Glen Tullman - Chief Executive Officer
Bill Davis - Chief Financial Officer
Lee Shapiro - President
Seth Frank - Vice President, Investor Relations
Richard Close - Jefferies & Co.
Charles Rhyee - Oppenheimer
George Hill - Leerink Swann
Corey Tobin - William Blair & Co.
Glen Garmont - ThinkEquity
Gene Mannheimer - Auriga USA
Greg Bolan - Wells Fargo Advisors
Frank Sparacino - First Analysis Corp
Anthony Vendetti - Maxim Group
Allscripts-Misys Healthcare Solutions Inc. (MDRX) F4Q10 Earnings Call July 20, 2010 4:30 PM ET
Good afternoon, my name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)
I would now like to turn the call over to Seth Frank, Vice President of Investor Relations at Allscripts. You may begin.
Thank you Amanda, this is Seth Prank, Allscripts’ Vice President and Investor Relations. On the call today are Glen Tullman, our Chief Executive Officer, Bill Davis, our Chief Financial Officer, and Lee Shapiro, our President. To start the call, I’ll read the Safe Harbor statement and then I’ll turn it over to Glen and Bill.
I want to inform everyone listening on this call today and via the internet that certain statements and comments made during the course of this call including statements regarding the expected completion and effects of the proposed merger involving Allscripts and Eclipsys are considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995.
These statements include risk, uncertainties and assumptions that may cause actual results to differ. For a description of risk that could cause actual results to differ materially from these forward-looking statements, please review the reports filed by Allscripts and Eclipsys with the SEC.
All forward-looking statements are based on information available to the companies on the date of this call and the companies do not undertake any obligation to publicly update or revise any forward-looking statements as result to the new information or in the future. In connection with the proposed transaction, Allscripts and Eclipsys have each filed to the SEC a definitive Joint Proxy Statement, which also constitutes a prospectus of Allscripts and an Information Statement for Allscripts stockholders.
Allscripts and Eclipsys have each mailed a definitive Joint Proxy Statement, prospectus, Information Statement to the respective stockholders on or about July 15, 2010.
Before making any voting or investment decision, the investors and stockholders are urged to read carefully in their entirety the definitive Joint Proxy Statement, prospectus, Information Statement regarding the proposed transaction and any other relevant documents filed by either Allscripts or Eclipsys with the SEC when they become available. They will contain important information about the proposed transaction.
And with this I’d like to turn it over to Glen Tullman, Chief Executive Officer of Allscripts.
Thanks Seth, and thanks everyone for joining us today. I’m excited to share with you our performance for the fourth quarter and fiscal year to talk about the latest market development, specifically the announcement of the final rule on meaningful use and to update you on the progress of our proposed merger with Eclipsys. After I speak, Bill Davis will review our financial highlights in more detail and provide guidance on 2011, and then we will open it up to your questions. So, let’s begin with results.
I’m exceptionally proud of the job our team did in delivering results for both our clients and our stockholders. Bookings for the fourth quarter total about $118.5 million, a quarterly record for Allscripts. Bookings for the year totalled $415.3 million, up 24% versus fiscal 2009 and another record. These results are indicative of a market that continues to expand paired with excellent sales execution led by our President of Sales, Jeff Surges.
For the forth quarter, we posted revenue in excess of $190 million, continuing our track record of consistent performance in growth. We made significant progress in our ability to scale and efficiently implement driving a 42% year-over-year increase in our professional services revenue. Our ability to rapidly implement our Electronic Health Record solutions is a point of differentiation and will continue to be mission critical as we head into the stimulus.
I give a lot of credit to our Chief Operating Officer, Eileen McPartland, and to Richard Sills who joined us only five months ago as Senior Vice President of Client Services and has already had a measurable impact.
Net income on a non-GAAP basis totaled $26.5 million or $0.18 per share. I’m especially pleased with this number in light of the investments we have made in addressing meaningful use, in better serving our clients with better processes, and in developing innovative new products. Our fiscal year results were also very strong, total non-GAAP revenue was $709.6 million and non-GAAP net income for the year was $98.2 million, an increase of 28% year-over-year.
Our results evidence our leadership in the industry as well as our momentum in the market. Building on our success, our proposed merger with Eclipsys, a leader in hospital solutions, opens up even more opportunity to grow. I will discuss the proposed merger in more detail, but the bottom-line is that the reaction of the market that is the people in organization to actually buy our solutions has been one of excitement and very strong interest.
Though excited about our future with the merger, you can see from our results in the quarter that we are very focused on delivering right now. We continue to win additional share on the physician market led by our Electronic Health Record solutions for physician groups and organizations of all sizes. One of the largest agreements signed during the fourth quarter was a significant expansion of our partnership with Catholic Health Initiatives or CHI, the nation’s second largest catholic health system.
In January, we announced that CHI, which has 75 hospitals in 19 states and 7,200 affiliated physicians, selected our enterprise Electronic Health Record for their 1,050 employed physicians, which was a big win. In the fourth quarter, CHI expanded our partnership by selecting our Enterprise Practice Management System for all of their employed physicians. CHI will also deploy our Payerpath solution for claims management and EDI and our clinical quality solution, which automates the collection and reporting of data for pay per performance award, as well as other metrics that practices need to demonstrate meaningful use to qualify for stimulus funding.
We believe that CHI will also serve as an anchor in many of the markets in which they operate and drive sales to independent physicians, who want to connect to their hospitals, a win-win for independent physicians and for CHI.
Other significant wins during the quarter included Central Penn Management Group, MSO or Management Services Organization that will provide our enterprise Electronic Health Record to Physicians’ Alliance, 120-physician, multispecialty group practice and other smaller groups.
