sidoti & Company. .

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

So depending on the solution set it -- we're trying to install, it varies across 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 in or moving to Epic 2014. So we have -- I'm aware. I've had conversations today with 2 clients there in the middle of their upgrades to Epic 2014, and that creates challenges for us and our process with them. .

Okay, that's helpful. And then just going back to the channel partner opportunities kind of from a macro level.

Is this kind of the way we should think about this opportunity and certainly, so I guess, potential opportunities to come? Is that they're opening up new addressable opportunities that otherwise would not have been addressable? Is that the way to understand these?.

Yes, that's the way I look at it. I mean, there are -- in either the senator's case or this particular case, the end user, the hospital at the end of the money trail is a hospital that would never have 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 a pretty good deal from where I'm sitting. And it -- we don't have to -- now that we've invested in getting the MSA in place, our investment in the sales process is frankly de minimis. It's their sales team selling their business.

When they get an account that has a 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 process is in place, and those could be added to -- those contracts get added to our system. .

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

I have a question about the VA.

I don't know if you had mentioned this maybe last quarter, but how many VA hospitals are you -- do you count as clients today?.

So on the scheduling side, we have the VA in Indianapolis as a client. And we, in Q2, sold the clinical analytics solution to the J.J. Peters VA facility in Bronx, New York. So we have 2 VA hospital clients there. .

Okay.

How does the -- does incumbency, that kind of incumbency help you as you understand how the bid process is working, given what they're looking for in general? Or is there kind of -- we shouldn't really think of it that way?.

I've learned a lot more ago about the government and VA bidding process than I cared to know in the last 3 months. You'd like to believe that incumbency matters. But I 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 in any projection or any forecast or anything we put out. It's a complicated process. It's competitive. We're investing. As I said on the call a few weeks ago, we've tried to compartmentalize our investment so as to not distract our organization from an opportunity of that size.

Our investment has been 1.5 FTEs and a fairly significant portion of my time when it's available. But we've continued to work with the various partners and the partner opportunities. The team from DSS has done a great job for us.

I think we're -- as Secretary McDonald fixed his guns on a fair and open competition, we're going to have our shot to compete. And getting in at bat, at something of that size for a company like us, is a big deal. So we're happy to get the at-bat. We're going to make a good effort at it. And if it goes our way, it goes our way. .

Is it fair to think of the timeline as similar to like DoD, right? I mean, I think they put up their RFP. Last month, they were talking about a decision time somewhere in early, mid-2015.

Is that -- is the VA kind of moving along those kind of those timelines as well?.

The published position and the communications we've had from 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. A second quarter next year, likely. Kind of you just take up aggression.

So they continue to tell us they're going to go fast and go hard, but they did do some of the things very fast. They did the vendor days. They did the demo days with lightspeed. I mean, honestly, lightspeed. 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, to our understanding, that the new secretary has personally has his hands in the mix on this particular decision. He does come from the commercial sector, so there's potentially some likelihood of a quicker decision.

But like I said in the prepared remarks, I have no idea how to handicap it, Charles. I just don't. I mean, it's... .

No. That's fair, yes. I was just thinking more about the timeline, that's all. .

Yes, I don't have any. .

We'll take our next question from Bob Evans from Pennington Capital. .

Most of my questions have been asked and answered. One question left though. We saw back in August, I believe, some insider buying. I know in the past, you've indicated a willingness by you and the management team to do so.

Once the window opens should we expect that conviction to occur?.

Yes, we -- in periods when we've been allowed by counsel to purchase, we've generally been buyers. And that, I think, I see no reason why that pattern won't continue. .

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

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

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