Allscripts Healthcare Solutions' CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: Allscripts Healthcare (MDRX)

Allscripts Healthcare Solutions (NASDAQ:MDRX)

Q1 2011 Earnings Call

May 05, 2011 4:30 pm ET


William Davis - Chief Financial Officer and Principal Accounting Officer

Glen Tullman - Chief Executive Officer and Director

Seth Frank - Vice President of Investor Relations


Bret Jones - Oppenheimer & Co. Inc.

Michael Cherny - Deutsche Bank AG

Atif Rahim - JP Morgan Chase & Co

George Hill - Leerink Swann

Jeremy Lopez - William Blair & Company

Lawrence Marsh - Barclays Capital

Jamie Stockton - Morgan Keegan & Company, Inc.


Good afternoon. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts First Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Seth Frank, Vice President of Investor Relations with Allscripts. You may begin your conference.

Seth Frank

Thank you, Andrea. Good afternoon. This is Seth Frank, Allscripts' Vice President of 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.

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 our ability to achieve the strategic benefits of the merger with Eclipsys, and other factors outlined from time-to-time in our most recent transition report on Form 10-KT, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at 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 introduce Glen Tullman, Chief Executive Officer of Allscripts.

Glen Tullman

Thanks, Seth. I want to welcome all of you to the Allscripts 2011 First Quarter Earnings Call. This is an amazing time in healthcare. The industry is transforming as we speak, and Allscripts is incredibly well-positioned with solutions that improve the quality of care and better manage costs. We provide the broadest suite of applications to connect caregivers, deliver information where and when it's needed and to generate insights, actionable suggestions at the point of care that lead to better outcomes. And we can prove it.

Here are just a few examples from our lengthy list of Sunrise reference clients. At Blessing Hospital in Quincy, Illinois, they achieved a 95% reduction in the rate of transcription-related medication errors. At Orlando Health in Orlando, Florida, they achieved a significant 25% decrease in the relative risk of mortality due to sepsis, one of the leading causes of death in U.S. hospitals. And at University Hospital in San Antonio, Texas, they were able to achieve a significant improvement on a few key metrics related to diabetic patients, including 74% more compliance with medication therapy to prevent cardiovascular disease and a 50% improvement in eye exams. And those are just a handful of the clinical outcomes our clients have achieved using our solutions. You can read about many more of them on our website.

The news of our ability to help our clients improve clinical and operational outcome is beginning to resonate in the market today, and it shows in our performance. It's also increasingly clear that our strategy is aligned with the direction of the market.

Last month, CMS released their draft rules governing accountable care organizations or ACOs. Some of our largest clients see ACOs or bundled payments as the future of healthcare, and they are already working with payors to formulate new reimbursement strategies. The rules for ACOs make one point very clear: Coordinated care will require an interoperable Electronic Health Record that connects providers across the entire continuum of care and entire communities. And every part of the community is important, which makes our footprint in 50,000 ambulatory practices, our relationships with over 1,500 acute care hospitals and our strong penetration of the post-acute-care world even more strategic.

When you consider the new payment models like ACOs, along with the $30 billion in federal incentives available between now and 2015 for hospitals and physicians who adopt and meaningfully use Electronic Health Records, you can better understand why the momentum in our market is increasing. When we brought together Allscripts and Eclipsys, it was in direct response to the fundamental shifts we saw occurring in the market, and I'm very pleased with our progress to date.

We have delivered on the commitments we made. We said we would continue to execute on a significant cross-sell opportunity in our combined client base, and we have. We said we would demonstrate success integrating our product portfolio, and we have. We said we would deliver on cost synergies, and we have.

And we now have one new factor to add. We told you we would deliver net new Sunrise Enterprise sales in 2011, and we have. The best evidence of excitement in the market relative to our merger is that in our first 2 full quarters as a combined company, we sold over $500 million in products and services, representing a 22% year-over-year growth. And as you can see from some of our announcements, that momentum isn't slowing down.

From a financial standpoint, the quarter was strong. Specifically, we reported non-GAAP revenues of $346.1 million, a 10.5% increase over the same quarter last year.

Non-GAAP net income of $40.6 million, representing a 12% growth year-over-year, and non-GAAP earnings per share of $0.21 per diluted share, up $0.02 year-over-year. We also demonstrated strong year-over-year operating margin improvement, growing from 19.1% in the first quarter last year to 20.8% in 2011, as we leveraged our size and benefited from merger-related cost synergies.

And we had another strong quarter of cash flow from operations, reducing our debt by another $41 million. Total bookings were $227.6 million in the first quarter of 2011. To add some perspective to our bookings, in the first quarter we signed approximately 600 agreements with new clients, representing robust sales across every one of our product lines.

As an example, the small office market alone accounted for nearly 50% of these agreements. The quarter sales also included 34 agreements ranging between $1 million and many millions of dollars each.

We believe our results are also a clear indication of what we've been saying all along about the competitive strength of Allscripts, that we're winning in the most important area of all, market share. We are adding agreements covering more physicians, more quickly than any of our competitors. Every quarter, more and more desktops open to the Allscripts operating system.

For third-party validation of this fact, you need to look no further than a new study released in April from the Medical Group Management Association, better known as MGMA. In a survey of 4,600 mid-sized physician groups, with a combined 120,000 physicians, MGMA found that Allscripts had 18% market share, easily ranking number one among physician groups within Electronic Health Record, and 60% greater than the next closest competitor.

Further validating our market leadership, the advisory board issued a special report on Allscripts on April 28. The advisory board is the most respected and well-researched advisor to a membership of more than 3,000 hospitals, health systems and universities. Key findings of their study included the following points: First, Allscripts has the largest base of stand-alone clinics in the U.S; second, Allscripts has the broadest portfolio, including ambulatory, acute and post acute solutions; and third, Allscripts offers ambulatory Electronic Health Record that meet the price and implementation needs of various market segments, unlike our competitors who push a one-size-fits-all methodology. But perhaps the most important, the advisory board stated that, "Clinical outcome are the name of the game in ACOs. Eclipsys was an early pioneer of designing outcomes management into their clinical applications." And that, "This is an area where we believe Allscripts holds the market lead."

