Allscripts Healthcare Solutions, Inc (NASDAQ:MDRX)
F2Q09 Earnings Call
Jan 08, 2009 4:30 pm ET
Glen Tullman - Chief Executive Officer
Bill Davis - Chief Financial Officer
Lee Shapiro - President and Chief Operating Officer
Mike Lori - Executive Chairman of the Board of Directors; Chief Executive Officer, Mysis Plc
Sean Wieland - Piper Jaffray
Sandy Draper - Raymond James
Ross Muken - Deutsche Bank
Richard Davis – Needham & Co.
Alan Fishman - Thomas Weisel Partners
Corey Tobin - William Blair
Richard Close - Jeffries & Co.
Jean Manheimer - Regus Security
Good afternoon. My name is Katrina and I will be your conference operator today. At this time I would like to welcome everyone to the Allscripts fiscal 2009 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise during the conference. At the end of the presentation, there will be a question-and-answer period. (Operator Instructions)
I’d like to turn the call over to Mr. Glen Tullman.
Thank you very much. Good afternoon and welcome to Allscripts fiscal 2009 second quarter conference call. This is Glen Tullman, Chief Executive Officer of Allscripts. Joining me on the call today is Bill Davis, our Chief Financial Officer; Lee Shapiro, our President and Chief Operating Officer and I’m also pleased to welcome Mike Lori, the Executive Chairman of our Board of Directors and Chief Executive Officer of Misys Plc who is listening in as well. Before we get started, I’m going to ask Bill Davis to review our Safe Harbor Statement; Bill.
This presentation will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events, developments, the company’s future performance, as well as management’s expectations, believes, intensions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.
These forward-looking statements are subject to a number of risks and uncertainties, including the volume and timing of system sales and installations, our ability to integrate acquisitions and realize the benefits of the merger with Misys Healthcare and other factors outlined from time to time in our reports filed with the Securities and Exchange Commission, to which you should refer including our 2007 Annual Report on Form 10-K, available through the website maintained by the Securities and Exchange Commission at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.
Thanks Bill. Well again, I’m very pleased to welcome all of you to the New Year and present our first quarter of results since the combination of Allscripts and Misys Healthcare. We believe we are in the right place at the right time with the right solutions for the market.
As you will see, our results demonstrate the early success of the merger, our overall operating performance and I’m pleased to say that we didn’t allow the team to get distracted by the merger and our fortunate position in the ambulatory sector of healthcare information technology which has so far weathered the economic challenges very well. We remain enthusiastic about our prospects. So let’s start by reviewing the numbers for the quarter.
The key take away here, as Bill will describe in more detail is that we are tracking to achieve the results for our full fiscal year of $700 million to $715 million in revenue and earnings of $76 million to $82 million, both on a non-GAAP basis. I’ll also comment on the political environment, the economy, early results from the merger and highlight the performances of each of our three primary business units in the quarter.
Bookings for our software and related services, which includes our enterprise, professional and health systems groups, were $80.7 million for the first three months or for the three months ended November 30, 2008, up 22% sequentially with every business unit contributing to the increase.
Revenue for software and related services for the quarter was $163.3 million. Total revenue for the three months ended November 30, 2008 was $173.3 million and you should note that revenue for software and related services does not include our meds business. Please note that these are non-GAAP numbers that give effect to the operations of both legacy Allscripts and legacy Misys for the full quarter including the period prior to the October 10 completion of the merger.
I started the call sharing our enthusiasm for 2009 and the opportunities we foresee. We believe that the Obama administration, under the capable leadership of Secretary elect of Health and Human Services Tom Dashell, will strongly promote both electronic health records and electronic prescribing. There is little doubt that this is good news for the country, for patients, for our clients and prospects and of course for Allscripts.
Contrary to some of the reports you may have read recently, we believe that some of the stimulus package we’ll see from the new administration will show up almost immediately, while the remainder will show up over a slightly longer period of time. In particular we expect to see programs that support the focus on comparative effectiveness, which you will hear a lot about from the administration.
Comparative effectiveness essentially compares different therapeutic approaches. This requires the kind of information that can only be produced by an electronic health record. So our products are uniquely positioned to provide physicians with the data they will need to succeed under the new Obama administrations plans.
We anticipate that a corner stone of these new programs will include both carrots and sticks, similar to the successful CMS ePrescribing program that was announced last July and launched January 1. As you will recall, those incentives provide physicians up to 2% of their annual Medicare billings as a bonus for using ePrescribing, as much as $3,000 to $5,000 per physician, while penalizing physicians who don’t use the technology.
The CMS program has had a very positive impact on the adoption of our ePrescribing offerings, both through our direct offerings and through our national ePrescribing patient safety initiative, which has grown from a few thousand users just over a year ago, to over 26,000 registered users today.
Overall we have seen a 60% increase in electronic prescriptions across all of our products in the last 90 days alone; a positive change that reflects the success of the CMS program in driving both adoption and utilization of our programs. Programs like this, which encourage physicians not only to buy the technology, but also pay them for using it, will be critical going forward and we expect to see a similar impact from the Obama administrations programs on electronic health records.
I want to touch just briefly on the economy before turning to the merger. While the economy is challenging for every business and every person today and dictates that we be cautious relative to both our projections and our optimism, we nevertheless believe we are well-positioned to compete in this environment for several reasons.
First, we have coverage across all of the key ambulatory and hospital connectivity markets. Second, we have a large base of practice management clients who are more likely to upgrade to a known electronic health record than start fresh and replace their working practice management system while also installing an electronic health record. Third, we have industry leading products, paired with new product introductions, scheduled for release this quarter. So again, despite the economic challenges, we continue to be optimistic about our sector and prospects for Allscripts.
