Allscripts Healthcare Solutions' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 3.11 | About: Allscripts Healthcare (MDRX)

Allscripts Healthcare Solutions (NASDAQ:MDRX)

Q3 2011 Earnings Call

November 03, 2011 4:30 pm ET

Executives

Steve Shute - Executive Vice President of Sales

Glen E. Tullman - Chief Executive Officer, Executive Vice President and Director

William J. Davis - Chief Financial Officer and Principal Accounting Officer

Seth Frank - Vice President of Investor Relations

Analysts

Richard C. Close - Avondale Partners, LLC, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

Michael Cherny - Deutsche Bank AG, Research Division

Jeremy Lopez - William Blair & Company

Sean W. Wieland - Piper Jaffray Companies, Research Division

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

George Hill - Citigroup Inc, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon. My name is Rob, and I will be your conference operator today. At this time,, I would like to welcome everyone to the Allscripts Q3 2011 Earnings Call. [Operator Instructions] Mr. Seth Frank, Vice President of Investor Relations, you may begin your call.

Seth Frank

Thank you, Rob. 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 Steve Shute, our Executive Vice President of Sales.

Before we begin the call, let me briefly 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 companies 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 www.sec.gov.

The company undertakes no obligation to publicly, pardon me, publicly any -- to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.

Now I'd like to turn the call over to Glen Tullman, Chief Executive Officer of Allscripts.

Glen E. Tullman

Thanks, Seth, and welcome to our Third Quarter 2011 Earnings Call. In the next few minutes, I will review our results, discuss what we're seeing in the market and why we're winning, and then turn it over to Bill Davis to provide more color on the numbers. So let's go ahead and get started with a brief review of our financial results.

Bookings were very strong in the quarter at $267 million, a 34% increase over the third quarter of 2010. That level of growth is indicative of strong demand and performance across all of our segments. Notably, this is a record bookings figure, something we are obviously very pleased with.

Turning to revenue, our non-GAAP revenue was approximately $371 million, reflecting 13% growth over the third quarter of 2010, and an acceleration from the second quarter. We've made impressive progress on the upgrade front, while also continuing to bring new clients online. Our non-GAAP net income was approximately $47 million, which equals $0.25 per share, a 32% increase in diluted earnings per share over the third quarter of 2010.

Bill will get into the details in a few minutes, but overall, I'm very pleased with our financial results and believe this was a great quarter for Allscripts. Moreover, it's a great market to be in. As you all know, while healthcare is highly complex, information technology has now taken center stage as a significant solution to the challenges facing healthcare. Relative to what we see driving the market, regulatory influences continue to be front and center. While Meaningful Use is on everyone's mind today, attention is beginning to shift to the required adoption of ICD-10 in 2013.

Another influential factor is the significant revision to reimbursement under way at the federal level, fostering the move to a value-based system of care. As an example, the Centers for Medicare and Medicaid Services, better known as CMS, published the final rule for accountable care organizations in October. Our clients need solutions like ours to shift from fee-for-service to fee-for-value. You can't get paid for quality outcomes unless you can capture, communicate, measure and share patient-centric information. And that's the essence of what we do at Allscripts.

One more example is the readmission rule, which takes effect January 1, 2012. The rule requires hospitals to cover the cost of care, provided to discharged patients who are readmitted to the hospital for the same problem within 30 days. As a result, more hospitals are expressing interest in our Care Management and discharge management products. These solutions streamline the flow of patient information from the hospital to community providers. Taken together, these trends have made healthcare IT a strategic board-level discussion for healthcare providers everywhere.

There are 2 key points: first, each one of these different regulatory issues is an opportunity for Allscripts. And second, we're bullish on healthcare IT market and believe it is poised for many years of growth ahead. One of the reasons we are confident is that our client base continues to grow. In August, at our annual Users' Conference, we hosted close to 5,000 attendees. The event created both great momentum, interaction with our new solutions, and support in the base. We also have over 26,000 clients who use our ClientConnect portal to learn, exchange best practices, and to explore new products.