Having covered the market, our strategy and our financial results, I wanted to highlight a few of our quality wins during the quarter. As we announced today, Lakeway Regional Medical Center will deploy Sunrise Enterprise to their new acute care hospital in suburban Austin.

The physician-owned hospital will deploy virtually every element of the Sunrise Enterprise suite to create an integrated Electronic Health Record. It will also deploy our business intelligence solutions, including EPSi. The Lakeway sale at the end of March was followed in April by another net new Sunrise sale to Hannibal Regional Health Systems in Hannibal, Missouri. Hannibal will deploy Sunrise across their non-for-profit acute-care community hospital. Hannibal previously implemented our professional Electronic Health Record for their 55 employee physicians in 10 locations. So this is the first sale of Sunrise to a legacy Allscripts client.

Another excellent example of selling into our base was Presbyterian Intercommunity Hospital, a 400-bed acute-care hospital in the Los Angeles area. PIH, a successful Sunrise Enterprise client, will deploy the Allscripts Enterprise ambulatory Electronic Health Record, and Practice Management solution for the 71 physicians of Bright Health, their exclusively affiliated Medical group. They're Electronic Health Record will be integrated with Sunrise, and PIH will offer our MyWay and Professional Electronic Health Record to over 600 independent physicians. They believe that connectedness is a competitive advantage for them and a value to their patients.

Jim West, President and Chief Executive Officer of InterHealth Corp., the parent company of PIH and Bright Health Physicians, said, "Deploying Allscripts Electronic Health Record for our healthcare providers and connecting them to our inpatient medical record system is a critical strategic imperative that will let us realize the full benefit of having one patient record across the continuum of care. Our partnership with Allscripts is central to the success of our health system, and we couldn't be more excited about the results we've achieved together."

One of the elements of our success at PIH has been our Remote Hosting business, which lets hospitals concentrate on their core mission while leveraging Allscripts knowledge to cost-effectively deliver predictable performance and reliability.

As you saw in our filing last month, we entered into a 10-year agreement with Affiliated Computer Services or ACS, a Xerox company and a true leader in healthcare application hosting. We did this in order to support our remote hosting services for our Sunrise Acute Care clients. The ACS agreement lets us provide world-class remote hosting capabilities, while we continue to be the face of Allscripts and of service to our clients.

The other first quarter Sunrise sale that I'd like to mention is Camden-Clark Medical Center, the third largest hospital-based healthcare system in West Virginia. Camden-Clark recently purchased St. Joseph Hospital, (sic) [St. Joseph's Hospital] a 325-bed acute care facility in the same community. They will deploy Sunrise at St. Joseph's in addition to Camden-Clark Memorial Hospital, replacing their legacy vendor. Both hospitals will be fully connected to more than 70 employed and affiliated physicians already using our Professional Electronic Health Record.

As I mentioned earlier, our ambulatory success continues to be very strong. During the first quarter, we won a significant number of agreements where large hospital systems selected our Enterprise Electronic Health Record for their employee physician groups.

In addition to PIH, Baptist Healthcare System, Inc. in Louisville, Kentucky selected Enterprise for 300 employed physicians in practices across the state of Kentucky. In the community where health systems continue to seek to connect with affiliated physicians, Allscripts provides an open platform that serves physician groups of every size and type. Some examples from the first quarter include Aria Health, a 3-hospital system in Philadelphia and a long-time Sunrise client, that will use our Community Record powered by our partner, dbMotion to connect with your employed and affiliated physicians. And Health First, another 3-hospital system and Sunrise client in Florida, will use Allscripts Community Record to connect their employed and community physicians with their hospitals, as well as with their home care organization to better coordinate care.

As more health systems move to coordinated care and in order to satisfy new reimbursement requirement, our community solutions provide Allscripts with an important competitive advantage.

Before I turn the call over to Bill, I want to make a point on the integration of our products and provide you with an observation from a recent client visit. Many who attended the HIMSS conference in March commented positively on our demonstration of live integration between Sunrise and our ambulatory Electronic Health Record at that event. We plan to have clients running this native integration, in production in time for ACE, our annual user conference, which takes place in August. So the bottom line is that the integration work is on track. Clients are actively participating, and we look forward to the completion of these installs and enhanced work flow it will provide for our clients.

Now while I love adding new clients to the Allscripts family and we've done a lot of that, our number one focus is delivering for our current clients. I'm proud of our efforts to reinvest in our base and to improve our existing client satisfaction. I wanted to share 2 brief and important milestones for Allscripts. First, I recently visited Baylor Health Care System in Dallas during the go-live of Baylor's upgrade to our Sunrise 5.5. Baylor is our largest Sunrise 5.5 client, with nearly 2,000 end users in 7 hospitals. And at the end of the day, Dave Muntz, Baylor's Chief Information Officer, took me aside and said it was one of the smoothest go-live he had ever completed. This really showcased the solution at one of our nation's largest and most prestigious healthcare delivery system across multiple facilities at one time.

The second milestone comes from North Shore-LIJ Health System, our largest client overall. North Shore is implementing Sunrise in their 14 New York City area hospitals, along with our Electronic Health Record for their 2,000 employed physicians. North Shore has also offered to heavily subsidize the purchase of our Electronic Health Record for their 9,000 independent community physicians.

In what is clearly one of Allscripts' most successful activations, North Shore-LIJ went live just last week on our computerized physician order entry solution across 3 of their hospitals. And within just 7 days, 97% of orders were entered through the new system. At a time when meaningful use is the metric that matters the most, our ability to quickly implement and reach full physician utilization of our Sunrise CPOE and Electronic Health Record will serve our clients and their patients very well.

These recent successes at Baylor and North Shore-LIJ represent very exciting progress for our Sunrise team. And with that, I'd like to turn it over to Bill Davis to take us through the detailed financial.

William Davis

Thanks, Glen, and good afternoon, everyone. Before we begin, I encourage you to access the non-GAAP table in the press release and accompanying explanation to assist you in evaluating and reconciling our GAAP and non-GAAP financial metrics that we've provided you earlier today and we'll discuss further on this call.