Now let me talk about the merger. With respect to the merger, I’m pleased to report that we made excellent progress in bringing the businesses together and today Allscripts and Misys Healthcare operate as one company, finding leverage where appropriate and sharing systems, products and resources across each of the operating units and as promised we will keep you updated on the key metrics.
From a sales perspective, after combining the sales force, we are now seeing solid cross-selling in the different business units. While I will cover this in more detail in the business unit discussion to follow, one good example is PD cardiology, a Misys practice management user that signed a $350,000 agreement for our professional electronic health record. All of that happened within 30 days post merger.
Today we announced two larger cross sales. Medical specialists of the Palm Beaches, a Misys tiger user that will implement our enterprise electronic health record for 85 physicians in 33 offices and physicians associates in Orlando, a Misys vision client that is implementing our enterprise EHR for all of their 80 physicians. This is exactly why we did the merger to begin with and it’s working. Good news!
Every merger also includes cost synergies and we continue to feel confident about realizing cost synergies of $20 million on an annualized basis. I’ll remind you that we already increased that synergy number once from our original estimate based on our progress. Much of the work has been accomplished already and now it’s all about realizing the benefit on a run rate basis.
It’s also useful to comment on our revenues, because today, more than half of our revenue is recurring, 59% this quarter and that paired with our growth profile, gives us confidence in our ability to deliver the numbers that the market expects.
I also want to comment briefly on our product strategy. We continue to support all of our products in use by our clients whether from legacy Allscripts or Misys and we will continue to maintain electronic health records tailored for large practice groups and academic organizations, mid sized multi-specialty groups and independent physicians groups that are smaller in the one to three physician range.
Each segment has different needs and we expect to serve them no different than BMW having a three series, a five series and a seven series. In all segments we continue to provide innovative products that our clients are excited about and we also continue to support distribution channels and partners that allow us to cost-effectively reach the entire physician market and do so, both rapidly and aggressively.
Now I want to provide some highlights from our three primary business units: Professional solutions, which focuses on small to mid markets; Enterprise Solutions, which targets the larger multi-special groups and academic medical centers; and our Health Systems Group, which includes our Care Management, Emergency Department, Discharge Planning, Home Care and Urgent Care Systems. Let’s start with our Professional Solutions Group.
The Professional Solutions group delivered strong sales, especially in the smaller independent physician groups that are served by our channel partners. I was especially pleased with the results given the challenges of combining two large sales forces. The results tell the story.
Let me provide a few examples: Core medical and Mercer Island Washington, a $350,000 agreement where Allscripts and Misys were competing before the merger. Post merger the two reps who had been competitors and never met before went into the practice together and presented our professional EHR and PM and the client signed.
Another example is totally weird. In an agreement in excess of $1 million who will resell our electronic health record via the ASP model to physician practices in Northern California, where they have 102 years of experience selling to hospitals and physician practices and 22 sales reps eager to hit the Street with our products.
In another indication of the future strength of the market, we signed a multimillion dollars deal in the current quarter with Edge Health, an innovator in Mackintosh based systems who will be a reseller for 1,000 ASP electronic health record seats. This agreement will take three to six moose to get started after which the revenue will be recognized over five years. Our view is that this market segment, especially given the coming stimulus from the Obama administration, will remain solid.
I also want to highlight the revenue cycle management portion of our business. We currently have 110,000 physicians using our practice management products; more than 80% of whom depends on us to process their claims. Moreover, today we have the number one physician directed EDI product, which is important because of our focus on the ambulatory sector and our ability to offer value-added services.
Other pure-play revenue cycle management companies have had initial success in revenue cycle management, but have publicly concluded that to really optimize value you have to tie clinicals to billing and more and more you need one system to do that effectively. With the combination of our practice management systems and footprint and the revenue cycle capabilities of our payer path ASP offerings, we are competing well, offer a compelling product and expect to accelerate our offerings in this area.
Speaking of investment and innovation, I’m pleased to report that our latest innovations are now starting to hit the market and we’ll soon be hitting the bottom line. This week for example, we’ve gone general release with our prenatal product which builds on the success we’ve had in the large and under penetrated OB/GYN market.
Allscripts prenatal is a web hosted, software and service ASP application that provides an electronic version of the most commonly used prenatal form by physicians who are providing obstetric care, which is a market of about 30,000 M.D’s. It works with both our professional and our enterprise electronic health record applications and it feels an immediate need for current customers with prenatal documentation requirements and because it can be used as a stand alone product, Allscripts prenatal also seeds the OB/GYN market for full electronic health record utilization, much as our electronic prescribing application is doing.
You will hear about more innovations in April at Hans, where we will officially launch our applications for the IPhone and our Kiosk, but you’ll see both in the field before the launch. What’s great about our innovation is that it applies across many of our products so we can leverage the investment.
Moving now to our Enterprise Solutions Group, the business continues to perform well. We’ve made substantial progress with our enterprise EHR version 11 and we now have nearly 6,000 physicians using the solution every day.
As I’ve shared previously, we continue to invest and focus on what matters most to our clients in the industry. Not just basic charting, but advanced clinical work flows, connectivity to other systems and value-added innovations like our clinical quality solution, which brings significant new dollars to physician organizations by automating their participation in pay-for-performance and pay-for-quality programs. In doing so, CQS contributes to the strong return on investment realized from our systems.