Beyond our success within our base, our third quarter results reflect the addition of literally hundreds of new clients. Now I love every client, but I want to call out 3 new Sunrise Clinical Manager clients that we added in the third quarter: Atlantic General Hospital, Lompoc Valley Medical Center and Flagler Hospital. Atlantic General Hospital in Ocean City, Maryland was a highly-competitive win. There were 3 primary reasons Atlantic General selected Allscripts. First, they are an existing Allscripts client that has been very successful using our Professional Electronic Health Record and Practice Management system for all of their employed physicians. Second, Atlantic General was attracted by the clinical sophistication of Sunrise and our strong focus on delivering meaningful insights and outcomes for our clients. And the final differentiator was our ability to protect Atlantic General's existing investments without having to rip and replace their legacy systems. The ability to provide Sunrise at a total cost of ownership that is manageable for mid-sized community hospitals is a model that we believe represents a significant market opportunity.

Another new Sunrise Clinical Manager client, Lompoc Valley Medical Center near Santa Barbara, California, wanted to step up to a more comprehensive solution in recognition of the growing importance of coordinating care with their community physicians. We're excited about the opportunity and their leadership in their local market.

And last but not the least, Flagler Hospital is a key win with an outstanding organization that HealthGrades named one of America's top 50 hospitals in 2011. We beat Cerner and Epic at Flagler for 2 reasons. First, because Sunrise Clinical Manager delivers the insights providers need to generate positive health outcomes and second, because Flagler liked our open strategy, which will connect the hospital to community physicians whether they use Allscripts or choose another EHR vendor. We're also seeing strong support from our existing Sunrise clients as they continue to invest in additional Allscripts solutions. One that I want to specifically highlight is Sunrise EPSi, our performance management solution, which brings together all the major components of financial management that a hospital needs.

During the quarter, University of California-Davis Medical Center became the fifth and final UC Medical Center to select Sunrise EPSi for Performance Management. The other 4: UCLA, UC San Francisco, UC San Diego and UC Irvine have also selected EPSi. While UC Irvine is a long-standing, outstanding -- long-standing and outstanding Sunrise Clinical Manager client, the others use our competitors. But significantly, when they needed to understand key business metrics and analytics, they turned to Allscripts.

Just after the quarter closed, we also signed Stanford University Medical Center, adding to an EPSi client list of many of the country's most prestigious healthcare organizations, including University hospitals in Cleveland, the Cleveland Clinic, Memorial Hermann Healthcare System in Texas, Catholic Healthcare Initiatives and Sutter Health in California to name just a few.

Moving on to the ambulatory market, Allscripts is the only company today able to address all segments of the physician market. We also have 3 unique sales channels, a direct sales force, a national reseller network and multiple hospitals that are marketing our solutions. And we have a proven formula to address the ambulatory market, one practice at a time, one community at a time and one region at a time. One practice at a time, refers to our basic selling model and something that we do multiple times everyday. We signed, as I mentioned earlier, hundreds of new clients in the quarter, thanks to our direct sales force and the strength of our offering to independent, midsize and large physician groups.

One community at a time, is an approach demonstrated by today's announcement with Children's Hospital of Michigan, one of the top-ranked pediatric hospitals in America. Children's Hospital of Michigan is implementing our Enterprise EHR for their employed and affiliated physicians in Southeast Michigan and plans to use Allscripts to enable collaboration with other hospitals in the community.

Finally, one region at a time, is a strategy we've developed recently to our partnerships with large payers in North Carolina and Pennsylvania to name 2. Blue Cross and Blue Shield of North Carolina, one of

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announced in September, they will provide Allscripts Electronic Health Records, training and support for at least 750 physicians across the state. The announcement followed closely on an agreement with HighMark of Pennsylvania, one of the largest health insurers in the country, both partnerships are representative of payers investing in healthcare IT to encourage their network providers to deliver higher-quality care.

The last area relative to our solutions is post-acute. What used to be an afterthought, care coordination is now mission-critical, and our footprint and offerings in the post-acute care market are becoming an important competitive differentiator for the company. One example is Tidewell Hospice in Florida, one of the largest hospices in the nation. Tidewell selected Allscripts not only on the strength of our hospice technology but to better connect with the hospitals and physicians they serve in their communities.

Turning to our organization. You've heard me talk about our need to ensure we are client-focused, and that we continue to align our organization to better serve our clients. A key player helping us to achieve these goals is Steve Shute, our Executive Vice President of Sales, whose team is focused on bringing our solutions and services to our existing and to our new clients. I would like to ask Steve to say a few words about his experience since joining the organization just over 3 months ago. Steve?