Another win was Erie County Medical Center, a 550-bed academic medical center in Buffalo, New York, who will implement our enterprise Electronic Health Record for 100 of their employed physicians across 24 of their ambulatory clinics and MedWest Health System, a three-hospital system in western North Carolina, which selected enterprise electronic health record and practice management for its 60 employed physicians and will also host and deliver the solution to more than 200 independent physicians in the communities it serves.
The MedWest agreement is just the latest example of a hospital subsidizing electronic health record purchases for their affiliated physicians, a trend we see continuing to build momentum and also hosting the solution as well.
The fourth quarter also saw continuation of another trend that we discussed before, the ability of Allscripts to leverage our full solution set to cross sell into our health system clients. Hospitals who utilize and are satisfied with our care management, emergency department and home care solution. For instance, today we announce that Centra, a three-hospital system in Central Virginia, selected our professional electronic health record for their 70 staff physicians and 200 affiliated physicians or I should say 250 affiliated physicians.
Centra has been using the Allscripts’ emergency department solution since 2008 and will also add the Allscripts’ homecare solution, as well as Allscripts’ community exchange or health information exchange solution as their platform for connecting the medical community in the region.
Huntington Memorial Hospital in Pasadena, California also selected the Allscripts community solution to drive a new health information exchange for their 1,000 affiliated physicians and thousands of other independent physicians across the San Gabriel Valley. Huntington had already successfully deployed our ePrescribing application with a lot of success in physician buying. It made their decision an easy one.
And last week, we announced a similar agreement with Sharp HealthCare in San Diego, winner of the prestigious Malcolm Baldrige National Quality Award. Like Huntington, Sharp will leverage our community record, which is powered by our partnership with dbMotion and offers a true semantic interoperability, allowing for one comprehensive patient record.
All of these agreements provide confirmation of our ability to connect healthcare stakeholders and share information across large health systems, including employed as well as their affiliated and other independent physicians.
We expect this ability to become increasingly important as integrated delivery networks continue to seek, to establish stronger referring relationships with their affiliated physicians based on information connectivity.
So as you can see, a number of critical wins and a record quarter. While this news is exciting, the headline last week was the release of the final rule establishing the criteria for meaningful use of an electronic health record by the U.S. Department of Health and Human Services.
The release of the final rule and the associated rule on certification of electronic health records creates clarity and certainty that the market has been waiting for. That’s the most important takeaway, clarity and certainty. In general, the rules were less stringent than expected, which will to serve to spur adoption by creating more flexibility in year-over-year. As a result, the transition to electronic health records will be less intimidating to providers in solo practices and smaller groups and as we have consistently stated, our solutions will meet and/or exceed the criteria.
We believe the government’s approach to meaningful use, paired with the first checks arriving late in the first calendar quarter of 2011, will continue to drive market expansion at a healthy and accelerating pace. As an indication of the level of interest, we had over a thousand prospects joins us at an Allscripts hosted webcast within 48 hours of the rule being finalized.
That said, it’s important to note that the bar on meaningful use will continue to rise each year with the standards for each successive year requiring more providers in order to qualify for incentives. That’s good news for Allscripts, because our solutions already have the robust functionality including strong reporting capabilities in clinical decision support that meaningful use will demand our providers over time, but there are two critical factors that will determine the success of the federal program, distribution and deployment.
The demand for electronic health records will require the size and scale of a company like Allscripts that can distribute to implement and support a market that includes a 163,000 physician practices with less than three physicians.
We believe Allscripts has the most comprehensive sales and marketing approach, and that we will drive this market through direct selling, through partners like Henry Schein, Cardinal and SYNNEX and through strong client community partnerships. When prospects are ready to buy, especially the smaller independent practices that comprise 50% of the market, we want to be in front of them. Our broad reach will work to our advantage in this case.
Another way to extend our brand, our reach and our availability is through regional extension centers. We are partnering with many of the approximately 60 nationwide regional extension centers or RECs to help primary care physician select and implement electronic health records.
We recently signed several agreements with statewide RECs, including Iowa, Indiana, Nevada, Vermont, Virginia and Utah and we have made progress selling to another sector the government is investing in, namely federally qualified health centers and community health centers. Some recent wins from the quarter include East Hill Family Medical Center, Community Health Services and Family Care and Clinic.
So, our distribution approach coupled with our ability to deploy this technology rapidly and cost-effectively through our ready process for accelerated implementation gives Allscripts a considerable competitive advantage across all segments of the market.
So let me close my comments by updating you on the proposed merger with Eclipsys. We have a unique opportunity, a $30 billion federal stimulus program with the final rules now published and the Healthcare Information Technology sector is poised to play a central role in the transitioning of today’s disconnected healthcare silos into a connected system of health.
To get there, our current and prospective clients require a single patient record across the spectrum of care delivery. In this regard, the timing of the proposed merger with Eclipsys couldn’t be better. I’m pleased to report that we are on schedule with our timeline for completing the merger. The Allscripts’ special shareholder meeting is set for August 13, 2010 to vote on the proposals necessary to complete the merger. Eclipsys shareholders will also be voting on the same day. This is all very positive news that positions us to complete the merger this fall.
Once the merger is complete, we will be perfectly positioned with integrated delivery networks and academic medical centers that are searching for an end-to-end integrated solution. The combined company solution will provide a number of key competitive advantages. For example, our solutions are built on the latest Microsoft technology, designed for the next 25 years, versus a month’s platform that hasn’t changed in the last 25 years.
And when we talk about connecting the community, we can actually deliver starting with our existing client footprints of over 1500 hospitals, 50,000 physician practices and over 10,000 post-acute care organizations. And at a time when meaningful use is the measure that matters the most, we are combining the two leaders in utilization. For example, physicians using Allscripts software lie close to half of the electronic prescriptions in America, which is a good proxy for EHR utilization and Eclipsys has been the leader in physician utilization of CPOE or Computerized Physician Order Entry for the last eight years.