I’m also pleased to report that our enterprise electronic health record was awarded the number one ranking in class, whereas the consumer reports of healthcare IT, a great indication that our clients are convinced, our innovation in this area is paying off. We also saw for the first time, what we expect to be many legacy Allscripts-Misys practice management clients, adding enterprise electronic health record on top of their existing Misys practice management systems.
As I’ve suggested before, practices that have a working practice management system, especially in this economy are more likely to add an electronic health record that is fully integrated with their practice management system rather than being forced to replace the practice management system just to get one vendor. It’s just much easier and more cost effective to add the integrated electronic health record.
I’ve already mentioned two examples of such cross-selling success, medical specialists to the Palm Beaches and physician associates. Both deals were well in excess of $1 million, but we are also closing a lot of smaller cross-selling agreements as well and we expect that to continue and our sales organization continues to deliver new clients from outside the Misys space.
One great example, Excella Health; a four hospital chain outside of Pittsburgh that will deploy enterprise electronic health record to the 115 physicians in their own practices in an agreement valued at just under $2 billion. Excella will also offer Allscripts ePrescribe, our stand alone electronic prescribing solution to the 500 independent physicians affiliated with their hospitals; a strategy that a growing number of hospitals are following as they seek to connect to and build relationships with the physicians who aren’t yet ready to adopt the full electronic health record, but who still want to enter the electronic healthcare highway with the easiest on-ramp, ePrescribing.
Quality companies keep upping the antae to play and I’m pleased to report that we are doing that as well, working closely with both clients and partners to improve the quality of healthcare, to truly connect to health. Let me provide just a few highlights: Allscripts ePrescribe integration is live with Google health and this is especially important given the rapid adoption of ePrescribing today, which will further accelerate under the CMS initiatives and incentive programs that we mentioned earlier in the call.
Two of our clients were honored for their success in part, due to use of our electronic health records. Oklahoma Arthritis Center won the Davies Award for excellence in the ambulatory care, the highest honor for a physician group in healthcare IT and Poudre Valley Health System won the Malcolm Baldridge National Quality Award, the only healthcare recipient of one of the nations most prestigious awards this quarter, which Barack Obama will present after he’s sworn in as President later this month.
Let me also talk a little bit about our Health Systems Group. I’m happy to share news of another very strong quarter, demonstrating excellent execution in sales based on a solid return on investment from their products. As I mentioned, much of what our Health Systems Group sells is on a monthly recurring revenue, ASP model, so the up front cost for our clients are less and can generally be financed through savings.
The big wins included Kindread Healthcare, the nation’s largest post acute provider, who selected Allscripts Referral Management and Referral Management Plus to help manage and coordinate patient referrals for their 82 long term acute care hospitals and 228 nursing and rehabilitation centers across the nation.
Another win was Integris Health, who already uses Allscripts for 74 physicians in their network of employed physicians and has now expanded our partnership to bring our Care Management offering to all 13 of their hospitals, in an agreement valued at over $1 million. Integris also uses our home care product in their network of post acute care facilities. This is a great example of clients who like the company and bring us in across their businesses.
Along those lines we are continuing to see solid synergies with our post acute network in Care Management and with the home care business that is now part of our Health Systems Group through the merger. As of day one of the merger, we identified 44 common clients between home care and our Care Management post acute market, representing about 100 locations. The first live client was Cleveland Clinic, who uses home care and Care Management in an integrated fashion. Post day one, we signed another client desiring this integration, cardiovascular home care in Fort Worth, Texas.
We are developing a stronger and stronger pipeline among the 44 shared clients and expect continued good results there. The integration between referral management and home care saves the home care and hospice agencies about 10 to 15 minutes per referral intake and adds value in terms of the continuity of data flowing from the hospital to the post acute care provider.
We also plan to strengthen our overall solutions selling approach to hospitals given the interest they have in connecting to their community providers in a manner allowed under the start Safe Harbor. To lead that effort, as we previously announced, Terry Macaleer has joined the company as VP of Community Sales.
Many of you know Terry’s name because he was part of the team that grew Shared Medical and then co-founded Eclipses. Terry is well known in hospital circles and we are pleased to have him onboard. With its strong recurring revenue and client satisfaction, we expect our Health Systems Group to continue to shine for us and deliver strong top and bottom line results.
So to summarize, the company continues to be well-positioned as a leader in ambulatory healthcare IT. We made solid progress on the merger in terms of cross-selling, cross synergies and execution with the addition of new clients across the board, continued innovation, new product introductions and strong financial results which Bill Davis will now talk about; Bill.
Great, thank Glen and hello everyone. I would like to start out by providing a quick overview of our results for the quarter in the six months ended November 30 and then I’ll wrap up with an outlook regarding the balance of our fiscal 2009.
As many of you know, we completed the merger with Misys Healthcare on October 10 and changed our fiscal year end to May 31 in conjunction with the merger. We also previously disclosed that Allscripts was the accounting acquiree in the transaction. As such, our GAAP results reflect Misys Healthcare performance for all periods presented and Allscripts results from October 10 through November 30. It is for that reason that we are providing pro forma results for all periods presented, so to improve payment for our invests.
With that said, we are very encouraged by the success that we have seen to date with regards integrating of our two businesses in what is a relatively short period of time. Such efforts enabled to us deliver solid results in our first quarter as a combined company and positions us well for the second half of our new fiscal year. As I will explain in more detail later, we continue to feel good about the guidance we previously gave for the full year based on our performance through the first six months.