In terms of our financial presentation this quarter, please note that Allscripts 2011 first quarter financial statements include consolidated results for both Allscripts and the Eclipsys for the 3 months ended March 31, 2011. Given our change to our December fiscal year, last August, historical consolidated results of Allscripts on both a GAAP and a non-GAAP basis, as well as our bookings, have been recast to provide comparative results for the 3 months ended March 31, 2010.

As it relates to our first quarter results, we are very proud of the fact that we continue to generate very positive financial results illustrated by: First, over $500 million of new bookings in the first 2 quarters of our consolidated operations, as well as 10.5% revenue growth in the quarter, driven by approximately 34% growth in our professional service revenue, and our non-GAAP operating margin expansion that Glen mentioned, which was fueled in part by a realization of our committed cost synergy to the market. And then finally, significant free cash flow that has enabled us to repay over $122 million or approximately 20% of the debt we took out less than 8 months ago.

What is equally, if not more exciting, is that the continued to find ourselves in the middle of a demand rich market that is interested in our entire solution set, which is why we are enjoying the market share success that Glen highlighted. Simply put, 2011 is also a very good start, creating an exciting and an excellent foundation for continuing growth in 2011 and beyond.

Specific to our actual results, let me start with our bookings performance. I want to remind investors that as we stated on our fourth quarter call, beginning this quarter, Allscripts is reporting a single bookings number for the consolidated company. We also conformed the legacy Eclipsys bookings definition to exclude Software Maintenance Agreement or SMA, as it's consistent with Allscripts historical definition of bookings. We have provided first quarter bookings under both methods in order to aid investors with this transition.

I also want to reiterate the fact that we have recast historical consolidated booking numbers to reflect the exclusion of SMA, as well as on March 31 quarter end in 2010, as it pertains to legacy Allscripts, thereby, aiding investors with growth rate comparison to prior periods.

We have provided this recast comparison for all quarters in 2010 and 2009 as a supplemental schedule posted on our website at

As Glen mentioned, Allscripts posted bookings of $227.6 million in the first quarter of 2011, which includes $15.2 million from acute Software Maintenance Agreement. Using our go-forward definition of bookings, total bookings were $212.4 million. This result compares to $206.6 million for the 3 months ended March 31, 2010, and $259 million in the fourth quarter of 2010.

Please note that Q1 2010 amount includes 2 Sunrise transactions, equaling approximately $40 million that had slipped from the fourth quarter of 2009 to the first quarter of 2010 that certainly impact the comparability of these 2 periods.

It is partially for that reason why I encourage investors to look at our combined bookings performance over the past 2 quarters. As I've mentioned before, Allscripts' bookings for the first full 2 quarters, since effectuating our merger with Eclipsys, were approximately $515.8 million under the old booking definition, which represents a 22% increase year-over-year, and $471.4 million under the new bookings definition, which represents a 20% increase year-over-year.

I also believe this view is beneficial given Allscripts' bookings in the fourth quarter meaningfully exceeded our own expectations and benefited from certain transactions we had originally expected to close in this first quarter.

On the acute-care front, as Glen indicated, we signed 2 Sunrise Enterprise agreements in the quarter, including one net new client. As you also saw today, as Glen mentioned, we recently signed an additional new Sunrise client that is Hannibal Medical Center. While we have lots of work ahead of us, we remain very confident in the underlying fundamentals of the acute market and Allscripts' ability to more win more than its fair share of new deals over time.

I'm equally encouraged by the strength of our new Sunrise pipeline, and we expect more opportunities for new sales in and outside our client base as the year progresses.

Our ambulatory sales remain very strong. Coming off a record fourth quarter, demand remained consistent in the first quarter, even during what is typically a seasonally slow 3-month period. The Enterprise ambulatory market remains robust, and we've seen solid performance in all 3 subsegments of the market that we operate in.

A particular note was the ongoing success of our reseller channel into the small physician space during the quarter. Deployments in this segment are up significantly year-over-year, and this is consistent with what Glen said earlier in that we saw approximately 50% of our agreements in Q1 come from the small office market segment, which is the least penetrated and largest sub-segment of the physician practice market for EHRs.

Allscripts' leadership and market share gains continue as we strengthen our differentiated position in the market through our community strategy and our effective distribution channels. In terms of mix, SaaS bookings represented approximately $43.7 million or approximately 21% of our first quarter booking of $212.4 million.

On an apples-to-apples basis, SaaS bookings were 27% of recast bookings in the first quarter of last year and 20% in the fourth quarter of 2010. The year-over-year composition of SaaS bookings reflect a larger mix of subscription Sunrise Enterprise sales in the first quarter of last year. For modeling purposes, I'd encourage you to think about this quarter's SaaS bookings to be recognized principally into revenue over the next 48 months, given again much of our Q1 2011 bookings relate to our ambulatory segments.

Turning next to backlog. Allscripts ended the fourth quarter with approximately $2.7 billion in total backlog, up just slightly compared to the end of the fourth quarter. Specifically, 83% of our backlog relates to future revenue from multi-year reoccurring sources, including maintenance, subscription contracts, outsourcing engagement, remote hosting contracts and transaction processing fees. This figure is relatively consistent with the fourth quarter, where 83% of backlog related to reoccurring revenue sources.

Backlog at the end of our first quarter is distributed as follows: Software and related professional services represented approximately $453 million of our reported backlog. Subscriptions and SaaS backlog make up another $625 million. Maintenance fees represented approximately $759 million of our reported backlog. This backlog category primarily consists of 12 months of maintenance fees for legacy Allscripts clients and multi-year maintenance fees contracted for by our legacy Eclipsys clients, which generally average approximately 4 years.

Renewal rates for maintenance agreements are consistent with historic rates. Finally, we ended the quarter with approximately $869 million of transaction and other backlog revenue, which principally consists of Allscripts' transaction fees from our Payerpath and other businesses, expected to be recognized over the next 12 months, plus contracted revenue from remote hosting and outsourcing services that will be recognized over the next 3 to 4 years.