Steve Shute

Thanks, Glen. I was delighted to join the team in time to be part of the quarter's close. My experience in Allscripts so far confirms why I came. I believe Allscripts is the right company, with the right strategy and the right solution set to help our clients address the challenges of a dynamic market. With my extensive background in enterprise software sales, leading the large teams at IBM, I'm in very familiar territory at Allscripts. I've been very impressed by the team I've inherited, whose productivity continues to increase as our bookings continue to grow. At the same time, I'm excited to be making several strategic new hires that compliment the existing team. With the winning combination of a great strategy, proven solutions and a talented team, I'm enthusiastic of our at near-term potential, and I'm confident that over the long-term, we will continue to execute well and gain market share. Glen?

Glen E. Tullman

Thanks, Steve, it's great to have you on board. So as you can see, this quarter, we continue to deliver on our strategy with major new client wins and with expanded agreements within our client base, while at the same time, strengthening our ability to deliver on our connected community strategy. Now I'll ask Bill Davis to provide more detail on our financial results this quarter. Bill?

William J. Davis

Great. Thanks, Glen, and good afternoon, everyone. And thanks again for joining our call today. Before I discuss our results, I would encourage you to review the GAAP and non-GAAP financial tables in today's press release and the accompanying explanations to assist you in evaluating and reconciling our GAAP and non-GAAP financial metrics, which we'll discuss on this call today.

As Glen indicated, we are very pleased with Allscripts' third quarter results. We demonstrated strong growth in bookings and non-GAAP revenue, operating income margins, as well as earnings per share on a year-over-year basis. We also aggressively reduced our debt in the quarter. Our financial position is strong, allowing us to make significant investments to drive future growth while also delivering consistent improvements in our operating performance.

So let's discuss the quarter's financial highlights. Beginning with bookings, we are very pleased with the $267 million of bookings posted this quarter, representing 34% growth year-over-year. This result is indicative of healthy demand for our solutions, as well as Allscripts' favorable competitive position.

Looking at new contract activity in the quarter, we had balanced success both within our existing client base and new client sales. We continue to gain share within the market we serve, and also benefit from increasing client spend, given the strategic and long-term nature of healthcare IT investments across the industry.

As Glen mentioned, we signed 3 new Sunrise Clinical Manager agreements in the quarter, and again benefited from exceptional demand for our financial decision support, EPSi, which we saw a triple-digit sales growth when you compare it to a year ago. Client-cross sales were also a significant contributor in the quarter. I know many of you are interested in the current demand profile within the ambulatory market. In short, the outlook for EHR sales over the next few years is consistent and unchanged from our prior expectations. Overall, we believe the majority of physician and healthcare providers practicing today do not have a fully implemented Meaningful Use certified EHR. Thus, the greenfield opportunity remains significant in all 3 subsegments, particularly in the small and mid-sized groups.

In addition, the community segment provides us with added reach, as hospital sponsor EHR adoption programs to affiliated community physicians. We also see significant new payer initiatives, as Glen mentioned, to drive adoption locally and across broader geographies, as is the case in our new relationship with Blue Cross-Blue Shield of North Carolina.

Turning to booking mix. Software as a Service transactions totaled approximately $34 million or approximately 12% of third quarter bookings. Seasonality, as well as a higher mix of service bookings in the quarter, resulted in a lower SaaS mix. We expect our SaaS bookings mix to return to more normalized levels of approximately 20% over the next few quarters.

Turning to backlog. Allscripts ended the third quarter with approximately $2.76 billion in total backlog, up approximately $34 million compared to the end of the second quarter. Approximately 83% of our backlog is derived from multi-year reoccurring revenue sources including maintenance, subscription contracts and transaction processing fees. The reoccurring revenue portion of our backlog has remained consistent over the past 3 quarters.

Our backlog breakdown is as follows: software in related professional services backlog totaled approximately $472 million; subscription and SaaS backlog totaled another $631 million; maintenance fees represented approximately $793 million and again, it's important to note that maintenance backlog consists of both annual maintenance fees of our ambulatory clients, as well as multi-year maintenance fees amongst our acute care clients.

And then finally, we ended the quarter with approximately $868 million of transaction and other backlog, which again is principally made up of Allscripts' outsourcing, remote hosting and transaction fees from our Payerpath business.