So looking first at our bookings also known as order intake, we had total bookings of $80.7 million in the quarter, which include those of both legacy Allscripts and legacy Misys Healthcare for the entire quarter. This compares to $66.4 million in the first quarter of our new fiscal year and represents a 22% sequential increase. This also compares to $76.8 million in the second quarter a year ago. Both historical periods, again reflect both legacy Allscripts and legacy Misys Healthcare combined.
Total bookings for the six months ended November 30, 2008 were $147.1 million and are fairly consistent with the amount of bookings we had the same period last year, especially when you take into account that last year’s booking results include the Columbia University transaction that we consummated in August 2007.
As Glen indicated, we’ve also seen some early success in our cross-selling efforts and we continue to see good demand for all of our product offerings even in spite of a very challenging economic environment. It’s important to note that our bookings reflect Allscripts established definition of booking. Misys Plc does in fact include transaction fees in their bookings definition and if you were to include those, such transaction fees would add approximately $37 million and approximately $75 million to our three month and six month bookings respectively. I highlight this to assist those of you who have historically followed the Misys Plc stock.
We ended the quarter with approximately $600 million of sold backlog. Our backlog consists of approximately $145 million of clinical software and related services fees. Approximately $95 million of subscription and ASP fees, as well as approximately $215 million of annual maintenance fees that are expected to be recognized over the coming year and approximately $145 million of transaction fees which principally consists of EDI transaction fees and again are expected to be recognized over the coming year.
We also are encouraged by the ongoing momentum we’ve seen on our top line. Total GAAP revenue in the quarter was approximately $128.6 million and approximately $173.3 million on a pro forma basis, which again gives affect to revenue for both legacy Allscripts and legacy Misys Healthcare for the entire period. GAAP revenue for the six months ended November 30 was $221.4 million and approximately $347.9 million on a pro forma basis.
Pro forma clinical revenue for the first six months of fiscal 2009 was approximately $327.9 million and represents a 7% increase when compared to the same six month period a year ago. Approximately $206.8 million or 59% of our pro forma revenue was recurring in nature.
Our GAAP revenue for the three and six months ended November 30, 2008, contemplated a $2.1 million reduction related to our revaluing of Allscripts deferred revenue balance on October 10. As we talked about previously, our deferred revenue has been adjusted and it has been adjusted by an amount of $14.5 million on a $54.2 million balance, which represents a 27% reduction. We anticipate recognizing this non-cash deferred revenue adjustment over approximately a 12 month period of time, starting this past October and we will continue to disclose this amount each quarter so you have visibility to that.
Pro forma gross margin percentage for the quarter was 52.9% and compares to 51.8% in our first quarter which was June 1 through August 31. Gross margin continues to be driven by approximately 55% gross margins in our clinical software businesses. Our gross margin in our clinical software businesses is reflective of our ongoing investment in our V. 11 deployment efforts and our ongoing investment in incremental deployment capacity across most of our businesses.
Margins in our Medication businesses were approximately 16.9%. GAAP operating expenses were $76.3 million for the quarter and they included $22.1 million of transaction related expenses. Pro forma operating expenses before stock based compensation, deal related amortization and transaction related expenses were approximately $64.5 million. This compares to $63.8 million in the first quarter of this fiscal year and $62.1 million in the second quarter a year ago.
As Glen indicated we continue to feel very good about our projected cost synergies of $20 million on an annualized basis. In keeping with our commitment to deliver such cost synergies, we’ve eliminated 85 positions in conjunction with the merger that will yield approximately $6 million of savings in the first year.
We’ve also eliminated approximately 195 additional future hires as we brought the two operating plans together that will yield an additional $6 million of savings in the first year and then a greater amount in year two. In addition we have eliminated approximately $5 million of discretionary marketing spend and anticipate an additional $2 million to $3 million of procurement savings in areas like travel and hardware procurement.
Transaction related expenses as I indicated previously were $22.1 million in the quarter and $29.1 million for the first six months. Such expenses included legal, integration, severance and expenses related to the discontinuation of relationships no longer prudent in light of the merger.
The second quarter transaction related expenses again of $22.1 million, included a non-cash charge of $14.1 million related to the write down of the company’s IMedica Investment due to our go forward product strategy.
Capitalized software in the quarter was approximately $2.5 million on a full quarter basis. This compares to approximately $1.6 million on a comparable basis in the first quarter of this fiscal year. With regard to overall headcount we ended the quarter with approximately 2,520 employees.
In conjunction with the consummation of the merger, $54.6 million of our convertible debentures were converted into common shares. Of the remaining $27.9 million debentures as of November 30, approximately $8.2 million were put back to the company in December and we satisfied such debenture puts out of our cash reserves.
Approximately $2.5 million shares underlie the remaining $19.7 million of convertible debt. Our outstanding convertible debt was anti-dilutive in our fiscal second quarter and fiscal half of fiscal 2009 for EPS purposes. Our diluted share count for the quarter was approximately 118.9 million shares for the quarter and it takes into account the fact that we issued shares to Misys in the aggregate of $82.9 million to effectuate the merger.
Allscripts taking into account not only existing outstanding shares but also the convertible debt conversion I mentioned before, a total of 63 million shares, it’s important to note that only a portion of those 63 million, worked their way into our diluted share count for the quarter because they were weighted average from October 10 through the end of the quarter and then we continue to have approximately 2.8 million shares underlying options in unvested restricted shares brought into the merger. It’s important to note again that those shares did not work into our diluted share count due to the GAAP loss.
Again the diluted share count also did not take into account the 2.5 million shares underlying the convert nor does it contemplate approximately 4 million shares for stock-based compensation issued by the company subsequent to the merger and they will be invested over the next four years.