Turning to the highlights of our income statement. Total non-GAAP revenue were $346.1 million or 10.5% growth compared to non-GAAP revenue in the first quarter of 2010. We are pleased with this growth, especially given our focus on meaningful use upgrades in the quarter.

Q1 2011 non-GAAP revenue includes approximately $10.8 million of acquisition-related deferred revenue adjustment in connection with the Eclipsys merger. In terms of revenue mix, our non-GAAP revenue -- on a non-GAAP revenue basis, approximately 16% of our first quarter revenue was derived from system sales, another 17% from professional services, 30% from maintenance and the remaining 37% from transaction processing and other.

Consistent with prior quarters, approximately 2/3 or 66% of our revenue was reoccurring in the first quarter. On a year-over-year non-GAAP basis, professional services revenue is up approximately 34%, reflecting the work we are performing to assist our clients in their endeavors to prepare for meaningful use, in particular, as they upgrade to certified version of our ambulatory and acute care products.

This contribution to Allscripts non-GAAP gross profit was $170.6 million or overall non-GAAP gross margin of 49.3%. Our non-GAAP gross margins were flat sequentially whereas year-over-year comparisons reflect 180-basis point decline in non-GAAP gross margin, driven largely by the higher mix of professional service revenue in the first quarter.

Our non-GAAP operating income totaled $72.1 million after giving effect to the add-back of our stock-based compensation expense of $7 million, and Eclipsys' transaction-related adjustments totaling $40.6 million, both of which are on a pretax basis. Non-GAAP operating profit margin was 20.8%. This represents a substantial improvement in operating margins compared to the 19.1% of the first quarter a year ago.

We are proud of this performance as we continue to invest in our innovation and solutions that will drive future growth while leveraging our fixed and discretionary costs. Our merger-related cost synergies are also positively impacting our results, and we continue to be on track for at least $25 million in cost synergies attained this year in 2011, $35 million in 2012 and then $40 million in 2013 and beyond.

Research and development expense totaled approximately $37 million in the quarter, relatively consistent with our fourth quarter expenditure and up 12% over last year. Capitalized software related to R&D totaled approximately $15 million or approximately 40% of gross R&D spend in the quarter, which is down from a high of 47% in Q4 and consistent with the direction we indicated on our fourth quarter call.

Software amortization totaled $3.6 million, up from $2.7 million in Q4, yielding a net capitalization rate of approximately 31% in the first quarter, which is down from a comparable 40% in our fourth quarter.

We anticipate our capitalization rate will continue to decline this year while amortization will continue to increase, reflecting our prior investment principally reflecting our significant meaningful use related investment and development activity in 2010.

Turning to net income and earnings per share. Allscripts reported GAAP net income of $12.6 million before giving effect to the add-back of stock-based compensation expense, Eclipsys' transaction-related adjustments, as well as a tax rate alignment adjustment, which I'll talk about in a moment.

Please note that included in the $8 million of interest expense on our income statement this quarter is approximately $1.9 million of pretax write-off of debt issuance costs associated with the amendment of our senior credit facility that we closed on March 31. We've included this one-time item and transaction-related adjustment for purposes of calculating both non-GAAP income and EPS in the quarter as noted in the footnote on our non-GAAP income statement reconciliation.

I will speak more to the credit facility amendment in a moment. After adjusting for stock-based compensation, Eclipsys' transaction-related adjustments, including the previously mentioned debt issuance costs write-off and tax rate alignment adjustment, our non-GAAP net income totaled $40.6 million, and non-GAAP diluted earnings per share totaled $0.21 per share.

Our non-GAAP effective tax rate was 39% as expected. As I mentioned earlier, our non-GAAP reconciliation reflect the normalized tax rate of 39%, resulting in the add-back of tax expense totaling $2.3 million in the quarter to increase our Q1 tax expense to the anticipated 39% effective rate for the entire year.

Turning to our balance sheet and liquidity. Allscripts ended the quarter with approximately $147 million in cash and marketable securities, an increase of approximately $16 million from December 31, 2010. Cash flow from operating activities were strong, totaling approximately $67 million, while free cash flow after capital expenditures and capitalized software development costs totaled approximately $39 million.

Our track record and the ability of this business to generate substantial free cash flow allows us to continue to pay down debt at a rapid pace, invest in new future growth initiatives, while maintaining a substantial level of financial flexibility.

Our accounts receivable for the company ended the quarter at approximately $320.4 million, which equates to days sales outstanding or DSOs of approximately 84 days, which is 2 days lower than it was at December 31.

Turning to debt. As I mentioned before, Allscripts reduced our overall debt and it's under our secured credit facilities by approximately $41 million in the first quarter, resulting in outstanding borrowings of $448 million as of March 31. And we initially borrowed a total of $570 million in August of 2010 and as a result, have reduced borrowings by $122 million since that time.

As you know, on March 31, we entered into an amended and restated credit agreement. The Amended Agreement was a positive development for the company in several respects, allowing us first to reduce the borrowing rate on these credit facilities by 75 basis points while providing additions [ph] that enhance our financial flexibility.

Today, we also announced that the Allscripts Board of Directors authorized a 3-year $200 million share repurchase program. As we stated consistently, it is our intent to leverage our financial strength and flexibility to enhance shareholder value. Any share repurchases may be executed through open market purchases, block trades or privately-negotiated transactions, including accelerated share repurchase transactions and may be funded through cash-on-hand, cash flow generated from operations or borrowings under our senior credit facilities. The company intends to continue to make voluntary debt repayments while executing on the share repurchase program.

Finally, we ended the quarter with approximately 5,800 employees, which is up from 5,580 at the end of our fourth quarter.

Before I turn the call back over to Glen, I would like to comment on our 2011 guidance. In terms of our guidance, we are reaffirming our previous guidance as stated in today's earnings press release. Specifically, non-GAAP revenue in a range of approximately $1.425 billion to $1.45 billion, non-GAAP operating income of approximately $303 million to $308 million, non-GAAP operating margin of approximately 21% and non-GAAP net income of approximately $167 million to $176 million, equating to a non-GAAP EPS range of between $0.86 to $0.90 per share.

