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Executives

Seth Frank - Vice President of Investor Relations

Paul M. Black - Chief Executive Officer, President, Director and Member of Compensation Committee

Richard J. Poulton - Chief Financial Officer

Analysts

Charles Rhyee - Cowen and Company, LLC, Research Division

Michael Cherny - ISI Group Inc., Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

George Hill - Citigroup Inc, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Allscripts Healthcare Solutions (MDRX) Q4 2012 Earnings Call February 19, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Allscripts Fourth Quarter 2012 Earnings Conference Call. Thank you. I would now like to turn today's conference over to Seth Frank, Senior Vice President of Investor Relations. Please go ahead, sir.

Seth Frank

Thank you very much, Susan. Good afternoon this is Seth Frank, Vice President of Investor Relations of Allscripts. I'd like to thank everyone for joining us on our fourth quarter 2012 call today.

Today we have Paul Black, Allscripts' President and Chief Executive Officer; and Rick Poulton, our Chief Financial Officer. Paul will summarize our recent company accomplishments, our strategic focus for the future and a summary of his recent meeting with clients and Allscripts team members. And then Rick's going to give an overview of the fourth quarter results and then we'll take your questions.

During today's discussion we'll reference supplemental financial tables, which are available on our website on the Investor Relations homepage of Allscripts' website at www.investor.allscripts.com. In addition, we'll reference both GAAP and non-GAAP financial measures on today's call, reconciliations of non-GAAP financial measures are available in the press release and they include accompanying explanations to assist you in evaluating financial metrics on the call. Let me briefly read the Safe Harbor statement and then we'll begin.

This presentation will contain forward-looking statements within the meaning of the Federal Securities laws. Statements regarding future events and developments, the company's future performance, as well as management's expectations, beliefs, intentions, 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 factors outlined from time to time in our most recent report on Form 10-K, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available 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.

And now I'd like to turn the call to Paul Black, President and Chief Executive Officer.

Paul M. Black

Thanks, Seth. Good afternoon and thank you for joining us. I'm delighted to speak to you today on my first earnings call for Allscripts. Today marks exactly 62 days since I joined the company as CEO. As you know, the Board of Directors concluded the strategic alternative process in late December and with this new clarity, we immediately hit the ground running. We are moving decisively to deliver on our mission to help transform healthcare globally.

During this time, I've been actively engaged with our clients and team members. We have already taken multiple actions to help move the company forward, diligently and with urgency. Today, with an independent Board of Directors, with a unique and responsible portfolio of assets and solidification of our senior management team, we are moving ahead to do the work necessary to restore our leadership position in this vitally important industry.

Allscripts closed out 2012 having achieved some important milestones. We released Sunrise 6.0 on December 4. This release includes the key enhancements, including ICD-10 compliance, enhanced pharmacy and note functionality. In addition, SCM 6.0 provides enhanced quality and performance improvement. The early adoption program has gone well and we have a significant number of clients already signed on for upgrades in 2013.

In early December, we also released Sunrise Financial Manager, our new revenue cycle management platform. SFM is built on the Sunrise 6.0 platform, and together with our clinical suite, provides a complete end-to-end integrated solution. Its features include electronic forklifts and a unique visual work core design and deployment. This solution set is architectured from the ground up for Accountable Care Organizations or ACOs, a clear differentiator from historic platform approaches. We currently have multiple early adopters and have made several sales to existing clients since going to [ph] GA.

We have also successfully launched ICD-10 supported versions of our ambulatory Enterprise EHR 11.4, as well as Professional EHR 12.0. These are all important deliverables for Meaningful Use 2, as well as [indiscernible] or excuse me, ICD-10 requirements. With this strategic foundation, our clients have continued to expand their use of our solutions. Our recent success story was our go-live at Baylor University campus, a 1,065-bed facility and the 11th in the Baylor system to activate Sunrise Clinical Manager.

With respect to Meaningful Use, we are pleased with where we stand today, with approximately 97% of our enterprise ambulatory EHR clients having at least one eligible provider test for Meaningful Use stage 1. Further, approximately 2/3 of our hospital clients have attested. In terms of industry ranking, our trajectory has been steadily moving upward and CMS indicates Allscripts ranks #2 in the eligible providers having attested for Meaningful Use.

In order to optimize our affiliated physician market opportunity, we are migrating, free of charge, our MyWay clients in the small physician market, to the advanced Professional EHR suite. Just this week we activated multiple clients with the accelerated migration center. This hosted solution also provides a new mobile, native iPad experience. So far the reception to the program have been strong. We're expanding our clinical footprint in the non-acute care delivery destinations, such as convenient care clinics, patient-centered medical homes and retail health care.

Regarding the acute care market, where single architected single database solutions are important, I wanted to update you on the Sunrise Acute Care solution. We successfully closed 2 Sunrise Clinical Manager agreements thus far in 2013. The first is with an existing client, who, after thoughtful consideration decided against aggressive attempts to leave as for the largest competitor and instead substantially increased their long-term commitment to Allscripts.