Let's turn now to the income statement highlights. Our non-GAAP revenue was $371.4 million or 13% growth year-over-year. Our third quarter non-GAAP revenue includes approximately $2.6 million of acquisition-related deferred revenue adjustments. The deferred revenue adjustments are as follows: approximately $400,000 relates to professional services, another $500,000 relates to maintenance, and the balance of approximately $1.7 million relates to transaction processing and other. In addition, approximately 2/3 or 65% of our third quarter revenue was reoccurring in nature.

We had a strong mix of revenue across growth -- across all of our revenue categories. Our non-GAAP system sales revenue grew 15% year-over-year, reflecting revenue from new client sales in the quarter, as well as ongoing implementations and initial implementation activity with several new acute care clients. Our non-GAAP professional service revenue increased 22% over the third quarter of last year. We initiated implementations on a variety of client projects and also leveraged additional capacity within our professional service organization, as we on-boarded new team members during the quarter. Our focus on Meaningful Use upgrades also continued in the quarter.

Non-GAAP maintenance revenue grew approximately 9% year-over-year, which is a strong performance for us recognizing the majority of our maintenance revenue is subject to what I call CPI growth. Thus, maintenance revenue benefited from robust go-live activity this quarter in both our acute and ambulatory segments.

Finally, our non-GAAP transaction processing and other revenue grew approximately 11% year-over-year on a non-GAAP basis. Please note, the sequential change when comparing Q3 to our second quarter revenue, relates to approximately $2 million of non-reoccurring revenue being recorded in the second quarter, associated with the hospital outsourcing client that required staff augmentation during the go-live at Sunrise Clinical Manager in one of their facilities.

Turning now to margins. Our non-GAAP gross margins were 45.7% this quarter, a 310-basis point decline over the third quarter of last year. The decline in gross margins over the prior year is primarily attributable to 2 factors: First, the recognition of higher than normal third-party systems revenue in the quarter that tends to carry lower margins, and then second, an increase in professional service revenue, which also carries lower margins, and again, was driven largely by the migration of our clients to Meaningful Use, as well as a larger number of new client system activations in the period.

Gross margins were also impacted by additional acquisition-related amortization, which we do not exclude from our gross margin calculation. The additional acquisition-related amortization drove a $2.3 million reduction in Systems gross profit year-over-year. On a sequential basis, our non-GAAP gross margins declined 230 basis points, which also were driven by revenue mix, specifically a lower proportion of software revenue and a higher proportion of third-party system revenue, as well as professional services.

Within system sales, we do in fact expect to see a return to more normalized gross margin levels in the fourth quarter. Also, we expect gross margins in our professional service organization to improve over the coming quarters as we continue to drive greater efficiencies into our Meaningful Use-related services, and our higher-margin implementation services become a higher percentage of our overall service hours.

Looking at our operating margins. Our non-GAAP operating profit margin was 20.3% in the third quarter. This represents a 110-basis point improvement year-over-year. Non-GAAP operating margins were down just slightly quarter-over-quarter. The year-over-year improvement illustrates the flexibility within our business model and continued success driving merger-related cost synergies from the business. Our outlook remains unchanged for annual cost synergies of at least $25 million in 2011, $35 million in 2012 and $40 million in 2013.

Our gross research and development spend totaled approximately $41.3 million in the quarter, a 7% increase year-over-year and a 9% increase over our second quarter. Even with this additional investment, we produced solid operating margin improvement over the prior year. Capitalized software attributable to R&D totaled approximately $15.3 million or approximately 37% of gross R&D spend in the quarter, which is up just slightly from 34% in our second quarter. Our development organization delivered important innovations during the quarter, including mobility applications, that were showcased at our national user group meeting, ACE, in August. Consistent with what we've said previously, we expect to exit the year with software capitalization rate in the low- to mid-30% range.

Capitalized software amortization totaled approximately $5.9 million in the third quarter, which is up from $5.4 million in the second quarter, yielding a net capitalization rate of approximately 23% in the quarter, up from 20% in the second quarter of this year.

Turning now to net income and earnings per share. Non-GAAP net income totaled $47.3 million in our third quarter, which equals 28% growth over the third quarter of last year, and our non-GAAP diluted earnings per share totaled $0.25 per share in the third quarter versus $0.19 in the third quarter last year, which equates to 32% growth.

You will note, that our non-GAAP effective tax rate was 34% in the quarter, lower than prior quarters and our previous guidance. The lower rate this quarter adjusts our year-to-date rate to be more in line with what we expect for the year, which is approximately 37.5% to 38%. The third quarter tax rate contributed approximately $0.02 to our earnings per share result in the quarter.