As indicated previously, I'm very encouraged by the company's performance over the last 2 quarters and believe we are well-positioned to deliver on our commitment to the market for the year.

In terms of bookings, I would like to call out and ask that you keep in mind that when you consider year-over-year growth in the second quarter of 2011, that the $234.6 million we recorded in the second quarter of last year under the new bookings definition includes the month of May, which was the last month of legacy Allscripts fiscal year in 2010. It's worth noting that we experienced, as has been typically the case in the past, a seasonally strong bookings quarter as we closed out any particular fiscal year.

I also want to highlight that the second quarter 2010 booking results also includes a large outsourcing agreement that related to the legacy Eclipsys business that I do not expect to reoccur in the current quarter. So we see a very exciting market opportunity ahead. Our financial performance is strong, and we clearly have the right solutions for the market that is on the cusp of significant transformation. The comprehensive nature of our solutions portfolio and our industry-leading market share puts us in an enviable position of strength.

We will be working hard this year to execute on the operational front, helping our clients adapt to the demands of meaningful use. We also see our competitive position with prospect only strengthening in 2011. And over the next several years as the demand curve to adopt Electronic Health Records continues to grow, we believe we are uniquely positioned to capitalize on that opportunity.

So with that, I'll turn the call back over to Glen for some closing remarks.

Glen Tullman

Thanks, Bill. To quickly sum up, we couldn't be more excited, as Bill just indicated, about the year ahead. 2011 is the year of transformation. Our clients and prospects want a vision they can believe in and that fits with the market change that they are feeling everyday, supported by up-to-date technology and innovation and confidence in our ability to deliver, as evidenced by Baylor and North Shore-LIJ, we are delivering.

And now, more than ever, I'm confident we have the depth of talent and commitment to execute on our vision of building a connected community of health and becoming the new operating system for healthcare.

Thanks to our clients who give us the opportunity to make a difference everyday, to our employees for their commitment to delivering on our mission and vision and to our shareholders for your continued confidence in Allscripts.

And with that, we'll now be happy to take your questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Atif Rahim with JPMorgan.

Atif Rahim - JP Morgan Chase & Co

Bill, I guess just on the bookings number, there might be some confusion in terms of how we model it. But you're about $30 million below my expectations. And if I recall, last quarter, you didn't talk about the 4Q '10 bookings being strong because of any pull through from the first quarter. So just want to see what that number might be like. And the year-over-year tough comp as you're calling out because of the $40 million in 1Q '10, if you back that out, what does your number come out to be? Or what should be our kind of regular trend in bookings that we should be expecting?

William Davis

Yes. A lot there in your question, Atif. I guess I'll start first with your comment around what I said on the fourth quarter call. My recollection was that, I thought I did in fact, mentioned specifically around University of Kentucky transaction that, that was one that had moved appreciably faster than we had originally expected. And in fact, it was a transaction of meaningful size that we are able to pull in the fourth quarter that kind of normal course would've expected in Q1. So that, in my comments, that was specifically what I was referencing, number one.

Number two is in terms of the comparability from a year ago, and I appreciate at the outset, that there's a lot of moving pieces here just in terms of change of fiscal periods and thus recasting results and the like, but if you were to look at legacy Eclipsys' historical results in terms of Q4 of 2009 to that of Q1 of 2010, as I indicated before, there were 2 large transactions, as I believe if we go back to even Eclipsys' transcript in the fourth quarter, they made note of at that time, that had moved out of the fourth quarter into Q1. So the dynamic of that was you literally had a higher Q1 performance for legacy Eclipsys than you did Q4, which is very unusual in this market place for reasons I think you understand, number one.

Number two is that with the recasting of the Allscripts results and effectively adding a March and taking away a December, I would suggest you have a little bit of the same dynamic at play, too, in terms of an apples-to-apples comparison. What I have said consistently and why we believe that the kind of a 6-month view is worth noting is that to grow this business top line 10% to 12%, I've talked about the fact that we need to be prepared to grow new system sales bookings in the high-teens into the low-20s.

And so again, I would orient you in that direction but I would caution you in that when you're dealing with these very large Enterprise transactions and large hospital transactions, one of the primary reasons we do not give bookings guidance is the predictability of when those are going to fall in any particular quarter. And as I've indicated and I think it's evident in our Q1 results, the fact of the matter is, is that with so much of that going to backlog and our ability to pull that into revenue, our revenue is insulated from some of that volatility on the bookings side. So we are very pleased with our bookings performance through the first 2 full quarters of the combined businesses operation. And again, we're looking forward to continued success in that regard as we look forward to the balance of the year.

Glen Tullman

This is Glen. I'll just add 2 quick points. One, last quarter, we were $20-plus million ahead of what a lot of folks thought we would deliver, and that basically is one reason we don't give the quarterly guidance because if you look at the past 2 quarters as I called out, $500 million, $500 million in sales is exactly what we think this company and the sales engine ought to be generating. And so I'm really clear about that.

I'd also mentioned we talked about the South Australia deal. That's not included in these numbers. If that was included in the numbers, you'll see a substantially different bookings result. So again, in some of these larger Enterprise deals we're talking about, any one deal can have an impact in the quarter given the size of some of these. So I just -- we do think, as we look at production, as we look at the year, it's one reason that Bill was very clear on restating our guidance numbers because we're very comfortable that we'll deliver those. But it's sometimes hard, as you saw one of the net new deals we've just talked about just happened to come in. So we can't always predict those exactly. But we're seeing terrific traction, and we're very comfortable with what's happening in the sales environment.

Atif Rahim - JP Morgan Chase & Co

Okay, that's great. I appreciate that. Bill, thanks for that color on the 18% to 20% kind of top line booking through that we should we expecting. That's good. So just one follow-up, anything that slipped out of 1Q that you feel might have been fine or was close to being fine? And then the South Australia deal, Glen, that you mentioned, the timing on that, when do you expect that to come through?

William Davis

Yes. So specific to your first question, Glen, just alluded to it. But to be very clear, we did have 1 new Sunrise deal signed. We talked about that Hannibal Medical Center. That is a Q2 deal of decent size that I've pointed to. There's always other deals in terms of a timing perspective that, again, we're always working aggressively to pull as much in as we can. But again, these larger deals have certain cadence to them that we just have to effectively just kind of manage to us.