This client signed a long-term agreement for SCM, as well as expanded the relationship to include our ambulatory offering and fully integrated Sunrise Financial Manager. This will enable a truly integrated platform, including in-patient, outpatient, Practice Management and patient accounting solutions.

We also signed a new integrated delivery network client in the quarter. This affiliate of a large, national, for profit health system is acquiring a comprehensive bundle of acute, ambulatory, post-acute, revenue cycle and service offerings to build off their new campus that is focused on wellness optimization. This is an exciting greenfield population health management client that will be a totally integrated solution across the entire community. This is a highly competitive opportunity that included an engagement from our 2 largest HCIT peers.

The secret sauce that distinguishes us with clients and prospects is our strategy of offering open Healthcare IT ecosystems, enabling our vision of Connected Community of Health, which ultimately drives better health outcomes for all consumers. Open means our architecture connects to clinical and financial data across every venue of care beyond the 4 walls of any given institution. For example, our web-based operating system enables a single sign on into one place and provides a fully integrated workflow across literally dozens of existing systems that otherwise require individual log-ons. This capability includes Allscripts, as well as third-party systems.

Open means the Allscripts develop a program, where we enable a broad community of developers and suppliers to design and integrate applications that become an extension of our architecture. We currently have dozens of developers who are working on new apps today in diabetes, patient ID authentication and other innovative and impactful areas. Open means enabling in-patient ambulatory and post-acute commissions -- clinicians, to design their own protocol and evidence-based alerts according to the needs of their own practice for clinical subspecialty.

For example, using medical logic module capabilities within Sunrise Clinical Manager, the Phoenix Children's Hospital designed specialized protocols and surveillance capabilities that greatly reduce the incidence of IV infiltration in pediatric patients, a painful and potentially serious competition for in-patient kids on ICD therapy. Today, there's no leader I know of occupying the virtual layer between the hundreds of different systems inside and outside individual healthcare organizations. This is our focus. This is why open matters, to connect all care venues to enable community-based individually coordinated care.

Open is a needs minimum requirement in the population Health Management Solutions. Allscripts is positioned to lead in the vast opportunities that have arisen in the connected community of health arena.

Now I want to focus on the 4 key areas for operational and strategic focus in 2013 and beyond. These are one, client alignment; two, unlocking competitive advantage, three, streamlining our cost structure, and four, reporting predictable, consistent financial results. We will continue to fine tune and invest in these focus areas during the year as it makes sense for the business.

Allscripts is a great company. We have the leading physician position footprint in the industry, with approximately 50,000 practices in over 1,500 hospitals using our solutions. We have an attractive position outside of the IDM, as tens of thousands of alternative and post-acute providers also use Allscripts.

Many of these organizations are the country's highest regarded hospitals, medical groups, community care organizations and integrated delivery networks. 2013 will be a year in which we deliver on our client obligations. This requires precise coordination, communication and joint accountability from every functional area in the company from development through sales to Professional services, hosting and support. We've made commitments to our clients and we have an obligation to deliver.

A major priority is to industrialize the delivery of our solutions, by metric-driven disciplines, we are establishing a cadence to deliver new solutions on time and to enable improved predictability for implementation and upgrade processes. Operationally, we are taking steps to simplify our client interactions and to make doing business with Allscripts easier.

We will accomplish this by eliminating potentially disruptive handoffs between business units and implementing a predictable, high-level of client touch. We will harden our client support structure. We will establish and set mutual 2013 goals with our clients and we will meet them.

Clients want more face time with our dedicated teams and we will execute on their behalf. We will also continue to grow on investments in R&D in 2013. We finished 2012 with $191 million in total R&D investments before capitalized software expense and this number will grow into the double digits in -- during 2013.

Projects will include enhancements for Stage 2 Meaningful Use, as well as investing in our revenue cycle services platform for the ambulatory market. We've taken some important steps to make sure we've maximized the return on this R&D investment. We recently created centers of excellence for the development of organizations; approximately 2/3 of our domestic R&D staff will now be in 1 of 2 major centers, Raleigh and Boston, with the rest of our staff in other locations.

This move enables us to concentrate and focus the team on delivering higher quality solutions faster, while reducing complexity and cost. Premium developers in the focused teams will ensure a more dynamic, agile, and robust working environment. As a result of these initiatives, I expect to see improvement in client satisfaction as the year progresses. Currently, we host a -- we use a host of internal surveys and client interviews, including annual measurement of net promoter scores to determine satisfaction and the propensity of clients to recommend us to their peers.

While these are important measures, they do not benchmark us against our peers. We believe such information collected by a third party is strategically critical for us to enhance our client satisfaction. Therefore I've established a relationship with the Cross Research organization to deepen our knowledge and perspective about the client experience.