Since we announced the transaction, I spent a great deal of time as has Phil Pead, President and CEO of Eclipsys talking with our clients and prospects in the market, and again I’m very pleased to report that the market reaction has been extraordinarily positive.
The market is excited because clients understand that our merger with Eclipsys will provide real choice. We will support a best-of-breed approach for clients who want to buy our standalone application and for those who want an end-to-end solution we’ll provide a fully integrated solution across the continuum of care, our vision of one patient record, one platform and one network.
In situations where Eclipsys and Allscripts are already working together, we have a robust exchange of information between our respective systems and the message to clients is that integration will only become better and deeper, ultimately resulting in one product.
Integration between our Enterprise Electronic Health Record and the Eclipsys’ Sunrise solution was already underway at some of our most prestigious shared clients even before the merger announcement and that head start will now move even faster.
For example, at ColumbiaDoctors, the 1200 physicians and surgeons of the Columbia University’s School of Medicine, we have established significant information exchange with the Eclipsys’ Sunrise system used by their main teaching hospital, NewYork-Presbyterian.
In the last 12 months, Columbia has exchanged over 30,000 patient clinical summary documents between our system and the NewYork-Presbyterian Hospital’s, Eclipsys’ in-patient system. The two organizations have also exchanged more than 25,000 ambulatory patient records for preoperative staff at the hospital to review prior to surgery. This is an important contributor to the safety of their patients.
Both of these are level six and level seven functions by the HIMSS Model, meaning the level of information exchange already in place today between our two systems at Columbia and its main teaching hospital is inline with the most advanced connectivity available in the market today.
There is a similar story to be told with other joint client organizations like Hartford Hospital in Hartford, Connecticut which uses virtually every Allscripts product along with Eclipsys as their enterprise in-patient hospital system.
As we have said, both Allscripts and Eclipsys already use common platform, including Microsoft.NET and other advanced technologies, which will enable us to deliver an integrated offering very rapidly, and for those clients who don’t currently use solutions from both companies, we will focus on accelerating overall interoperability with key competitors using our strong community interoperability solutions. Our open architecture approach will simplify connectivity with third-party applications, delivering on our goals, creating a connected system of health.
Overall, the merger will create a company that will offer the industry a very big step forward and will drive important things like connectivity, open architecture, semantic interoperability and innovation.
So in summary, a great quarter and a great year for Allscripts. A critical tipping point for the market is the announcement of the final rule on meaningful use and a major move that positions us perfectly to lead in this market for many years to come with our pending merger with Eclipsys.
With that as a foundation, I’ll now ask Bill Davis to provide you with more detail on the financials for the quarter as well as our guidance for fiscal 2011, Bill.
Thanks Glen, and good afternoon everyone. In terms of my comments, first I will discuss the details of our financial results for the fourth quarter and for the full year. I will then provide financial guidance for Allscripts’ standalone for our fiscal 2011. I will conclude with an update on the progress towards consummating our proposed merger with Eclipsys Corporation.
Before I begin, I would encourage you to access the non-GAAP reconciliation table and explanations included in our press release to assist in evaluating comparable period and adjustments to reconcile GAAP and non-GAAP financial metrics. In addition, we also provide a supplemental financial data table that includes previously reported financial information on a quarterly basis including GAAP and non-GAAP information. The supplemental data sheet and our press release both can be found on our website at www.investor.allscripts.com.
As Glen highlighted, Allscripts had another outstanding quarter across all of our key financial metrics. Starting first with bookings, as Glen also mentioned we had total bookings in the quarter of $118.5 million representing approximately 15% growth versus the fourth quarter a year ago and the 12% sequential growth rate.
This performance is notable on several accounts, given that it marks the highest quarterly booking figure in Allscripts’ history and demonstrates considerable growth over a very strong quarter one year ago. We had another exceptional quarter of Enterprise EHR sales illustrating our success in winning large physician practice in hospital-based community deals. For the year, Allscripts total bookings were $415.3 million, which represents 24% growth versus fiscal 2009.
As I mentioned previously, we continue to see large physician organizations move ahead with their strategic plan to implement Enterprise Health Records in order to be optimally positioned to demonstrate meaningful use and take full advantage of the federal stimulus program.
In addition, as Glen discussed Allscripts is having a great deal of success working with integrated delivery networks in health systems as they pursue large scale roll-outs of ambulatory electronic health records to their employed and affiliated community physician in order to improve their clinical integration.
Bookings, including transaction processing fees, which are included in Misys plc’s definition of booking, would add approximately $39.2 million to our quarterly reported booking which will bring our total to $157.7 million.
Reflecting the significant mix of enterprise license transactions in the quarter, approximately $21.7 million or 18% of our fourth quarter booking relate to Software as a Service or SaaS transactions that will be recognized as revenue over the next 48 months. For the year, SaaS bookings were $92 million or about 22% of total bookings for the fiscal year.
We continue to expect SaaS deals to increase as a percentage of total booking, as we see a growing mix in new bookings from the most underpenetrated segment of the market, which are the smaller physician practices, again generally in the sub-10 provider segment who will likely prefer a SaaS-based model for purchasing electronic health records. We believe this segment of the market will begin to see more attraction in the latter part of calendar 2010 and into 2011 consistent with our prior comments.
Turning to backlog, Allscripts ended the fourth quarter with approximately $774 million in reported backlog. This is up from $747 million we reported last quarter. Our backlog continues to provide clear visibility as approximately two-thirds of our backlog consist of future revenue from reoccurring sources including maintenance, SaaS contracts and transaction processing fees.
Backlog totals for the fourth quarter were as follows: Approximately $233 million of clinical software and related services fees, approximately $142 million of subscription and SaaS fees and approximately $250 million of annual maintenance fees, up from $246 million in the third quarter and such backlog is expected to be recognized over the next 12 months and then finally, approximately $150 million of transaction fees which again principally consists of EDI transaction fees and again are expected to also be recognized over the next 12 months.