In terms of the South Australia transaction, that negotiation continues to go very well. As we estimated earlier -- or late last year, it's one that is heavily regulated in terms of the government being involved in the ultimate approval of it. We do anticipate that a portion of that transaction, and I would suggest to you, a small portion of that transaction will likely be consummated this coming quarter in Q2. And then I would expect that the balance of that transaction to be in the second half of 2011. But we are anticipating the initial tranche there in Q2 as we originally intimated and then the balance still within the year.

Atif Rahim - JP Morgan Chase & Co

Could you put any numbers around that?

William Davis

We've not commented on the overall size at this juncture.


Your next question comes from the line of Jamie Stockton of Morgan Keegan.

Jamie Stockton - Morgan Keegan & Company, Inc.

I guess the first one, Glen, there have been some other vendors in the space that have talked about a slowdown in bookings here early in 2011 because you're seeing some providers say,"You know what? I'm going to wait and qualify for meaningful use in 2012," and so that's delayed some contracting. Have you guys seen any impact from that or do you have any thoughts about what might be going on in the market as a result of that?

Glen Tullman

No. To the contrary and again, that's one of the key points. I think some people -- Bill and I have been very consistent from the very day that auto was introduced, that every quarter, we would see positive movement in a variety of fronts, that the market would continue to build. And we are continuing to see that, and we talked about the net new Sunrise deals. We talked about the sheer number of deals that are being signed here. It's very substantial and $500 million is more business than we've done in any 2 quarters in the history of the company. So we see that as very well. There are always deals large and small that move out of one quarter and into the next, but our deal flow is very good. And we feel very confident about it.

Jamie Stockton - Morgan Keegan & Company, Inc.

Okay. And I guess my other question, just pertaining -- maybe it's the same answer, but some states have started to cut Medicaid EHR checks, those -- I guess at least half of that money can go out before the physician practice would actually qualify as a meaningful user of an Electronic Health Record. I am just curious if you've seen any impact from those initial checks going out, I think, in about 5 or 6 states.

Glen Tullman

Yes, we've seen -- as we mentioned, University of Kentucky was the first hospital to get a federal check that came in, and we think that, that has created sufficient interest in the hospital space. We also see very dramatic interest, large and small, across the market. I think when the federal checks start to hit, that's when we'd see -- that's when we think we'll see much more dramatic increase. But the message is clearly getting out and the first one, when you talk about the small market where we've already seen, as a mentioned, very substantial penetration and growth, when you see physicians coming in with their federal checks, we think you're going to see another nice step up. And that's in the next month or few months.


Your next question comes from the line of Larry Marsh of Barclays Capital.

Lawrence Marsh - Barclays Capital

Just to further clarify and drill down the point on the bookings. I appreciate that your recast, or go-forward, definition actually introduces a bit more volatility as you introduce the Eclipsys legacy progression. And as you said, Bill, the fourth quarter is well above expectations, the fourth quarter, a little light. And it sounds like you're saying the second quarter may be, if I'm reading correctly, flat-to-down versus last year's $234 million. So I know you don't guide the bookings but just directionally then, do we think about then the comps then getting, obviously, much better in the second half because they're going to be facing, obviously, a much stronger fourth quarter 2010 comparison? Or is it, look, you can't really predict because of the size of the deals are that much greater?

William Davis

Larry, I don't want to provide specific guidance on the second quarter. But what I will say, I did call out specific cautionary considerations as it pertains to Q2 comparison. Again, most notably that you had a large outsourcing transaction on the Eclipsys side and it captures our May quarter end. Really why I'm saying that is I don't want simply people to take the recast number, apply a growth rate, too, and say that's the expectation. I really would ask that the market puts some care into it. That being said, as Glen indicated, we really candidly could not be more bullish and optimistic in terms of the buying behavior and our success in the marketplace.

And I would underscore another point, which I don't think is readily apparent in our Q1 results although both Glen and I commented on that. And that is, over half of our booking in the first quarter was into the small physician space. And as I've talked to the market about that, the reality is that those small physician practice sales by definition tend to be lower average deal value. And yet, they are very impactful in terms of overall market share and also tend to convert to revenue faster just given the inherent nature of the transaction. So we are very bullish on our success in all 3 subsegments of the market, and I am really just trying to encourage people as opposed to just unilaterally applying a growth rate to historical number. Just give some care to some of the nuances that we are dealing with through this transition.

Lawrence Marsh - Barclays Capital

Yes. And guys, I appreciate you did call out to caution us for the first quarter because of the strong fourth quarter. So yes, I remember you saying that. But it sounds like in your mind, I guess, the first quarter bookings number, knowing there's always some variability, was in line with your general expectations?

William Davis

Yes, and I could say that unequivocally. Relative to our own internal plan, the only variability, it pertains specifically to South Australia in terms of its specific timing. But as it pertains to domestically both what happened on the Eclipsys combined with that on the ambulatory side, we are very much in keeping with our own internal plan for the quarter.

Lawrence Marsh - Barclays Capital

Okay. And then just to follow-up, we've gotten some feedback already with the announced departure of John Gomez, some customers communicating, I guess support of the direction of the company and not really that much of an overall concern. I was just curious if you could share any additional feedback you've gotten from customers as that's been communicated. And do you have a timeline in mind, Glen, when you'd like to have somebody else in that slot?

Glen Tullman

Yes. Relative to John, again, I think people were -- John has been around the Eclipsys side of the equation for a period of time, was well-regarded by those folks. And really, John had a big part of helping to set our vision. I think most of those clients would tell you today that they're very focused on execution. And when John and I talked, I wanted to make sure the 5.5 was exactly what we wanted it to be, that the integration work was where we wanted it to be. And that of course meaningful use was achieved, and all of those objectives were met. So it couldn't have been a better time if John was going to be departing, that he depart. And from the standpoint of replacing, finding for replacement for John, interestingly, I mean, one, of course we have a search going on. We're getting terrific candidates. Those candidates will likely be folks that are bring a little bit broader experience, that's not just focused on applications but that are focused on this idea of a connected community of health. So that includes applications, that includes connectivity. It includes, what we call, not only information but insights and then outcomes. And so we see ourselves as moving into a broader business base as well. So I think it's healthy for the business.