Turning to our balance sheet. Allscripts ended the quarter with approximately $86.5 million in cash and marketable securities, a decrease of approximately $30.9 million versus our June 30 balance, reflecting in part, substantial debt reduction in the quarter, which I'll discuss in more detail in a moment.

Cash flow from operating activities totaled approximately $42.2 million while free cash flow after capital expenditures and capitalized software totaled approximately $14 million. Accounts receivable for the company totaled approximately $371 million, which equates to DSOs of approximately 90 days, which is up 2 days from June 30. The slight uptick in DSO this quarter was due to collection timing. I'm very pleased to report that we have made substantial progress already in the fourth quarter, and I anticipate a reduction in our DSOs this quarter.

On the leverage front, Allscripts reduced its outstanding debt significantly in the quarter, electing to deploy free cash flow, as well as some cash on hand, to reduce our outstanding borrowings by approximately $45.5 million, which represents the largest quarterly pay down to date. This resulted in outstanding borrowings of approximately $377 million as of September 30. Since the inception of our credit facility in August of last year, Allscripts has repaid approximately $193 million or close to 1/3 of our total borrowings. As we've stated previously, our general goal, on an annual basis, is to deploy approximately 2/3 of our free cash flow to repay debt and the remainder towards share repurchases. This quarter, we elected to exclusively pay down debt in light of our strong share repurchase activity in the second quarter, and desire to aggressively reduce our debt levels.

Finally, we ended the quarter with approximately 6,000 employees, up from approximately 5,900 at the end of our second quarter.

Before I turn the call back over to Glen, I did want to make a few comments regarding our 2011 guidance. We are increasing our non-GAAP revenue, net income and EPS guidance for 2011, in light of our strong third quarter performance and positive outlook on both interest expense as well as taxes. Specifically, non-GAAP revenue is now anticipated to be in the range of $1.455 billion to $1.46 billion versus a prior range of approximately $1.44 billion to $1.45 billion. We anticipate non-GAAP operating income of approximately $303 million to $307 million, which is a slight adjustment from the $305 million to $308 million non-GAAP operating profit guidance provided previously. We continue to anticipate our non-GAAP operating margin to be approximately 21% and non-GAAP net income of approximately $175 million to $179 million. This equates to new non-GAAP EPS range of between $0.91 and $0.93 per diluted share.

Within our assumptions, we have adjusted our anticipated interest expense, given the rate at which we've been reducing debt. We anticipate total interest expense in 2011 to be between $20 million and $21 million. We have also adjusted our tax rate assumption from a range of 38% to 39.5%, to 37.5% to 38% range.

Finally, regarding our booking expectations in the fourth quarter, recognizing the fact that our third quarter bookings performance was stronger than expected, and it did not include any international bookings, I expect our domestic bookings in the fourth quarter to be sequentially up by a modest amount. Our anticipated South Australia transaction will be additive to our domestic sales performance. Specific to South Australia, please note, approximately 10% of that transaction was booked in our second quarter, and the balance is expected to close in the fourth quarter. Our anticipated fourth quarter bookings performance should position the company to deliver 17% to 18% total bookings growth for the year when compared to 2010's pro-forma balance. I hope you're as pleased with our results as I am. We have tremendous opportunity ahead, and we look forward to updating you on our continued progress. Thanks, as always, for your attention. And I will now turn the call back over to Glen for a few closing remarks.

Glen E. Tullman

Thanks, Bill. So to sum up, we're delivering both strategically and operationally within a market that we're confident will continue to grow rapidly. The industry is changing, and Allscripts is responding to market needs and innovating. We do that in part through a great group of clients, who give us the opportunity to make a difference. And we're committed to working ever more closely with our clients to find the right solutions. We're also fortunate to have an extraordinary team of employees, focused on delivering on our mission and vision and shareholders who are focused on the value we're creating in the market. And with that, we'll now take your questions. Thanks very much for joining us. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Atif Rahim from JPMorgan.

Atif A Rahim - JP Morgan Chase & Co, Research Division

A couple of questions. One, on the upgrade cycle for existing clients. Bill, could you highlight to us where you stand in terms of the Meaningful Use upgrades? And as we look to the end of the year, if you also have a majority of those done, what that means for professional services margins next year? And then, secondly, if Glen or Bill, you 2 could talk about the future opportunities that you highlighted beyond Meaningful Use. ICD-10 and value-based purchasing, if you could just highlight to us what products you have that address those areas, and if you could put any numbers around those, that would be great?