For those of you who track our backlog composition each quarter, I did want to call out for you the fact that we reclassified approximately $20 million of our subscription backlog in the fourth quarter to the other three backlog categories. This reclass pertains the inventory held by our value-added resellers and our desire to ensure our backlog reflects how we expect such licenses to ultimately be deployed to end-users which will principally be as licensed transactions.
So let’s now turn to highlights from the income statement. Total revenue in the fourth quarter was a $190.3 million and $190.9 million on a non-GAAP basis, they are giving us back to a $600,000 differed revenue adjustment. Allscripts revenue growth, on both a GAAP and non-GAAP basis was 14% in the fourth quarter when compared to the same quarter a year ago. Fourth quarter revenue also represents a 6% sequential growth rate compared to the third quarter.
In terms of our revenue mix, we had a particularly strong quarter in our professional services organization, as revenue grew 42% year-over-year and 36% sequentially as we saw an uptake in utilization of our implementation resources for both our enterprise and professional EHR solutions.
We experienced approximately 17% growth in system sales revenue in the quarter versus the prior year as we continue to recognize software license revenue from implementations of projects across multiple client sides as well as benefit from our seasonally high fourth quarter bookings. Reoccurring revenue from maintenance, transaction processing and SaaS contract was approximately 63% in the quarter consisting with Q3 and fourth quarter a year ago.
Maintenance revenue growth of 16% over the fourth quarter last year reflects continuing growth of our installed base as new clients go live and begin their software maintenance agreement. Transaction and other revenue which consist the revenues from our Payerpath Revenue Cycle Management and transaction processing business, plus our ePrescribing and SaaS revenue grew approximately 6% over the fourth quarter last year. For the year, Allscripts total non-GAAP revenue of $709.6 million represents 9% annual growth when compared to fiscal 2009.
Let’s turn now to margins and expenses in the quarter, non-GAAP gross margin percentage for the fourth quarter was 54.1% down versus 56.4% one year ago and down compared to 56.6% posted in the third quarter of this year. As we’ve indicated consistently, we expect gross margins to track in the mid 50% range for the immediate future and we will likely see fluctuations quarter-to-quarter depending on our revenue mix.
Specific to this quarter’s gross margin percentage, we did have a higher mix of hardware sales and third party product sales in the quarter, all of which carry lower gross margins and thus drove our system sales gross margins down in the quarter. This revenue dynamic is generally consistent with our prior experience in past four quarters.
Second, the growth in professional services sequentially and year-over-year contributed to lower gross margin revenue in the quarter, consistent with our plan within professional services and as I talked about in our prior calls, we added new deployment resources to our organization and these individuals tend to have lower utilization rates over the first several months.
We continue to believe that our professional service gross margins will expand over the next several years, as we reap the benefits of adding new capacity now that will provide greater efficiency in margins going forward.
We also expect the positive impact from our continued investment in technology, in accelerated new client installations through initiatives such as ready which is our rapid implementation approach as well as our Upgrade Enablement Center.
GAAP operating expenses were $78.1 million for the quarter. Non-GAAP operating expenses, which excludes your related amortization of $5.7 million and transaction related expenses of $9.1 million were approximately $63.4 million, which is down just slightly versus our third quarter. The transaction expenses in the quarter were primarily associated with Allscripts proposed merger with Eclipsys in legal advisor cost associated with our proposed reduction and ownership interest of all Allscripts by Misys plc as well as severance, integration and certain other legal and related settlement cost incurred in the quarter.
We exhibited strong control over our discretionary expenses in the quarter, particularly in light of the fact that our quarter specific expenses incurred included our HIMSS event as well as higher year and commission expense due to our higher revenue performance.
Excluding the $9.1 million in transaction expenses, SG&A was down approximately 5% year-over-year and 4% sequentially. As planned, we continue to invest in research and development in the quarter as R&D grew 31% over the same quarter last year. We have invested significantly in both people and technology as part of our strong commitment to innovation. We expect to drive significant leverage from these investments as sales and revenue accelerate from stimulus driven demand.
Allscripts total growth R&D expenditures for 2010 were in line with our targets totaling approximately $70 million before capitalization. For the quarter, capitalized software was approximately $7.7 million bringing our year-to-date total to $21.1 million or just under 30% for the year. This capitalization rate is consistent with significant investments we are making to ensure our products are ready for the requirements under the final certification in meaningful use rules.
Our strong discretionary expense management, even while we significantly invested in innovation, resulted in non-GAAP operating margin of approximately 20.8%. This figure is based on non-GAAP revenue and excludes total deal related amortization of $5.7 million of which $3.1 million is included in our cost to sales line and also excludes the $9.1 million in transaction related expenses I discussed earlier.
Our margins are down just slightly compared to our 21.1% non-GAAP operating margin we reported in the third quarter. Operating margins on a GAAP basis were approximately 12.9% and reflect the one-time items already discussed.
Our GAAP tax rate in the quarter was approximately 38%, a 300 basis point decline from the 41% rate we recorded in the third quarter. The sequence of the reduction in our effective tax rate was driven largely by the completion of our expected research and development tax credit study which again was completed in our fourth quarter. For fiscal 2010, Allscripts tax rate was approximately 39% consistent with the expectations we set out for the market at the beginning of the year.
Turning to our balance sheet, Allscripts ended the quarter with $145.3 million in cash and marketable securities, a net increase of $27.6 million or 23% from $117.7 million in the third quarter. Cash flow from operating activities was very strong setting a corporate record of $52 million in the fourth quarter. We also repaid all outstanding borrowings under our credit facility during the quarter.
Our ability to generate substantial free cash flow is an important component of our business that affords a substantial strategic flexibility going forward. To that point, we generated approximately $38 million of free cash flow in the quarter and we anticipate Allscripts on a standalone basis as capable of generating on average $20 million to $30 million per quarter in free cash flow in the upcoming fiscal year.