We will return Allscripts to growth. Therefore, we must ensure the company is well positioned to provide solutions and services beyond electronic health record. We will do that in several ways. One is through capturing a larger share of our clients' information technology and budget, provided the needed services that they value. IT hosting is an area where we participate today, also known as managed services. It's a relatively small business, constituting less than 5% of our annual revenue in 2002 -- or 2012, with marginal profitability.

We believe there is a significant opportunity within and outside of our client base, the host clients IT systems, which offers major strategic advantages to healthcare providers. We are enhancing our focus on this business and plan to implement operational metrics to increase predictability and reliability of revenue and profitability over the next several years.

In addition, the second -- the evolution of population health management has occurred and we are well positioned to provide a community architecture and our operating system that enables the base operating platform and our analytical tools, care coordination and transaction services necessary for providers to successfully participate in value-based healthcare.

Given our core strategy of open systems, we believe patient information and connectivity needs must be supported independent of the point of care or underlying IT supplier. Data stuck in a silo is not information, throw into the mix, the switch to risk-based provider contracts or a single payment for population health, and you have a tremendous opportunity.

The Allscripts community care architecture is an important differentiator for us in the market today that will enable our clients to be properly positioned in the future. Through our partnership with dbMotion, today, we create a single virtual patient record for multiple sources, systems and care settings across communities. This is the digital key that unlocks the open exchange of our information with other systems to enable a free flow of patient information across disparate EHR systems.

Health providers need actionable, realtime decision support of point of care, tracking new referral systems across communities to coordinate care and analytics to predict and identify gaps in the effectiveness and outcomes of health populations. This core technology is instrumental in positioning Allscripts for future opportunities to comprehensively support Accountable Care Organizations with population health management, clinical and financial analytics, patient engagement and care coordination.

It's notable that dozens of our clients are already using Sunrise today in a manner that will be of critical value and a pay per value environment. For example, the quality team at university hospitals in Cleveland is leveraging Sunrise to enhance clinical best practices compliance and access new surveillance tools. Within a span of only 4 months, the team designed, developed and deployed a host of new features. Plenty of these resulted in 100% compliance in assuring recommended pneumonia blood culture frequency, prior to initiating treatment. DOH Cleveland also use advanced whiteboard features to predict case risk to reduce readmissions.

Our care management platform enables care coordination across the community during the discharge and post-acute phases of care delivery. Today, Allscripts Care Management platform alone delivers 6 million referrals annually across almost 1,000 hospital clients and we have more than 112,000 post-acute providers in our network. We have a proven successful formula in go-to-market strategy that we will duplicate in emerging markets segments.

Finally, we are focusing our efforts in 2013 on building momentum with patient or consumer engagement, a critical component of Meaningful Use 2. Mobile solutions that are EHR-agnostic will be critical to our success in this arena. We look forward to continuing to update you on our progress throughout 2013.

Next, I'd like to discuss the notion of making the most of the assets we have, becoming more efficient and productive. We are putting a strong operational focus on the business to streamline the organization and reduce our cost of doing business. We announced this morning a planned design to support this focus by creating a simplified physical organization that is aligned more closely to our business priorities and is more agile in delivering results for our clients. We will execute on this fact [ph] consolidation plan over the next 3 quarters, as we move from having dozens of locations, some with as few as one or two people, to 70 key facilities in North America. Aligned with the centers of excellence strategies discussed earlier.

We will also take actions, including rigorous and intensive procurement and sourcing processes that coordinate and maximize natural advantages of our scale. We will invest in key areas, like solutions development, enhanced placing [ph] capabilities and service offerings that drive superior returns and drive enhanced efficiencies in overhead-related areas. To be clear, we have a plan to invest approximately $45 million to $50 million in 2013 that will drive in excess of $50 million of annualized savings from our cost structure beginning in 2014.

For 2013, we expect to capture approximately $25 million of these savings, or about half the total annual run rate, thereby offsetting part of the upfront investment for 2013. We will share additional details on this program as they are implemented and executed during the year.

Before I turn the call to Rick, I wanted to briefly address the importance of delivering consistent plans and performance as a strategic focus. We will take several actions during 2013 to set the stage for improved financial consistency and predictability in the future. This is driven by our client alignment initiative. Today, we enjoy 2/3 recurring revenue. While 100% recurring revenue is an enviable target, we plan to more fully align our business terms and financial model with future market demands. This will result in an increasingly larger net subscription-based contracts, increased testing revenues, as well as SaaS offerings for the ambulatory and post-acute marketplace.

As you have heard from our peers and in your own channel checks, this is largely a matter of client preference in emerging business models. Also, as mentioned earlier, we will seek to aggressively solicit and capture as much of our clients' IT spend as possible. An example would be a client who makes multi-year commitments to our entire portfolio, such as a greenfield population health management client I've discussed earlier that maximizes our long-term visibility and aligns our performance with client success. This will provide us with superior profitability and return for our clients aligned efforts.