William J. Davis

Yes, I'll take the first question, and then, I'll let Glen take the second one. As it pertains to the upgrade cycle, as I mentioned in the last quarter call, we did, in fact, peak in terms of monthly volume in the July, August timeframe. Yet they continue to be a meaningful part of our, kind of, overall service delivery model, and we'll continue to be through the balance of the year. Rough estimates, at the end of the third quarter, we had about half of our 50% of, both our acute and enterprise client bases, up or through the Meaningful Use upgrade cycle, and a little over 2/3 of our Pro[ph] and MyWay base. And again, that will continue through our fourth quarter. And we'd be glad to update it on our fourth quarter call.

Glen E. Tullman

Great. And to take the second piece of that, beyond Meaningful Use, let me start by saying, that Meaningful Use stretches out a long time. So we're talking about, in terms of Meaningful Use, mid-2012, to get the final rules for stage 2 just to give you a sense. So then you've got stage 3 after that. That said, we see ICD-10 as an enormous opportunity. You're going to have to replace essentially every Practice Management and Revenue Cycle Management system out there and that's an enormous task. And then of course, the whole analytics area. And that's one of the reasons, Atif, that we focused on EPSi. Because as you can see, we have a substantially lead, in terms of who the market looks to when they look for analytics data, whether the interesting thing about EPSi is more sales of EPSi go outside the traditional Allscripts base than are inside the Allscripts base. So it's a very strong there. We also have some new offerings were bringing on. Humedica is one that the market's very excited about, and we're excited about as well. And then our own offerings, which include some of the offerings, Sunrise Clinical Analytics is one good example, but where we're are able to do that. So again, we have a real opportunity there.

William J. Davis

And I didn't answer the second part of your first question, Atif, and that was kind of outlook in terms of service margins in general. I continue to believe that mid- to high-20s is a realistic expectation for our service line of business. As Glen indicated, Meaningful Use, upgrade activity, will continue to be something we have to service. So I don't think it will happen necessarily in one quarter. But as we look towards 2012, I'm absolutely expecting that you're going to see margin expansion in that area of our business.

Operator

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

George Hill - Citigroup Inc, Research Division

Bill, with respect to bookings, is there a chance you can give us some color on what percentage of the bookings are coming from the current installed base, people buying upgrades versus new footprints?

William J. Davis

George, I don't get into that specific detail in any particular quarter. I have said previously, in the third quarter, really, is no different that you could see sales from our installed base being generally in the third to 40% of our overall sales performance. And again, there is no kind of unusual activity in the third quarter to suggest it will be materially different. I just would underscore a statistic that Glen sited in his script, that is it pertains to the net new customers. We are literally talking about hundreds of new clients coming on board across our entire product portfolio. So both within our installed base as well as net new customer acquisitions, we cannot be more excited about our third quarter performance.

George Hill - Citigroup Inc, Research Division

That's great color. And then maybe just a couple of housekeeping follow-ups. The 10% of the Australia deal that was included in bookings this quarter, safe to assume that's probably in the $4 million to $6 million range with the contribution?

William J. Davis

Yes. To clarify George, and I'm sorry if I misspoke, the 10% I was referencing was actually reminding people that was in the second quarter. It was absolutely no South Australia bookings contribution in the third quarter.

George Hill - Citigroup Inc, Research Division

Okay. Hopefully I just heard that wrong. And how about, what's contributing and what's driving the tax rate lower?

William J. Davis

And this has been a key initiative for us, and I've intimated a couple of times in the past, but obviously bringing the companies together, we've been doing a lot of thoughtful strategic planning around our tax structure. And so the 2 key drivers there are: First, on the state tax organization and our ability to effectively put some things in place there that has been in the works since the time of the merger. And then secondarily, completion of our R&D tax credit work that again is positive and will continue to contribute to the balance of this year. Those are really the 2 key drivers for the tax dynamics for not only the quarter but for the full year.

George Hill - Citigroup Inc, Research Division

And then I guess, safe to assume that should be sustainable, right?

William J. Davis

Absolutely. The clear intention is that, that is sustainable. Yes.