Accounts receivable increased just slightly by $3 million to approximately $182 million versus the third quarter. Our day sales outstanding in the fourth quarter declined by four days to 87 days, which in generally in line with historical levels. Finally, we ended the quarter with 2428 employees, which compares to the 2358 at the end of third quarter as we added additional staff in R&D as well as professional service deployment resource capability.
I want to now provide you with guidance for Allscripts on a standalone basis for our fiscal year ending May 31, 2011. Please keep in mind that subsequent to the confirmation of the proposed merger with Eclipsys, we will update our guidance to reflect the combination of the two companies and our anticipated switch to a December 31 calendar year.
In the meantime, I will provide you with our expectations for the core Allscripts business. With regard to revenue, we anticipate revenue for fiscal 2011 to be in a range of $780 million to $790 million. Such revenue guidance does take into account the fact that we expect the third revenue adjustment of approximately $1.6 million in the year. We anticipate net income for fiscal 2011 to be in a range of $92.5 million to $95.5 million, which equates to diluted earnings per share range of $0.61 to $0.63 per diluted share again on a GAAP basis.
Non-GAAP net income expectations are in the range of approximately $118 million to $121 million, which equates the non-GAAP diluted earnings per share of $0.77 to $0.79 per diluted share.
Our non-GAAP net income guidance contemplates approximately $20 million of acquisition related ammonization as well as approximately $20 million of stock-based compensation and the previously mentioned $1.6 million deferred revenue, all of which are on a pretax basis.
In addition, we expect to incur additional transaction expenses associated with the proposed merger with Eclipsys in our proposed reduction and ownership venture at the Allscripts by Misys plc. These expenses will naturally be excluded for the purpose of calculating non-GAAP net income and diluted earnings per share. We are assuming a corporate tax rate of approximately 39% in our guidance and we also anticipate a share count for the fiscal year of approximately 153 million shares.
In addition, we believe the pending merger with Eclipsys and Misys’ stake reduction, which includes a secondary offering of Allscripts stock by Misys represents a highly unique situation that we believe merits providing investors with additional insight into our near-term business outlook. As such, we are letting this quarter to provide bookings guidance for our fiscal first quarter ending August 31, 2010.
Our guidance reflect Allscripts’ strong overall market position and our expectation, as I mentioned earlier of strengthening sales in the sub-25 physician practice market, resulting in a sales mix of larger contract volumes with lower average deal sizes. Our guidance also incorporates the fact that summer months traditionally have contributed to some level of seasonality. Based on these factors, we anticipate Q1 bookings to be in the range of approximately $105 million to $110 million.
Finally, in terms of our progress on completing the proposed merger with Eclipsys, on July 14 the FCC declared our registration statement effective and we have scheduled our August 13 special meeting for Allscripts shareholders to vote on the proposals necessary to complete the merger. We view this as a positive development that creates additional certainty to our timeline to completing the proposed transactions with both Eclipsys and Misys.
We anticipate completing the secondary offering in the September timeframe subject to market conditions. Pending successful completion of the secondary offering, we expect the remaining transactions, including the merger with Eclipsys to close shortly thereafter.
On the integration front, we are making excellent progress on our planning post merger to bring Allscripts and Eclipsys together as one company. As you know, the management team at Allscripts has executed ahead of plan on post merger cost synergies in the past and we feel confident in our ability to achieve our goals with this transaction, specifically the $25 million of cost synergies in calendar 2011, $35 million in 2012 and by 2013 and beyond an expectation that we will be at a full run rate of cost synergies in excess of $40 million.
So in summary, we could not be more pleased with the quarter and the year. We believe the business is on a strong footing and well positioned for the long-term growth opportunity we see going into stimulus driven demand and beyond. We are operating from a position of financial strength and as Glen has said, we believe the Eclipsys transaction is perfectly timed for the combined companies to maximize the market opportunity at hand.
So, I want to thank you for your participation, and with that I would like to turn the call back over to Glen for a few closing remarks.
Great, thanks Bill. These are extraordinary times in healthcare and I’m convinced that Allscripts is ideally positioned to take advantage of the opportunity at hand. I’m pleased with our entire organization and the results that we delivered. That said; we also understand that we have a great deal of work ahead of us, but I am confident that we have the energy, the will and the commitment to execute on our mission to transform healthcare. Nothing could be more important or more fun.
Thanks to our clients who give us the opportunities, to our employees who make it happen day in and day out and to our shareholders. We will now take your questions.
(Operator Instructions) Your first question comes from Richard Close with Jefferies & Company. Your line is open.
Richard Close – Jefferies & Co.
Just really quick, congratulations. Bill if you can go over these margins again and just give us maybe some indication in terms of the level of hardware that you had in the quarter, we are little surprised by that number.
And then with respect to the professional services margins, you mentioned I think adding some team members. Could you talk a little bit about the amount of additions in professional services, so we can quantify the utilization?
Richard, I’d be glad to. Again as I talked about in prior quarters, I do believe as we build capacity and drive the level of revenue mix that I talked about, not only in this call but in prior quarters, that margin will fluctuate a bit and that’s why I have told the market to expect kind of mid-50s gross margin. With that said, I would really turn your two questions around in the sense that much of the margin compression that we saw in the quarter, I would attribute to the service aspect.
Again, as we talked about in the third quarter, we saw an opportunity with the relative strengths of the business to begin to build on that capacity and we took full advantage of that.
If you look at the headcount additions which I outlined for you on the call, I would suggest you that the better part of those additions were in the area of service, I would say much as the half to two-thirds of them were in the service area and then the balance as I mentioned were in R&D.
Specific to your second question on hardware, we don’t get into really that level of specificity in terms of the revenue mix, but I will just say that it was a contributing factor in terms of the overall mixed consideration and the margin consideration.