In addition, as our development organization executes, we will industrialize our processes much more so than they are today, better aligning our costs and revenues in creating a loss quarterly volatility. Finally, we are committed to utilizing our cash flow and balance sheets through share repurchases, debt reduction and business development initiatives intended to create long-term value.

As I hope you have surmised from my comments today, clients are priority #1. Let me summarize the messages we heard from our clients during the initial period of intense interaction with our install base. These conversations focus on what we are doing well today and where we need to improve. Clients of all types and sizes deliver a clear message that Allscripts is a critical long-term partner. Clearly, they want to help, as our mutual success is interdependent and requires close alignment.

Allscripts also enjoys significant loyalty, brand equity among our clients and I would submit that this fact is not lost on the industry at large. This requires daily focus to maintain and grow this equity. I've also had the pleasure of meeting with many Allscripts team members across the country to better understand who we are as a company and what makes us special. Allscripts has great assets, a large multidimensional install base, passionate, dedicated and hard-working team members an innovative spirit, unique technologies, an institutional strength, that in my opinion, no one else can touch in this industry.

This company sits on a very solid foundation to move forward and execute. And with that, I'll hand the call to Rick, to discuss our financial performance and elaborate further on these initiatives.

Richard J. Poulton

Thank you, Paul, and good afternoon, everyone. I'd like to add that I'm excited to join all of you for my first official Allscripts' earnings call as CFO, and I look forward to getting to know all of you in the weeks and months to come. I will make my comments relatively brief, so we may get to your questions as soon as possible.

Also, please utilize the supplemental data sheet available on the Investor Relations section of our website, as well as the supplemental information in today's press release. It contains backlog and other metrics we've historically provided on this call. In our fourth quarter, we benefited from sequential increase in bookings to $180.7 million, compared to approximately $162 million in the third quarter. As Paul stated, the clarity that resulted from the conclusion of the strategic alternatives process was helpful in making sure we closed out 2012 in a positive direction and the bookings results for the quarter reflect strong momentum during the final 2 weeks of the year.

We saw growth quarter-over-quarter across all of our solution offerings, including ambulatory, acute, and post-acute, led by acute sales of our existing client base. A few notable wins in the fourth quarter included the following: A major academic medical center utilizing Sunrise Clinical Manager in its acute facilities, agreed to purchase our Enterprise Electronic Health Record as the platform for their ambulatory strategy. We also had an initial sale success after going GA with our Sunrise Financial Manager. A larger key client signed an agreement to implement SFM and we have several others in the early adopter phase and are undergoing implementation.

We also had success cross selling our Care Management platform this quarter for multiple clients, including a multi-million dollar agreement with an existing large, strategic clients along the East Coast. Software-as-a-Service agreement constituted almost 36% of our bookings mix during the quarter. This is a substantial increase over the prior quarter and year. This shift toward more predictable consistent financial results is consistent with the strategic initiatives Paul outlined a moment ago, but it also explains the enthused system sales revenue recognize during the quarter. I'll comment more on that in a moment.

Non-GAAP revenue, before nonrecurring provision to deferred revenue, increased slightly over Q3. Our Professional Services maintenance and transaction processing grew in Q4, we experienced a decrease of almost $6 million in system sales, the majority of it lower software. This reflects, in large part, revenue mix in the quarter, as well as the higher SaaS bookings I mentioned.

As we noted in our press release, we recorded a one-time charge against revenue of $16.8 million. This adjustment reflects a revenue deferral for clients who have long aged accounts receivable balances. This provision is added back for our non-GAAP results because of its non-recurring nature. And the way you should think about this is we've effectively shifted these client accounts to more of a cash basis revenue recognition.

Non-GAAP gross margin during the year -- or during the quarter declined 190 basis points, entirely due to a large negative swing of system sales gross margins. The non-GAAP systems sales gross margin was a loss of $2.6 million, or negative 9%. This resulted from a low mix of Allscripts Software revenue in the quarter, combined with higher amortization expense. Capitalized Software amortization flows through this system cost of sales line, as do certain purchase accounting amortization. In total, this represents $16.5 million of cost of sales for this line.

Moving down to SG&A, expenses increased $14 million over Q3, largely as a result of the one-time items included in the non-GAAP presentation. These items relate to severance associated with the departure of executives, cost associated with the strategic alternatives process, as well as the period-to-period costs associated with migrating our MyWay client to our Professional EHR platform.

Our R&D expense increased from the quarter to approximately $50 million and we capitalized approximately with $3.6 million during the quarter. This capitalization rate is much lower than the usual experience and this was primarily a result of unique circumstances between a status of certain projects and the accounting rules that apply.

As we employ our agile methodology for solutions development, we may have quarterly fluctuations in the amount capitalized. But as Paul indicated, we do expect 2013 gross R&D to grow double digits and capitalization rates should return to the 20% to 25% range for the full year.