Please note that the number of shares used in determining EPS for all prior periods reflects the 82.9 million shares issue to Misys in the merger due to GAAP rules requiring that historical stockholders equity of accounting acquirer which is Misys in our transaction, to be retrospectively adjusted for the equivalent number of shares they received in the merger. The share counts that you historically have seen for Allscripts stand alone are no longer relevant and this should help address any disparity and EPS calculations for those of you reviewing prior models.
GAAP net loss for the quarter was $6 million or a $600,000 loss for the first six months. Non-GAAP net income was $16.8 million for the quarter and $32.2 million for the first six months of our new fiscal 2009. This compares to $27.2 million for the first six months of fiscal 2008 and represents an 18% growth. Our non-GAAP net income contemplates the add back effect of Allscripts pre-merger results, as well as our non-cash deferred revenue adjustment and deal related amortization, stock-based compensation and transaction costs, all of which have been presented on an after tax basis.
Regarding taxes, we have done more detailed work on our expected effective tax rate for the year and we believe it will end up being closer to 40.3% than previously communicated 39%. This year’s effective rate is slightly higher than previously expected due to a higher level of nondeductible transaction costs and certain state tax apportionment considerations. We are continuing to work to reduce our rate and believe a 39% rate is still an appropriate estimate for fiscal 2010.
Turning now to the company’s combined Balance Sheet. We’ve made good progress on our preliminary purchase price allocation. We have been working with an independent valuation firm in assisting us with that analysis. Based on Allscripts closing price on October 10, total value of Allscripts as of that date was approximately $569 million.
Approximately $240 million has been attributed towards specifically identified intangibles in areas such as acquired software, customer relationships, trade names, acquired backlog and the like. We anticipate approximately $5 million of deal related amortization in each of the next two quarters and $2.9 million of such amount will be recorded in cost of sales related to acquire software. Please note that both of those amounts are on a pretax basis.
We ended the quarter with $77.1 million in cash and marketable securities. We still have approximately $20 million of transaction related costs that were or are expected to be paid subsequent to November 30 as well as an additional $8 million used to fund the convertible debt that was put to us back in December. Taking all of those into consideration, we continue to believe an appropriate starting cash balance to fund on-going operations, will be in the range of $45 million to $50 million.
With regards to accounts receivable, we ended the quarter with approximately $148 million and that represents day sales outstanding of 83 days when you take into account pro forma revenue for the period.
Total debt at the end of the quarter again was approximately $79 million which was made up of $50 million from our existing credit facility and approximately $29 million related to the convertible debt. Again, $8 million of that convertible was paid off in December leaving us with approximately $71 million total debt outstanding at the end of December.
So now turning to our outlook for Allscripts-Misys for our new fiscal year ended May 31, 2009. As we have previously communicated, we continue to believe that we will generate revenues of $700 million to $715 million on a non-GAAP basis and this compares to the $347.9 million generated through the first six months of this year.
We also continue to remain confident in our ability to generate non-GAAP net income or adjusted earnings of $76 million to $82 million and that compares to the $32 .2 million generated through the first six months of our fiscal year. Our earnings in the second half of the year will benefit from the cost synergies we put into effect near the end of our second quarter.
Total deal related amortization is now expected to be approximately $19 million for the year and again approximately $8 million of that will in fact be recorded in cost of sales and we also expect stock-based compensation to be in the range of approximately $11 million, in both of those amounts again are on a pretax basis.
In closing, I would like to applaud the excellent work of the entire Allscripts team and the relentless pursuit to bring these two great organizations together and while we are not immune to the broader economic environment, we do believe we are uniquely positioned to capitalize on the great market opportunity we have before us.
So with that I’d like to turn it back over to Glen for a few closing remarks.
Bill, thanks very much. I started the call with a welcome to the New Year and the idea that this is really our year to succeed. The merger is behind us, the government is also behind us and there are now great opportunities in front of us. We are in the right place, at the right time, with the right tools and product offerings and I believe our first full quarter results for Allscripts Misys along with our operating execution demonstrate that.
We are the leader in the Ambulatory Health Care Information Technology space by almost every metric; more physicians, better products, more R&D investment, higher sales, broader product suites, more committed people and we are accelerating given the opportunity. We know that with the continued commitment of our employees, the partnerships of our clients and with your support, we have a bright future ahead and we remain excited about it.
So thank you for joining us today and we are now ready to take your questions.
(Operator Instructions) Your first question comes from Sean Wieland - Piper Jaffray.
Sean Wieland - Piper Jaffray
Bill, first question’s for you on the EPS line. The guidance for full year EPS, does it still stands at $0.49 to $0.53 and should we be using for our pro forma EPS the actual share count you reported or the pro forma share count?
Sean, so we are absolutely focused on delivering the adjusted earnings, a non-GAAP net income range that we’ve talked about. I do believe that the share count that we have presented in our guidance slide of 155 million is appropriate for people to focus on, because it is reflective of what our go forward share count will be and it takes into account the amount of shares offered to Misys in the transaction as well as the underlying convert and the like.
So we will continue to focus. It’s going to be a little bit choppy in terms of relying on the share count for GAAP purposes here through this year, but I think as the business continues to progress, that higher share count is more appropriate for apples-to-apples comparison.
Sean Wieland - Piper Jaffray
Okay, so we should to add up to your EPS guidance be using on a pro forma basis a higher share count.
Sean Wieland - Piper Jaffray
Okay and then Glen, you talked a little bit about Obama; how do you actually see the money being deployed? I mean what mechanism is it? Is it incentives, is it grants, is it pay for performance? What’s your view on that?