The final point I would make on that is that, and I tried to highlight that in my comments, seeing that in the fourth quarter is not that uncommon, especially as sales folks are motivated to meet quarter for the year and the like that we tend to see a little bit of an uptake in terms of hardware sales in the fourth quarter and so in many respects I would expect some margin improvement as we move into calendar 2011, just based on the relative seasonality.
Richard Close – Jefferies & Co.
Your next question comes from Charles Rhyee of Oppenheimer. Your line is open.
Charles Rhyee - Oppenheimer
Thanks for taking the question. Maybe Glen, just to go back to sort of the macro picture real quick, you were talking about the clarity and certainty around the stimulus, but clearly with the lower hurdle rate on the final rules here, isn’t it fair to think that we might see sort of less spending this year as those providers that have already sort of been implementing can easily qualify under the stage one.
I understand that the standards get more stringent later on, but in the short-term would you expect to see some of that demand now get pushed out to layers as people defer to meet some of the stricter requirements as you move out to 2013?
No, to the contrary what’s going to happen is, you are going to have more people say, let’s get on board because it’s easier to get the money sooner. So, the first payment of $18,000, you can get that more easily than you could in the past. So, we have people who are waiting on the ruling saying, look now if we have to meet an 80% hurdle, wow that’s going to be hard.
We might as well take our time because our chances of getting that done before January, February, March kind of timeframe, but now when it’s 30%, all of a sudden they are saying, look we can get this, we can surely get to that number. From our perspective, the good news is that whether it’s 30% or 80%, you still need the system, you still need to be trained on it. Then once you get up and once you do 30%, you’re going to drive forward and do more. So, this was really about building a market.
The bottom-line is with 20% electronic health record penetration, this is overall good news and all those people who are waiting to see the final rule now have seen it. So, the time is now for them to get moving.
Charles Rhyee - Oppenheimer
Certainly, just a quick follow-up to that point then, so maybe I understand what you are saying on the physician side, but maybe if you were to think about in the hospital side where hospitals have been buying a lot of technology for years. Do you think it’s a little bit different on that side perhaps then?
No, I really don’t because again what we are seeing and what I try to stress is in almost every single market, hospital systems are using technology to build this connectivity to their referral base.
You know the way a hospital makes money is, it gets referrals from a lot of practices. They don’t need that for their employed physicians, but what they do need is to connect to their affiliated and the independent physicians in the market, and what they figured out is the easiest most cost effective way to do that is using information technology.
So that’s why we are seeing big and small groups who are saying, let’s get a community strategy, let’s use the Stark Relaxation which won’t last forever, let’s go ahead and use that as a way to electronically connect to all of our physician referral sources.
Now, the hospital market is still very underpenetrated as well. We talk about Eclipsys, Eclipsys is the leader in CPOE or Computerized Physician Order Entry, but overall use is still relatively low. So, this is going to drive the market across the board. Again, certainty always does that.
Charles Rhyee - Oppenheimer
Great, thank you.
Your next question comes from George Hill at Leerink Swann. Your line is open.
George Hill - Leerink Swann
Hey guys, thanks for taking the question and a long time no see. Bill, with respect to the revenue guidance, you gave us a real narrow window to shoot through, 780 to 790. Can you talk about the company’s level of revenue visibility with respect to guidance and what’s baked into the assumptions and I guess how should we think about what could drive surprise.
Yes great question George. Again, something that we talk a lot about is that this business model does in fact enjoy a high level of visibility first and foremost by the fact that 65% of our revenue is reoccurring in nature and we don’t see that changing as we go into 2011, if anything it will improve slightly, number one.
Number two is, is that we also enjoy the fact that we are coming into the year with close to $775 million and so backlog and so as it pertains to the non-reoccurring portion of our business, again the benefit of these large enterprise deals that we have sold throughout 2010, many of those take 9 to 12 months to deploy, so that also contributes to a high level of visibility that we have.
And then third, and Glen touched on this a bit just in terms of our sales engine, you know we increasingly have a very high degree of confidence and the level of visibility that we have in terms of our pipeline management and where the deals are coming from. So, you take all three of those into account. I appreciate the fact that the $10 million is relatively small range on close to $800 million of total revenue, but with all those factors into account, we are comfortable with our ability to hit within that range.
George Hill - Leerink Swann
Okay. So, I guess is it fair for me to say that you guys feel like you have a minimum visibility to that range.
I think we have maximum visibility, minimum concern.
George Hill - Leerink Swann
Okay, fair enough. With respect to the capacity and services, I guess can you talk about what percentage of capacity utilization you feel like you are at right now and how do you expect that to trend over the year?
Yes, again we’ve not gotten into that specificity just in terms of what our explicit hiring plans are, other than to say that again our areas of investment in the near-term, intermediate term will remain on our deployment capacity number one, our sales capacity number two, and then R&D number three although again recognizing the level of investment we made in R&D to this point we feel pretty good about kind of where we are at there, but those would be really the three key priorities.
Again, one of the benefits that we have in terms of the backlog gives us unique level of visibility of what those resource requirements are going forward and so again feel like we’ve got a good handle on what our requirements are there.
I also would highlight again that we do expect meaningful benefits to be derived from both ready, which is our rapid deployment initiative as well as our Upgrade Enablement Center capabilities, which are really critical here and both are motivated to ultimately reduce our cycle times.
And so again, to my earlier comments, in an expectation that we do expect margins in the service area to improve as we harness the benefits from not only utilization coming up but also those initiatives taking full effect.
George Hill – Leerink Swann
Okay, thank you.
Your next question comes from Corey Tobin at William Blair & Co. Your line is open.
Corey Tobin - William Blair & Co.
Hi guys, congrats on a nice quarter.
Corey Tobin - William Blair & Co.