Non-GAAP operating margin was 8.3% in the quarter compared to 13.8% in the third quarter. This, again, a function of lower system sales gross margins and the higher research and development cost I just mentioned.

Our non-GAAP effective tax rate for 2012 was 23.6%. So the meaningful adjustment downward from the 29% that we were booked at through the third quarter. The primary driver of this change is a higher proportion of profits being allocated for international jurisdictions, as well as the impact of the one-time charges in the quarter -- that we recorded during the quarter.

Thus, as we did in our Q3, we reported a quarterly catch up adjustment to align our new effective tax rate for the year. Required adjustment in our Q4 rate to align to this effective rate of 23.6% for the year, actually resulted in a net tax rate benefit for the quarter at 93%. Please see the non-GAAP Table 4 for the cumulative impact of the tax rate adjustment on one-time items for the quarter.

Utilizing the non-GAAP tax benefit, non-GAAP EPS was $0.16 per share. As you saw in our release, we have introduced a non-GAAP adjustment EBITDA calculation to help investors better understand the underlying business trends. The cost of EBITDA totaled $53.6 million in the quarter and was $253.5 million for the full year. Please see Table 5 in our release for this information and we will continue to provide this on a go-forward basis.

We believe adjusted EBITDA is a valuable metric for evaluating our performance and plan to provide this figure in a recurring basis. Looking forward, as you heard from Paul, we are taking decisive steps, including our site and debt consolidation, as well as establishing R&D centers of excellence in order to fully align ourselves with our clients. With this mission being our primary focus in 2013, we are not providing forward-looking financial guidance beyond what we have discussed today in order to afford ourselves maximum operating flexibility to execute on our plan. We'll continue to evaluate the merits of providing additional metrics, as we make progress.

Thanks for your time and attention. I'll now turn the call back over to Paul.

Paul M. Black

We're actually going to take Q&A. I understand we've had some sound quality issues during the call. I apologize. Susan, can you hear us?

Operator

Yes, I can.

Paul M. Black

Do we have an echo? Or is the sound quality good? Because we'd like to proceed with Q&A please.

Operator

We can proceed with Q&A.

Paul M. Black

Let's go ahead then.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Charles Rhyee with Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

Paul, a question for you. In the last couple of months, as you've been traveling now meeting with clients. You kind of talked about some of these intense conversations you've had. Can you talk about some of the main concerns from your existing client base that they're really kind of pressing you about? You obviously talked about some of the good things they've said. What are some of the big issues that they're struggling with, with Allscripts? And then maybe, any conversations you've had with prospective clients, what are the kind of the questions they are asking, as they look to maybe move forward with Allscripts?

Paul M. Black

Sure. It depends what venue I'm in. If I'm in a treatment patient facility, versus a large ambulatory group practice, or when I'm at some very large retail clinic operation, so all of those things are different conversations. [indiscernible] folks are very interested in what we're doing on the population health management side. And what our Care Director and what our Care Coordinator asset's going do to do for them. They're also pretty interested in what we're doing with our cost accounting systems in that regard, because they want to make sure that in the absence, potentially, of a claim in the future, they want to be able to account at the shop's floor level at the clinical side of exactly how they're going to get things done. They're trying to make sure that we remain focused on R&D spend, which I reassured them that we have. We have a lot of deliverables that are due this year that we are -- as I've mentioned, are doing quite well again. They are mostly interested in Meaningful Use 2 payments and in their ICD-10 compliance, which we feel very confident we're in good shape with them on. Most of them -- or a lot of them are asking about what else we're working on and they're pretty interested in a lot of the future things that I've talked about here today. So to summarize what they're saying, is they're saying that you're important to us. There are some things we need to go work on together, that the open actually is very important to them. That's what makes Allscripts different. It's why they bought us in the first place. And typically end the meeting with how can I help? I know that's kind of a fun conversation to have to be honest.

Charles Rhyee - Cowen and Company, LLC, Research Division

What about prospective clients? Anyone asking about an integrated offering? When we'll be fully integrated Sunrise hit the market? Any kind of questions like that aspect?

Paul M. Black

Yes, I get some of that, but I could take them for a couple of places now and show it to them. So I feel much better if they want to jump on an airplane, we can go show them. And I think that's important, that we have -- to actually have that as well. And -- not on the acute care side, that's important to some of them. But most of them, again, are trying to -- they're talking about the layer of volume [ph] and what we're going to do with that.

Operator

And your next question comes from the line of Mike Cherny with ISI Group.

[Technical Difficulty]

Michael Cherny - ISI Group Inc., Research Division

So let's try this. So the system sales line, you mentioned how there's going to be a larger focus on Software-as-a-Service-based revenue going forward. I know you're not providing guidance per se on that line item, but when we you think about where you were in the quarter, is that the type of accurate jumping off point you expect for the next portion of the year? I mean, just given the transition of the system sales line on a year-over-year basis while throughout the [ph] year. Just trying to get a sense of what our appropriate starting point is?