Sean, I think that there will be a variety of different ways they are going to apply it. One of the clear messages that has been sent to all of the various teams that are working across the administration is to get money out quickly to stimulate the economy and as you heard, I think it was released this morning, President-elect Obama talked once again about electronic health records and the fact that every American should have them.
So my expectation is you’ll see some of that funding go through existing mechanisms and the administration is well aware of the successful CMS program which is based on reimbursement that physicians are currently given. So one thing we know because we’ve seen it and that is if the government decides to say they will reimburse differentially based on whether or not you are using electronic health record that will drive immediate changes in the market.
So we see all of the above being used and again initially there was some thought that the administration would back off from the strong investment in healthcare IT, but I think they’ve made it very clear and Secretary-elect Dashell has made it very clear that’s not going to be the case. So we see it as additional stimulus.
Sean Wieland - Piper Jaffray
Okay, that’s helpful and one last question; what’s the status of you recertifying under CCHIT? I think in a couple of weeks you have a couple of products; have you hit their anniversary date?
Again, being on the board of trustees what I can tell you is that, certifications don’t just last for 12 months. So certifications are for a longer period of time. That said, with the change and with the start requirements that require you to be C-chip certified in order to qualify for the start funding and reimbursements, all of our products meet that standard right now. So we expect to both continue to focus on the new certifications, but the good news is that anyone who is using our current set of products can qualify for reimbursement under stark.
Your next question comes from Sandy Draper - Raymond James.
Sandy Draper - Raymond James
Bill, I just have a couple of questions. I want to make sure I’ve got the pretax and after tax numbers for the add backs correct for the year. Can you just run through those again?
Again Sandy, what I would encourage folks to do, because our prepared remarks took a little bit longer than usual, so I want to make sure that we allow time for Q&A. I would refer everybody back to the exhibit in the press release itself and I think there’s a very clear table that outlines those on an after-tax basis and so to get pretax basis you just simply for the ‘09 period use an effective rate of 40% and the prior year periods 39%.
Sandy Draper - Raymond James
So there’s a table for guidance? I must have missed that.
I’m sorry. I thought you meant from an historical perspective.
Sandy Draper - Raymond James
I’m talking about for the ‘09 numbers.
My apologies. What I indicated was that at this point anticipate that deal related amortization is expected to be $19 million for the year, that’s a pretax number and then $8 million of that will be recorded in cost of sales. So I wanted to call that out and then we are anticipating $11 million of pre-tax stock-based compensation.
Your next question comes from Ross Muken - Deutsche Bank.
Ross Muken - Deutsche Bank
So as we look at the guidance in terms of revenues, it assumes a bit of a sort of acceleration into the back half to get to even the low end of the range. So as we sort of contemplate that, to what degree have you built in anything in terms of demand to come from what’s being done from a legislative standpoint and to the degree that it’s not relevant to that is that from cross-selling in terms of synergies or just a continued improvement in the market?
Yes Ross, I’ll let Glen comment as well in terms of the programs of the market dynamics, but just to clarify the first point you made, I mean as a practical matter if you took our third quarter performance and we did nothing more than just effectively repeated that in the third and the fourth quarter, you actually get very close to the low end of the revenue range. So I don’t foresee that there’s a significant ramp on the revenue side that is necessary for to us deliver on that commitment.
With that said, we absolutely believe that we are going to see increasing amount of cross-selling potential and that will absolutely help fuel the relative growth in the business, but I don’t think there’s anything extraordinary required there to deliver that.
On the adjusted earnings side, it does require a little bit more of a ramp than that on the revenue side, but again in my comments I made the point that for all kinds of purposes, the second quarter profits did not fully benefit from the cost synergies in the quarter. Many of those were put into a place at the end of the quarter and so we are going to benefit from those more significantly in Q3 and Q4. So that will be a huge driver in reconciling whatever difference might exist on a run rate basis.
Just to add to that the only thing I would say is we have not built in any assumptions relative to acceleration from government programs. I’ve only said that it doesn’t make sense to build a business based on depending on the government doing anything at all. So any acceleration, any of those programs, we would see a strong upside.
With that said, right now given where the economy is, again we want to be cautious about saying the upside acceleration would be very healthy and that would offset any potential downside that we might see in the economy. However, as I mentioned in my comments, the good news about being in the ambulatory sector is we’ve not seen a lot of that like some of the larger hospital players have seen in terms of slow down in investment.
Ross Muken - Deutsche Bank
Just relative to your assumptions from sort of a macro economic perspective when you are putting together the guidance, I mean to what degree do you believe the typical consume is going to be impaired that psychology is sort of suggesting, there’s going to be the sort of delayed investment at all sorts of things, not just types of software, but virtually any sort of goods sold. What sort of the basis of thought in terms of what you are relaying into your guidance relative to that?
Well again, we see virtually every one of our products has a direct measurable return on investment, so you talk about taking cost out. Now I’ll use one example that’s very obvious. The demand for the kiosk that we have coming out is very substantial. Why? Because people have said for every kiosk I put in, I take out a person who I have to care and feed for who makes more money every year, etc, etc and they know kiosk worked. We’ve seen it in the airlines; we’ve seen it in hotels and the like. So they are chomping up a bit for that kind of automation.
Going back to some of the products that we’ve talked about, they take dollars out, they add efficiency, they allow you to see more patients much and that’s part what I tried to emphasize in my comments about our health systems group, our hospital systems sales. Those once again are adding efficiency, saving 15 minutes per file and that translate into real dollars, so these are investments.