Very quickly I wanted to touch up on the REC initiative, and Glen you touched upon your prepared remarks a little bit, but just to put the numbers around this. Can you give us the feeling for how many of the RECs so far have made the preferred vendor decisions? How many of those has Allscripts been selected within? And then are you seeing any lead generation coming from the REC program at this point?
Let me start Corey with the last question first and that is that the RECs are really starting to get up and operating just now. So, there is a few of them that are starting to really take off, but many have been waiting for guidance, there has been a number of meetings in Washington and elsewhere and I don’t think they have had completely clear guidance on some of these programs.
That said, they are in the building phase now, very few of them have actually made full decisions and I think Allscripts had been in play and active in virtually all of the decisions, they don’t have a specific metric for you.
Corey Tobin - William Blair & Co.
I’ve understood, and then one, Bill one quick one for you in the guidance if I could. It looks like there is a fair amount of operating margin improvement that’s sort of projected in the numbers and just curious, it sounds like we shouldn’t necessarily expect it coming from gross profit and one, that’s the question is that the correct take where we should have from your comments.
Two, assuming it is, should we expect to see more leverage on the SG&A side or the R&D side? I guess the question really comes down to giving some of the investments you are making on the R&D side, so I think you put a little clarity between those two lines where we expect the leverage to come from.
Yes, it’s a great question Corey, and quite frankly it’s actually a combination of all the above, the reality in keeping with my comments to answering George’s question on the service side I actually am expecting some modest improvements in terms of overall gross margin. So, I didn’t mean to imply that we didn’t expect any there and I now just point you specifically to the service area where I would expect that, but I would characterize that as a few 100 basis points, not something more dramatic than that.
And then to your other point, the leverage in the operating cost structure comes from first and foremost G&A and again, we made a lot of investment this past year in terms of the management team, the infrastructure processes that we see leverage in 2011 number one, but number two and as I somewhat eluded to in the response to the question on headcount edition, we have also made a lot of investments on the R&D front. We expect to make more next year, but you will start to see some leverage or modest leverage there.
The other point is on the sales and marketing front, again as you know we laid a lot of foundation this past year in terms of our distribution capabilities with the likes of Henry Schein and Cardinal Health. We were very encouraged by the progress we saw with those capabilities in the second half of the year in 2010 and quite frankly we are going to get a full year benefit of that in 2011.
So, quite honestly, I’m actually expecting a little bit of leverage in sales and marketing line as well for that reason.
Corey Tobin - William Blair & Co.
Last one if I could, on the professional services margin. When do we get up to sort of peak utilization or optimized utilization, which sounds like I think from your comments you said, a couple of years it could be. Is that like a 20% number or could that be back up to the 30% plus number that we have…?
Yes, in prior quarters I have talked about, I think a realistic kind of within that couple years mid-20s, I really would be disappointed if we can’t get it to that level. I think we over time could aspire to as high as 30%, but to be very clear I think the right expectation here is kind of the mid-20s and that higher level I think ultimately comes about in terms of the full effect of ready and UEC and the like coming to full fruition, which I think will take some time.
Corey Tobin - William Blair & Co.
Okay, great. Thank you.
Your next question comes from Glen Garmont at ThinkEquity. Your line is open.
Glen Garmont – ThinkEquity
Thanks guys. My question was answered. Thank you.
Your next question comes from Gene Mannheimer at Auriga USA. Your line is open.
Gene Mannheimer – Auriga USA
I appreciate the color on the margin profile, and I just wanted to ask about the SaaS nature of bookings. You talked about increasing prevalence of SaaS and subscription in the 20-doctor and marketed below. To what extent are you seeing it at the upper end of a spectrum? And for example, how many doctors would be in your largest client that has selected this subscription model? Thanks.
Gene, on the high end, I would say virtually all the transactions that we are doing are site license arrangements, we are seeing little to know uptake on the SaaS front in large practices.
I think it’s important to highlight because this is a trend that we talked about in the past as well as restating, and that is it’s the low end of the market. I think it’s important to distinguish between those that are truly looking for SaaS offering and those that are looking for effective financing alternatives and one of the first things that we do through our sales process is delineate between the two and we have solutions for both, and are accepting of really both.
But as we really get into these small practices, we do see or expect I should say that these smaller practices where they have limited IT infrastructure to support the systems on their own, a greater interest on the SaaS offering and what we are seeing at the high end.
Gene Mannheimer – Auriga USA
Thank you, Bill.
Your next question comes from Greg Bolan at Wells Fargo. Your line is open.
Greg Bolan – Wells Fargo Advisors
Thanks for taking the questions. Just to follow up on Corey’s question. Can you quantify the goals laid out for the public sector team in terms of win rate for RECs that have not chosen preferred vendors, and is it fair to say that traction has accelerated with small doc practices in places like Iowa, Vermont, Virginia and the like?
Yes. Again, for the RECs, we see them as a collaborator. They are going to help us sell. The way they survive, the way they make money is getting practices interested, signed up through a demo and ultimately to buy, that’s the way they get paid. So, whether or not they will be a driver remains to be seen, I think it’s another course in the market trying to educate people, it’s like having commission sales representatives out there because the only way they get paid is by getting people the presentation, getting them to sign up and use the product.
So, basically that’s what I think I would say. The other thing is if you are a REC and you basically get paid by getting somebody to implement the product, you want to make sure that the product you are showing to them is easy to implement, has a lot of reference sites, is all the good things that we have at Allscripts.
So, a large network is what makes us attractive to the RECs. In terms of specific goals, our goal is we would like to have 100% of them, it’s too early to really give out metrics and I’m not sure that would be productive.
Greg Bolan – Wells Fargo Advisors
Sure. Thanks. And then just a follow-up, looking at the transaction fee backlog over the past five or six quarters, I guess with additional divisions coming on to the Payerpath network, I would have thought this backlog would be building up a momentum. Bill, can you help us reconcile what’s causing the stagnation in this backlog?