Paul M. Black

Yes, I mean, I guess here's what I would say to that. Clearly, fourth quarter was down significantly from what you've seen us work previously. So we haven't seen that big of a shift in the business in one quarter's time. So I think what we're showing you for the quarter is a little artificially low. But directionally, as we more and more go-to-market with the types of solutions that customers want to buy, I think we'll start or continue to see a shift towards more the transaction processing and those type of line items on our P&L close to the software sales line item. So roundabout way of saying we think there's a little bit of an artificial deflator in it for the quarter, but directionally, it will sort of come down a bit.

Michael Cherny - ISI Group Inc., Research Division

And then just jumping over to the IDN you were discussing. You talked about a couple of your competitors being involved there. Can you talk about when you are going through the discussions there what specifically, particularly with regards to the new product rollout, attracted this client towards, like, to you guys. What were the key tenets they focused on with you that decided to allow them to go your way?

Paul M. Black

I'd say 2 things. One is the -- our strategy and what we are in the delivery component for population and health management, broadly, number one. And number two, the open connected community architecture approach that we have. We acknowledged that there's many other places and venues outside the 4 walls of the hospital that we haven't connected into. And we live in the world where we're going to interface and inter-operate with those other venues that may not all be Allscripts. And in any community, we have a large IDN, or we have a large physician practice group that's going to be a relevant player in an ACO world. They need to connect to those different post-acute care settings and not all post-acute care settings are going to be in one specific supplier.

Operator

Your next question comes from the line of Greg Bolan with Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Paul, in the past, your predecessors had characterized the replacement market for kind of core key clinical to be around 400 hospitals. Over the next few years, hospitals with moderate to large size, kind of ranging from $10 million to $15 million per hospital. Is that consistent with what you are thinking of? Has that changed at all? That'd be helpful.

Paul M. Black

Well, it probably hasn't changed substantially. But my -- the way I've been -- that I've grown-up is I assume any organization that is taking care of a person whether that's a health facility, in-patient facility, outpatient facility, that, that is an organization that should have some relationship with this company. So I look at anything that's out there even if it's an all x supplier or an all y supplier, there are still a bunch of different things that we can go in there with that our competitors don't have that we have. In many cases, we have more of our -- some of our operations installed in a none-core Allscripts architecture accounts than we do in our own. So at -- EPSi is an example. Our cost accounting system is installed and that should be installed, as far as I'm concerned, in every organization throughout the globe. So there are some competitors that are out there that are requiring major upgrades or major uplifts to their technology that people have talked about in the past that are certainly -- organizations we're having conversations with. But again we have a pretty large sales force and we have a substantial number of different solutions that we can be selling to anybody, irrespective of a let's say, they make core supplier of choice.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

That's helpful. And then as a follow-up, bookings for the quarter were quite a bit better than ours and definitely consensus is up. Just thinking about the sequential improvement, could you maybe characterize -- and I'm sorry, I apologize if I missed this in your comments earlier, but if that was a concentrated to one or just a several clients, just kind of -- just looking at concentration as it relates to the sequential delta in bookings.

Paul M. Black

Now there's a number -- and I don't think we provided the actual color, but there wasn't one large deal to tell about during the quarter. We, of course, love to have large deals every quarter, but we didn't have one. The team was scrambling pretty hard. They did a pretty good -- they did a very good job, in my information, to bring in the bookings number that they had. I, of course, would love to see a $300 million, or $400 million, or $500 million booking number. We had a $180 million and exceeded, at least with some of the estimates that were out there, but again my expectations of the team and the team's expectations of themselves are higher than that. So I appreciate the compliment. It was a tough selling quarter given all the other activities that were going on in the marketplace and specific activities that this company was undergoing at the time. So I was pleased with the core execution of the sales organization and the professional services organization in the quarter.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

That's great. And just real quick on that, so the goals that you've set forth for your team, as it relates to bookings, are those more consistent with 2011 levels?

Paul M. Black

We -- yes, that's a great question. Again, if go back to -- there's a lot of opportunity that's out there, there's a lot of opportunity in new areas that is not getting exposed to in the past. There's a lot of global opportunities that we've not executed on as swiftly as I would expect. So, I feel our expectations of a pretty good-sized sales force to be able to go out and execute. I don't think we've given that level of detail yet.

Operator

Your next question comes from Glen Santangelo with Crédit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

I'm just kind of curious, Paul, if you can talk about sort of the gross margin trend in the quarter was obviously a little bit worse than we expected and the R&D obviously ticked up sequentially a fair amount. Could you maybe give us a little bit more color into those trends and maybe when you'd expect those to normalize?