Lawrence Marsh - Barclays Capital

When do you hope to have somebody, Glen?

Glen Tullman

We want to find the right person. So I don't think we'll time that. But based on the quality of folks we're getting, I expect that, that would be some time soon.


Your next question comes from the line of Michael Cherny of Deutsche Bank.

Michael Cherny - Deutsche Bank AG

Just quickly on the buyback announcement. I was wondering, I know you said over the next 3 years, can you give any color as to how you think about executing that buyback, if you have any thoughts already, given this is something that's fairly new for you guys?

William Davis

Yes. We are spending a lot of time, discussions with the Board on, what I affectionally refer to as a balanced distribution of capital. As I mentioned in my prepared remarks, we're very focused on continuing to make voluntary repayments on our debt. And I would just tell you that just rule of thumb, not that it will be always exactly like this, but we generally think about it in terms of 2/3 of what will deploy will go towards reduction of debt, 1/3 towards the buyback program.

And as I intimated in my remarks, we're going to be opportunistic, just recognize the kind of the volatility that exists in and around the company from a stock performance perspective. I also -- I just would highlight, this is the second buyback that the company has executed under -- if you recall a few years ago on the heels of the Misys transaction, we launched and successfully executed a buyback program. So deploying a lot of those same type of principles and disciplines will be prevalent here as well.

Michael Cherny - Deutsche Bank AG

That's helpful. And then just one other question regarding the market. There's something that tends to come up in a lot of the calls, but in terms of Regional Extension Centers, we're obviously a little bit further down the path with these being established. Can you talk about some of the experiences you've had there and kind of what that's meant in terms of any type of additional bookings?

Glen Tullman

Well, I guess what I would say is I think every element that comes in is helpful. But I wouldn't say that, that's driving the market per se. I think it's helping to educate the market. But ultimately, I think it's a combination of dollars, availability to install and ultimately, the acceptance and connectivity. Connectivity is becoming more and more important. So people want to make sure that what they buy is going to be available and out there. So that's pushing more and more of the system sales to the larger providers, and they want to make sure that they are connected and can talk with the people they refer to. So those are probably heavier buying signals. Most of the organizations out there have selected -- I think now Allscripts is in more than 90% of the overall, kind of, selected or approved systems. And so from that perspective, that by itself isn't driving sales. It's helpful but it's not driving sales.


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

George Hill - Leerink Swann

Bill, a couple of quick housekeeping items to start with. When you were going through the backlog, did you say the old transaction in the EDI was $859 million or $869 million?

William Davis

The transaction is $869 million.

George Hill - Leerink Swann

Okay. And then for those of us who build our models with the bookings flowing into the backlog and onto the income statement, I wasn't clear. Should we be modeling going forward for this quarter using the $227.6 million or the $212.4 million?

William Davis

Well, again, I'm assuming that in your model, historically, you would have backed out the component that was maintenance. And the way we've given this to you, I think you could go either way quite frankly because we feel like we've given you enough information in terms of how much should go to the maintenance bucket versus how much of it should go to software service versus SaaS. So I'm hopeful that all pieces are there. But our intention going forward is we will try to transition fairly quickly, i.e., over the next couple of quarters where we provide both. But ultimately, I'd like to get to just the single net new definition.

George Hill - Leerink Swann

All right. So for those of us who modeled the maintenance independently, $212 million is the right number?

William Davis

That's right.

George Hill - Leerink Swann

And I guess just lastly, one more question on the share repurchase. And Glen, this is kind of a strategy question for you as well. If you guys are looking to do the share repurchase, it's safe to assume that you guys think the products that as you go to market, especially on the inpatient side, is kind of robust and complete. And maybe comment on how you think about the M&A environment in light of the announced share buyback?

Glen Tullman

Yes. I'll go first, and Bill may want to comment as well. We believe we have everything we need today to execute on the guidance that we've provided. Now that said, we have been in the past, and we'll continue to look at things that are put in front of us and be opportunistic. We will be carefully opportunistic, and we think we have the resources to do whatever we might need to do or whatever might come in front of us. So Bill and the team have been very careful in, kind of, the 2/3, 1/3 debt to buyback ratio. We've been very careful in understanding on a 3-year basis how much cash we're generating than we expect to. And then looking, working closely with Lee Shapiro at all of the opportunities in the market. I will say that some of the stand-alone providers, I'm sure you've heard this, are obviously, shopping. There's a lot in the market for stand-alone providers and they're out there. Those represent less interest to us because integrating a stand-alone provider means ripping out their existing base and putting in our stuff or if you don't do that, managing an extra Electronic Health Record. We're already very comfortable with the mix that we have. So no, the one place that we'll look to be strategic in is potentially in the information side of the equation. And we're looking at that very closely. We're investing a lot of dollars internally. We're looking at partnerships, and we'll continue to keep our eyes open for people who can help us push forward in the information side of the business.

William Davis

I just would add 2 very quick things. One is we think the sizing of the buyback itself, we feel very comfortable with the financial flexibility that it affords us, number one. Number two is our access to capital, I think, demonstrated by our restructuring of the debt is very, very positive. I will note, we do as a company have a $250 million line of credit that has been fully repaid. So that is fully accessible. But third and probably most importantly, as we've demonstrated in the past, we're very focused on any potential transaction if and whenever one came to fruition in terms of evaluating its accretive nature, driving cost synergies out of the business. So in many respects, our ability to manage that from a capital allocation perspective, I remain very comfortable with. So we think this program should be received very positively by our shareholders. We're committed with not only reducing our leverage, but also begin to deploy capital in a way that benefits them directly, especially in light of how inexpensive the debt is now based on the restructured amounts.

Glen Tullman

If you wanted to do something, capital wouldn't be our issue. It's all about strategy.