Well, again, I think you actually touched on the answer and that is, is that what drives that majority of that backlog today is our Payerpath or EDI portion of the business. The reality is, is that especially at the high end where a lot of the transactions have taken place, you do not have as high of an attach rate in terms of practice management solution to those electronic health record sales.
So, people have heard me talk about the fact that on that side of the business, it’s not growing at the same rate as EHRs are growing. With that being said, as we move into the medium doc market and down into the low end of the market, our experience is that, that attach rate is actually meaningfully higher than what we witnessed at the high end of the market.
So, as this market moves to medium, to smaller size practices, I actually would expect that you will see that starts to move in a more tighter correlation to what’s happening on the EHR side. So, it’s really a function of which systems are being sold and how much of it is bringing a PM replacement along with it and today that hasn’t been as much as what we expect going forward.
Greg Bolan – Wells Fargo Advisors
That’s fair. And so is it fair to say that that attach rate at the smaller end would be maybe two or three X that of the larger enterprise physician practice arena?
We’d not quantified that specifically, but directionally I would say it was substantially higher than what we witnessed in the enterprise side for sure.
Greg Bolan – Wells Fargo Advisors
Okay, thanks so much.
Your next question comes from Frank Sparacino at First Analysis. Your line is open.
Frank Sparacino - First Analysis Corp.
Hi Bill, I just wanted to follow up on that last question. If you look at the subscription business, the last couple years you’ve had very strong booking and even assuming a four or five-year sort of period in most of those agreements, the subscription business should be at a fairly material run rate, more than $5 million in quarterly revenue.
I just wanted number one, is that accurate; and then secondly that would suggest that that transaction process inline still should be growing at least $1 million, if not more a quarter. Is there any thing that would be subtracting from that line?
Well, again just couple points, because you had a couple questions there. On the subscription front, we are seeing positive movements, just to be clear that revenue is captured in our other transaction and other classification. So, it is combined with the transaction fees that we are talking about.
So, we are seeing, to your earlier point, we are seeing very nice growth that’s being keeping with the booking performance that we have conveyed to the market, number one.
The counter balance to your point, within the EDI business specifically there is actually fairly minimal attrition, but what you do have going on within the EDI business specifically and we’ve not talked a lot about this previously, is that we have a portion of that business that is supporting the paper base form of certain of these practices and in effect by virtually moving them to our electronic solutions, we are cannibalizing that portion of the business a bit.
So, it’s not an attrition dynamic, it’s really a transition from a paper base to an electronic base that’s embedded in that. So, other than a few percentage point attrition that we’ve customarily experienced I would just highlight the fact that that’s the other dynamic that’s really going on underneath the covers.
Okay, why don’t we go ahead and take one more question.
Your last question comes from Anthony Vendetti - Maxim Group. Your line is open.
Anthony Vendetti - Maxim Group
Thanks, most of my questions have been answered. But, just quickly, what was the recurring revenue this quarter and then lastly Glen, if you could just talk about what you think a realistic time frame is for the one network, one platform, one page and record?
Yes, the recurring revenue in the quarter was 63%. Relative to that what I would say is you got to look at in a few different ways. First and foremost, I would like to start with our clients, what do our clients want and if you go to a place like Columbia what most of the physicians would tell you is they want the ability to use the Allscripts product and be able to see hospital information and then in the hospital, they want to use the Eclipsys system to be able to see Allscripts and they have that capability today as I outlined in my script.
So, we are already exchanging that important information so they know what the drug interactions and potential drug interactions could be, they know what the orders are, they know what the labs are. So, that information exchange is happening today. That’s at an object lower level. At an higher level, when you drill down, you get into the database level and I think at that level, that’s going to take a little longer.
The good news is that both systems Allscripts and Eclipsys are Microsoft based and both systems are open architecture. So, from that prospective we think they’ve moved pretty quickly, but the message when we’re looking at this 600 or so systems, that we’ll be making purchase decisions.
They are going to look at a few things: (1) how easy is it for our physicians to use both these systems today and the answer is, it’s very easy today, they don’t have to wait; (2) they are going to say, well how easy is it, if we use your system to connect to the community? And when we hear out almost 50,000 practices out there to connect to, it’s a kind of like an ATM network for hospitals. When you go to a bank, you want to make sure they have ATMs all over. You don’t want the bank to say, well we are going to build a network.
Now, if you think about it, Allscripts has those ATMs all over. They have physician referral groups, and that’s what the hospitals look for, they want to connect to the client whereas some of our competitors are using old technology. They have no inventory presence and the only thing they can talk about is well, within the hospital, we connect, but it’s not Neolithic, because the system includes labs, it includes inventory practices, it includes competitors, we are going to connect that all together.
So, I think the answer is we have a solution that works now, it’s the solution built for the future, it’s going to scale all integration team today is together. They’re focused on making and happen at the request of the customer. We did that before we ever contemplated getting together, because they’re customers. Remember, we have 20-shared customers today and they said we want Allscripts and Eclipsys to get your systems to work together.
So, we have that underway and again, the underlying platform is the same. So, we can make this happen pretty quickly. So, I think not only are we excited about it, most important the buyers, our clients and prospects are excited about it.
Now maybe that’s a great place to wrap the call up where we started which is this has been a very strong quarter for Allscripts, we are proud of the performance of our people, we are proud of the numbers that we put up on the table.
Second, it’s been a meaningful few weeks because we have the final rule on meaningful use and that’s really a pivotal event for the industry. And last but not least, as you just heard our proposed merger with Eclipsys is perfectly timed to take advantage of what is the largest opportunity that healthcare has ever seen. So, again, we are excited about executing, we are pushing forward and we appreciate all of your support.
So, thanks again and we will look forward to talking with you all soon.
This concludes today’s call, you may now disconnect.
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