Paul M. Black

Well, again, I think the gross margin is getting affected a bit by both an increase in amortization, noncash amortization, previously capitalized software, as well as again, with more and more of the bookings coming on more subscription basis, less from revrec and so we're losing some of that high margin software revenue as a result of that. So that's -- I think that's really what's driving that margin outcome. On the R&D side, we're going to continue to invest heavily in our product suite and as we've indicated a couple of times here, we will grow our gross spend double digits on a year-over-year basis in 2013. We did see an artificially low, in my opinion, artificially low capitalization rate on that software investment issue this quarter. We shouldn't expect to see that going forward. And as I said again in my comments that we would expect for the full year next year, we may have a little quarter-to-quarter volatility, but for the full year, we should be back in that kind of 20% to 25% range in terms of capitalization rate.

Glen J. Santangelo - Crédit Suisse AG, Research Division

And, Paul, just to kind of follow-up, I mean, shifting gears for a second. A number of your competitors have talked about sort of decelerating growth in terms of ambulatory purchases. Could you maybe just elaborate a little bit in terms of what you're seeing in the market on the ambulatory side?

Paul M. Black

Yes, again, depending -- if you said not in the ambulatory marketplace, and I apologize this is Day 62, but what I'm seeing is the places I'm going to are the larger physicians' group practices, the larger IPOs, the larger MSOs and those folks have been relatively actively acquiring physician groups. So I'm seeing growth in those organizations and growth in the physician groups that they are bringing on board. Some of them are buying those physicians groups and some of them are affiliating with them. The same on the IDN side, where you've got your larger IDNs that are out there, where we are the ambulatory solution of choice for them, both for the internal, if you will, employed positions, as well as for their affiliated strategy. They are also spending quite a bit of money to go acquire physician office practices. So I haven't been, quite frankly, and I will, but I haven't been to the single, or the 2 doc-office practice to find out what's going on in their world. I haven't -- I've just not been out there to be able to go do that yet, I will. But I'm not -- everybody that I'm talking to is growing their footprint. And again, I've not been to all of them, but the ones I've been to are healthy and are growing.

Operator

Your next question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc, Research Division

I guess, Paul, can you talk a little bit about the company came to the individual strategic decision process in the end of December. We're now midway through quarter 1. You talked about the shrinking [ph] bookings in the last 2 weeks of the fourth quarter. I guess just client confident trajectory and how the conversation has changed with clients over that period?

Paul M. Black

I've got -- George, I'm sorry, it's Paul. I've got the preamble, I didn't get your question.

George Hill - Citigroup Inc, Research Division

Okay, I'm trying to figure out if the reverb on the line is coming from me.

Paul M. Black

Yes, I apologize, we have it as well.

George Hill - Citigroup Inc, Research Division

Okay. Just the -- I guess the pace of improvement with respect to bookings and operating results, after the company announced the strategic review was complete.

Paul M. Black

I'm sorry, yes, we only had 6 business days. So...

George Hill - Citigroup Inc, Research Division

Well, I guess, can you comment up through now?

Paul M. Black

Oh, up through now? I apologize, sure. So -- there's still a bit of are you really done? There's something else I should be watching -- asking about or thinking about, that sounds we've concluded the process. The banker is no longer around. The data room is closed and I was not named as an interim. And so that level of discussion that we are having on that topic when they bring that up is, are you sure you're done? So that's number one. Number two, again, there's a lot -- most of the places I'm going, George, are the install base clients. I've been to a few net new opportunities. The install base clients I'm going to are -- they want to make sure that we're doing well, which we are, and we talk about that. And then we talk about specific things we're going to do in the next 30, 60, 90 days with them to stabilize, to optimize and to, if you will, innovate, on top of the platform that they already have. And we're doing some 30, 60, 90-day plans with those folks that's some core objective align us and then we're going to go meet them in that kind of timeframe. So there's been a lot of that going on. It creates a better, tighter kind of alignments out there. There's a couple of large clients that are extraordinarily interested in that our entire concept of openness, given the requirements that they find themselves in where they have acquired, let's say, 2 or 3 large hospitals, or 2 or 3 large physicians with practices and are trying to figure out how they're going to inter-operate all those different solutions that are out there, without having to wreck and replace. And we're giving them options for how to go do that as well.

George Hill - Citigroup Inc, Research Division

Okay, and I guess just as a quick follow-up. How long do you think will be before you're out of, what I'll call repair mode for the company and you can -- the company can just compete in the market without the overhang of clients and prospects worried about a company in a constant state of reorganization?

Paul M. Black

Yes, I'm trying to get all that behind us and I think we're done for the most part than that, George. So I wouldn't characterize it as repair mode. I'd characterize it as execute mode, get back to knitting, get back to staying home and doing the chores and get back to delivering in behalf of our clients, which is what they've always wanted.

Operator

Your next question comes from the line of Bret Jones with Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I just wanted to start up with bookings a little bit. I just want to make sure I understand the message that you've talked about restoring growth. I just wanted to see if you actually put it down that you expect bookings will grow in 2013?