George Hill - Leerink Swann

Last quick follow-up then. Australia, you guys have been VOC [ph] there for quite a while. Is there any risk that doesn't sign?

Glen Tullman

Well, let me say, having grown up in business, until it's signed, it's not signed. That said, everything we hear, we see, we've hosted -- We've been fortunate to host the key leadership from Australia in the last 30 days. They were here in the U.S. and our teams spent a lot of time. Lee Shapiro, our President, is headed over there. Phil Pead, our Chairman, was recently there. I was recently there. So I think it's a very, very strong relationship that we're building there. And as Bill mentioned, our expectation is to bring in the first piece of that in the coming quarter. So we're highly confident about that. Again, that, as I mentioned, it wasn't in these numbers but when it is in, depending on the piece of it, you'll see some of that and we'll talk about it.


Your next question comes from the line of Ryan Daniels from William Blair & Company.

Jeremy Lopez - William Blair & Company

It's Jeremy in for Ryan. I'm just curious, you have several months of Eclipsys kind of under your belt now. I'm curious as you look at that business strategically, if you have made changes or see any changes from a go-to-market standpoint, whether it be in terms of how Eclipsys contracts. I know they have a fairly unique way of going about contracting relative to peers, and also related to the type of size of the hospital that you would consider from a pipeline standpoint.

Glen Tullman

I'm going to take half of that. Bill can take the contracting piece. One, strategically, this is probably, given where the market is today and the need to operate across ambulatory, acute and post-acute, this was as well-timed a merger as you'll ever see. From an execution standpoint, we've now done a few of them, this is as smooth as an integration effort that you'll ever see in terms of realizing synergies, in terms of very little overlap between the 2 organizations and between in terms of the fit. The quality of the software is nothing short of the best in the market, and we're seeing that. It's one the reasons we're out there. We're starting to run ads and tell people about the story and especially, the outcome story and the great clients we have. I mean, it's the best client base in the world, bar none. And I say that very, very strongly. When you've got [indiscernible] tethering in the cancer area, when you've got Columbia, when you run down the whole gamut of organizations we're working with, and it's all of the best organizations out there. So all of that we see as very positive and we see -- and that's why you're starting to see now the net new sales of that software will pick up. Some of those net new sales will be not only at the high-end but into the strong, existing base of community hospitals. So we think that software can work with the largest, most sophisticated organizations, both in the U.S. and abroad, at great clients like SingHealth and others. But we also see it being able to scale down cost effectively to the community segment. And that's important given some of the changes with competitors at the small to mid-sized hospitals where we're also able to compete. So we just couldn't be more pleased with where it is. In terms of how they're contracting, Bill, you might want to comment a little bit on that.

William Davis

Yes, I just would simply say that our experience through the first 2 full quarters is the contracting is proving to be very consistent with what Eclipsys had been doing, preceding the merger. So I really am not seeing any change there in any material sense. So very consistent. I'll just reiterate, Glen touched on it, I did in my prepared remarks, again, I -- one of the most significant positive surprises of this merger having now operated 2 full quarters is the success that we are having from a cross-sell perspective, which to me is true evidence of the success of bringing these businesses together and the value of bringing the portfolios together. And we're starting to see that extend out into net new opportunities. So the product integration and the power of the existing relationships, I think again, things that are just delivering real value to the business.

Jeremy Lopez - William Blair & Company

And then one more, kind of shifting gears to the gross margin side. I know there's a little bit of -- the number is depressed because of the deferred revenue that you're reporting on the pro forma revenue, and I'm curious how should we think about allocating that deferred revenue in terms of getting to a more, I guess, accurate gross margin, in the different revenue segments?

William Davis

The deferred revenue -- I'd almost rather follow up separately in terms of what that split of that deferred revenue adjustment is between software versus service and maintenance. My sense is that it's largely maintenance driven, second would be software and then third would be service. But we could follow up separately in terms of that break.


Your final question comes from the line of Bret Jones of Oppenheimer.

Bret Jones - Oppenheimer & Co. Inc.

If I could just follow up on Jeremy's question. I had a question on the systems gross margin. I was actually adding back all the deferred revenue just try and get to a clean number, but that doesn't seem right. Even doing that, the gross margin came in late. Now I was wondering if you could talk to what could have been driving the systems gross margin down and whether we're seeing -- is that an effect of the third-party resellers or is it really too early to see that hitting that number?

William Davis

Yes, the systems sales margins -- so again, and I now have the data for Jeremy's question. Maintenance is about half of that adjustment. You've got actually the other half, about $4 million in the SaaS line item and then the balance is in professional services. So call $5 million maintenance, $4 million SaaS and $2 million professional services is the break of the adjustment. In terms of the systems sales margin, I will tell you that comparing Q4 to Q1 is a mix, both in the context of hardware and then secondarily with the third-party offering in that particular revenue category. So there is some variability from quarter-to-quarter as I've talked about in the past in terms of our own software versus third-party software. dbMotion being a very good example, which is very, very attractive to customers for the reasons that Glen touched on in his prepared remarks. But it's really the complement of third-party and hardware that's driving that margin differential.

Bret Jones - Oppenheimer & Co. Inc.

All right. And then I'll just ask one final one. Bill, you were talking about in your comments, you were trying to reign in the bookings expectations, and you highlighted the outsourcing deal from a year ago within Eclipsys. Can you quantify that for us?

William Davis

Yes, my recollection was kind of in the $15 million to $20 million range.

Bret Jones - Oppenheimer & Co. Inc.

All right, perfect. Thank you.


This concludes the Q&A portion of our conference. I would now like to turn the call back over to Mr. Glen Tullman for any closing remarks.

Glen Tullman

I just want to sum up by again telling you that I think the message should be clear. We see a very robust market that we are successfully selling into. The last two quarters have generated more than $500 million of bookings, and we are executing very well from an integration standpoint. So we see very solid times ahead. Bill went ahead and reconfirmed the guidance that we have provided to the market. And again, I expect that we're going to continue to deliver on that. So a strong quarter for us and one that we're continuing to accelerate from.

So I want to thank all of you for joining us today, and we look forward to talking with you next quarter.


This concludes today's teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!