I also mentioned that when you talk about ASP, the nice thing is there’s not a big capital outlay up front. So they can start using it and take the savings to pay for the cost of the systems. So all those reasons, we continue to remain cautiously optimistic that we’ll move by.
With that said for large hospital systems as an example, we know if you have to go out and get bond money or something like that you’re going to have a problem and we’ve seen some large hospitals say they’re putting big projects on hold, but they are going forward with projects that connect them to revenue sources like our systems that connect them to physicians who spend money and direct patients to their hospitals.
Your next question comes from Richard Davis – Needham & Co.
Richard Davis – Needham & Co.
So embedded in your outlook and you talked about this a bit in the conversation. So is the sales integration basically done? So if I’m a salesman for you, I have my territories and everything is all set there. I was just trying to kind of make sure how to center that.
Absolutely, one of the things we pushed hard on was, day one of the transaction our sales folks had their territories, their patches of dirt. They have their quotas set, they know what products they are selling and we actually were able to by cross licensing some of the products do sales trading before we closed the transaction.
Had it not closed that would have been an issue. We would have had both companies with the ability to sell each other’s products which would have been a little awkward but the good news is it did close and the sales force is running well and producing as you saw from some of the nice sized deals that they closed this quarter.
Your next question comes from Alan Fishman - Thomas Weisel Partners.
Alan Fishman - Thomas Weisel Partners
My one question is around that $19 million in deal related amortization and the $11 million stock comp. Is that pro forma for the year similar to revenue? How should we treat that if we are looking at the actual dates at which the transaction closed?
The way those have been derived is leveraging what we’ve included in our first six months results on a pro forma basis and then you should be from the totals of that given be able to derive what we anticipate for the second half of the year. So they’re anchored in the preliminary work we’ve done on purchase price accounting, as well as the stock issuances that I made reference to that you will start to see show up in expense here in the third and the fourth quarter.
To the extent you want to get a better sense as you look out to 2010 and beyond, what I would encourage you to do is leverage the second half of ‘09 and par lay that into a full year view for 2010, because in some respects the timing of the first half of the year might not be appropriate to leverage.
Alan Fishman - Thomas Weisel Partners
Okay. So I guess the 90, 100 days, the company was not together.
They actually include, it does, but it basic is picking up Allscripts legacy amortization. We didn’t go back and effectively take that out and replace it with the new. So again what I would encourage you to do is focus on the second half of the year if you are trying to get out beyond 2009.
Your next question comes from Corey Tobin - William Blair.
Corey Tobin - William Blair
One housekeeping question if I could and two bigger picture ones. Bill, do you have the comparable backlog numbers for either at the end of Q1 or perhaps the ends of Q2 last year?
I do not Corey. We took a lot of effort in terms of bringing both businesses together definitionally and we have not had the opportunity to do that from a historical perspective as of yet.
Corey Tobin - William Blair
Understood. Then shifting gears to the second; Glen, given the comments you made on the hospital environment and everything that’s out in the press, are you seeing any change in hospitals interests or ability to fund stark related deals or to help ambulatory purchases through the stark provision?
No Corey, again we haven’t seen that. In fact what we’ve really seen is that the hospitals have said, “Look, we aren’t going to do a lot of these projects, but the once we will do will connect us to the physicians that give us revenue.” So we haven’t seen any slow down in hospitals willingness to invest in stark related projects to date.
Corey Tobin - William Blair
And then one final one if I may; how many customers do you have using one of your EMR solutions that are paying for an ASP type model, paying on more of a subscription type model? Thanks.
I’m not sure we have that statistic readily available Corey, so we can follow up on that. In terms of EHR ASP customers it’s a relatively small number to date.
Your next question comes from Richard Close - Jeffries & Co.
Richard Close - Jeffries & Co.
Yes, with respect to [Nefse] the customer base you mentioned some numbers what has grown to I think you threw out 26,000. How many of the Nefse customers have you up sold to your core ePrescribing product?
In terms of up selling to our core ePrescribing product, that wouldn’t really be what we would kind of aim to do. Nefse was created to focus on smaller physician groups who frankly in many cases either weren’t buying or weren’t candidates to buy the ePrescribing product, because they might have been a stand alone physician or a three doc practice. The bulk of those Nefse clients are in fact much smaller group. The average group size would be much more akin to the one to five doc range, three docs or less.
The idea there was to get them using automation and then hopefully and of course now with the funding they are seeing the positive effects of using automation and also getting funding for it and so there would be more likely candidates to then upgrade to an electronic health record. We will sell them on an ePrescribing system based on Nefse. So, that really wasn’t the strategy and I doubt we’ll see much of it.
Richard Close - Jeffries & Co.
Okay, so have you seen anyone end up buying an electronic health record from you guys from you guys through Nefse?
Absolutely, in fact one of the most interesting stories we’ve had this year is one of the big purchasers of our electronic prescribing system was an account that I mentioned during the call earlier today and what happened was they came to us, they spent a significant amount of money buying our electronic prescribing system.
Our rep heard them say, eventually we are going to upgrade to a full electronic medical record or electronic health record. We sent our reps in and that sale which was made last quarter converted to the full electronic health record sales that I mentioned earlier as someone who would be distributing our software, that’s the edge deal that I talked about.
Richard Close - Jeffries & Co.
And then Bill, finally, obviously we’ve been focusing on backlog conversion over the last year I guess. If you could talk a little bit about any improvements there with the existing Allscripts business I guess the version 11 kind.