Paul M. Black

On a year-over-year basis?

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Yes.

Paul M. Black

Yes, that is our goal.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay, and then just to get a sense for what you think the mix of those bookings are going to be? Because it does sound like there's a shift in focus if you're looking more towards expanding hosting and things like that. Is that something you'd think will change the mix in 2013, or is that more longer term?

Paul M. Black

The way that I'm going to present the sales force and what we're going to ask them to do is sell software. And everything else that goes around that, great. We're going to sell as much software as we possibly can. We have a lot of it. We have a lot of other additional offerings that are out there and we have a lot of venues that are out acquiring software that cross -- span the entire gamut of health care, which is pretty exciting and interesting to me.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay, great. And then just one last one, if I could on the revenue. The revenue deferral. I just wanted a better understanding, can you have a track record for collecting on these clients and why is the ARH is for these particular clients, is it inability to pay, or is there something else going on?

Paul M. Black

Yes, I mean, I think the reasons for the aging on the receivable have gone on a gamut of some being more potentially given what you might think of as traditionally credit-oriented. Some of it not that way at all. Some of it has even characteristics of disagreement, perhaps, that we have to continue to hash out with certain clients in some areas. But I think with that said, the common theme in what was changed as we just said hey, where we have some of these elongated receivables, we think we should change our approach to rather just continuing to book -- send them monthly maintenance bills and book revenues all the time. We should have a little bit of an approach to that. So we've taken a more conservative approach to the balance sheet and we think it's a kind of prudent move, given the circumstances.

Operator

Your next question comes from the line of Eric Coldwell with Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

I believe you said 36% of the mix was soft in the quarter on the bookings. Can you give us a sense on what that -- how that impacted your actual bookings? Obviously there's going to be some variance, I think, between how you've won traditional sales versus SaaS-based deals?

Paul M. Black

I'm not sure I got your question.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Well, oftentimes, the SaaS based contract will not come with certain of the upfront payment, perhaps companies don't book the total magnitude of the contract upfront, or set minimums. We've seen with other companies in this space, when they have a mix shift with SaaS, they can have a negative impact on the actual bookings, not just the revenue. I'm just curious if there's any difference in how you book your SaaS-based contract versus your traditional once, maybe there's not enough.

Paul M. Black

No. There's not any real meaningful difference in the way we've employed the bookings.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Okay. Second question, I just want to understand the clarification on the tax rate, realizing that the adjusted number tax rate, actually a benefit this quarter. I think we've got the number, but are you taking a one-time benefit for items such as charges and accruals that were actually diluted from the pro forma results? So you're getting an adjusted benefit for items that didn't show up above that line in these numbers or prior period numbers? I'm just wanting to get a clarification on that.

Paul M. Black

No, the shift in the projected effective tax rate for the year is really predominantly a function of -- is the mix between how much of it is U.S.-based profit versus international based profit for us, from a tax perspective. And certainly with some of the charges we've taken, that predominantly weighs heavily against the U.S.-based operations. So you have more of a shift going in the international markets and that's bringing down our overall effective tax rate.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Okay, last question is related to MyWay. You made a comment about starting the transitions of customers again. The audible here wasn't great. So I'm just curious if you can give us a refresh on what you said about MyWay and the conversion success so far.

Paul M. Black

Yes, we have a migration center that's converting those clients to a hosted environment. That hosted environment migration parent has been active now for about 6 [ph] days. So far, the process of getting people converted to MyWay to Pro has been going quite well. And when they come out of that experience, not only will they get a converted -- becomes converted more quickly, but we're going to do a predominant amount of the work for them, number one. Number two, we'll be hosted. And number three, they'll come out with an iPad application to interact with the back end servers. So it's pretty comprehensive and the initial feedback has been positive.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Can you give us a sense on what kind of attrition you might have experienced so far, can you quantify that?

Paul M. Black

No. I don't have that, sorry. Well, thanks, everybody, for your questions and for your attention today in enduring what will most likely be a longer than normal prepared set of remarks.

To summarize, Allscripts has a strong, highly differentiated, breadth of solutions, a significant footprint of diversified loyal clients around the globe. We will take the next several quarters to focus squarely on our clients and simplify our approach, increase our touch, deliver on obligations and drive a positive and permanent inflection point in their satisfaction with us.

Second, we will position the company to further development of existing solutions in new offerings to position the company and our clients for the world of population health management.

Third, we've taken steps to carefully manage our cost structure, leverage our size and streamline our processes to be more efficient in our day-to-day operations. And finally, we will take concrete steps to improve the predictability and consistency of our financial model and align our business practices with the broader market direction to subscription-based agreements.

Thanks very much for your patience and time. And we look forward to seeing many of you at the HIMSS in New Orleans in 2 weeks.

Operator

Thank you for participating in today's conference. You may now disconnect.

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