Yes, we absolutely saw continued progress in terms of backlog conversion in TouchWorks. It really is indicative of two factors: (1) is that we continue to feel increasingly confident in our ability to predict the deployment cycle times necessary to deploy V. 11, number one; but (2) is that even though it’s becoming more predictable it continues to be a little bit higher than what was our historical kind of version 10 deployment cycle time, but that has in fact translated into our ability to continue to move more customers out of our backlog into deployment ultimately to go live state.
So we are very encouraged by that. We are very focused as I mentioned in prior quarters around really the productization of our deployment cycles, something we referred to internally as enterprise ready and that is all about how do we drive even further efficiencies into those deployment times so that we can even further accelerate that going forward. So it is a key priority of the business.
Why don’t we take maybe two more questions or three more questions; I know we’ve run a little long today.
Yes sir and your next question comes from [Jean Manheimer – Regus Security].
Jean Manheimer – Regus Security
A quick housekeeping item if I could. Bill, did you happen to mention or maybe I missed it, a non-GAAP SG&A expense for the quarter?
Yes, I did. So pro forma operating expenses, because we break these out separately in the press release, so this is before stock comp deal related amortization and transaction cost; they were $64.5 million in the quarter and that compares to $63.8 million in the first quarter and $62.1 million in the second quarter a year ago.
Jean Manheimer – Regus Security
And Glen, sort of when the merger closed you provided sort of a product roadmap on how you see investment going into the combined Allscripts-Misys product going forward with respect to Vision Tiger, obviously TouchWorks, etc. Has that changed at all now that things have settled or is that still the plan?
Well, I think the plan is still pretty consistent. As I said earlier, we expect to continue to support offerings that are at the high-end academic medical centers and the a like in the mid market where we are so strong than that at the lower end and that does really require three different products that are tailored to the implementation and the needs of those respective markets.
Relative to the investment, I think our investment strategy stays the same. We’re aggressively investing in Payer Path which is our ASP based revenue cycle management product and you will see more and more movement there. We think we can capitalize on that fact that with the largest install base of practice management in the industry it’s unnatural for us to provide those services to our client base and they are asking us for it, so we get better and better at that. We continue to invest aggressively.
On Tiger and Vision, we have large basis with those products. We expect to continue to see them, make sure they are happy and invest in those products and in an appropriate way on a go forward basis.
Also as we talk about the various innovations, whether it be our OB/GYN product, whether it be the Iphone set of products, the products that are coming out for the Iphone and the like, all of those will be available to the existing base as well, those innovations. So we see that base as staying very solid and happy and to the extent they are ready to upgrade, we’re there for them as well.
Your next question comes from the line of [Frank Farasino - First Analysis].
Frank Farasino - First Analysis
Glen, for you just real quick. From a revenue cycle standpoint, you guys have had a number of partnerships historically and I’m just curious, what is the state of those partnerships today now that the acquisition has closed?
Sure. Well, I’m not sure about a number of partnerships. We’ve had a good partnership with Medicure; that may be one of them. It’s a good solid product in the market. Part of our base continues to use it. I think on a go forward basis, we’ve made it very clear that the product will be supporting as our own product, our Payer Path product. Our margins increase substantially when we put Payer Path in versus third party like Medicure number one; and number two we are making a very substantial multimillion dollars investment in Payer Path. So for both of those reasons we’ll continue to have good relationships.
Also just to be clear, to the extent that a client comes to us and wants to use a particular partner, we are willing to work with them. So we’ll continue to support our Medicure clients and if someone comes to us with a third party we’ll work with them as well, but our preferred way of going forward will be to use Payer Path.
Frank Farasino - First Analysis
Glen, can I just follow up real quick on that? Can you help me understand when you look at the growth dynamics in that marketplace; obviously there are a number of players in that marketplace that are growing at very high rates. If you look at the growth in your business it’s been fairly anemic, so I guess (1) help me reconcile the disparity in the growth there and (2) should we assume that the transaction part of the business there starts to accelerate going forward?
Well, I’d say a few things. (1) Remember that I think the figure I gave was about 80% of our base is already using payer path and it represents a very profitable part of our business today and kind of going forward if you have 80% of our base using the product, we are already the largest in the ambulatory market by a factor of ten or more. I mean it’s a big number, but you should assume that the transactional part of our business and especially the value-added part of those transactions will grow.
When it’s a big base, even a small percentage in gross will mean a lot to the bottom line, because those dollars drop right to the bottom line. So we see a lot of goodness coming from the payer path asset and from the investment we’re making there. It’s a high margin business for us.
Great, well let me go ahead and just wrap up and I really want to leave you with just two key thoughts. (1) The take away I mentioned earlier and then Bill reinforced and that is that we are tracking to achieve the results for our full fiscal year of $700 million to $715 million in revenue and earnings of $76 million to $82 million, both on a non-GAAP basis. So we are reaffirming the numbers that we provided at the beginning of this merger, this transaction.
(2) We are also reaffirming that the upward guidance we gave relative to the synergies and that is that we are track to achieve the synergies. We are on plan, on target to do that and finally maybe most important the cross-selling which under lied the key reason we wanted to put these two organizations together; it’s happening, it’s real, our sales force is executing against it.
So we believe the position of our business in the ambulatory space couldn’t be better. We think we are in the right place at the right time and we are looking forward to continuing to execute against that, but we are feeling very good about where we are in the business even in this tough economy.
So again I want to thank all of our shareholders and the folks who follow us. I want to thank our great client base and most importantly I want to thank all of our employees who are putting forth such a great effort to make this a reality. So thanks very much and we look forward to talking with you next quarter.
Thank you for participating in today’s conference call. You may now disconnect.
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