George Hill - Citigroup Inc, Research Division

And the last one is for Steve. Steve, welcome to the company. Can you give us a minute on what your early interactions with customers have been like? What you're hearing from people and your experience inside the company?

Steve Shute

So first, it's very positive. The loyalty to Allscripts has been terrific and it's been a very warm reception.

Operator

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

Michael Cherny - Deutsche Bank AG, Research Division

So, I'll get the quick housekeeping question out of the way. Bill, no share buybacks in the quarter. Remind me again, you bought 150 million left on your current outstanding authorization?

William J. Davis

That's correct. And again, it's a 3-year program. And again, we felt we came out very aggressively in the second quarter. We are trying to deploy a very balanced distribution of our capital, and so for that reason why we turned our attention to further debt reduction this quarter. We will obviously continue to be very opportunistic as we go forward in terms of striking that balance. As I shared with the market last quarter, the general guidelines in which we're operating in are -- you could think about as much as 2/3 of our free cash flow going to pay down debt, and about 1/3 going to share repurchase, again on an annualized basis.

Michael Cherny - Deutsche Bank AG, Research Division

Perfect. And then I guess just to recut the bookings question in another way, when you think about where you had success in the quarter, you talked about across your entire platform. Looking down more kind of the small end of the market. Obviously, I think, the general view is that, that was going to be an area in the market that might lag from adoption perspective. Are we starting to see the impetus on their part, the catalyst where they're starting to realize that they need to be getting moving now and starting to see an acceleration in bookings on that front? Or just kind of talking about particularly the small end of the market would be great.

Glen E. Tullman

Yes. This is Glen. Clearly, when we're talking about hundreds of new clients signing on, big part of that comes from the lower end of the market as well. We're seeing substantial interest, and we're seeing that not just for Meaningful Use, but we're starting to see payers and other organizations really step up to engage the smaller physician practices. There's a real interest on the payer side of the equation to ensure that there is a balance in the market that we have as many small- to medium-sized physician groups as we do large groups. And the good news is that at Allscripts, we can play in all of the above. So the largest integrated delivery networks, mid-sized and smaller groups where we're saying. But we're seeing great take up across the board. I have to say it's a very strong market out there.

Operator

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

Lawrence C. Marsh - Barclays Capital, Research Division

Just a couple of follow-ups, Glen. First, to you, Bill, the bookings one more time, I know it's about $30 million above what you would suggested we should expect this quarter. You highlight a lot of momentum in different areas. Is there anything in particular that drove the $30 million or so beat or is it just pretty much across the board?

William J. Davis

Well, it is pretty much across the board. Certainly we were very pleased with the 3 Sunrise deals in the quarter. And as I've talked about in the past, those are not only sizable, but the timing of them is sometimes difficult to predict. So that certainly was a contributing factor to the over-performance. But I just, in all honesty, would suggest that the strength across the continuum on both the inventory and acute side really, really contributed to the overall strength.

Lawrence C. Marsh - Barclays Capital, Research Division

Okay. Very good. You've been very consistent in announcing these Sunrise Clinical Management Enterprise awards a couple in Q1, a couple in Q2, and Q3. You said in the past, that you expect a couple of hundred enterprise decisions across the country in the next year or so. How do we think of the pace of these announcements from you and your organization here over the next year. Do we look for real acceleration in these announcements? And I think just to follow-up with that, too. The seam of single platform providers for stage 2, do you anticipate more of that happening or you will see, in your words, more rips and replaces of inferior systems to your platform here the next year?

Glen E. Tullman

Yes. Larry, this is Glen. So a few things. First of all, we do see momentum building here. The message is starting to get out. The message, which is pretty clear, is we believe Sunrise SEM is the best software in the market. And if you look at the folks using it, Colombia, Presbytarian, Memorial Sloan-Kettering, you go out to UC, Irvine, just across-the-board university hospitals in Cleveland, all the best names are out there using Sunrise. And that message is getting out. The other piece of that is, of course, it's open and that allows you to connect to the community. It's not outdated software, it's brand-new software that can allow organizations to connect to the community without ripping and replacing. Now Oliver Wynman did a study that said that 93% of the healthcare organizations in the country can't afford to rip and replace. And they need software that's going to play nice with the other elements of what they have already installed. So we see real momentum building there. Relative to your question, on kind of the single vendor, single database, there's really 3 pieces to that: One is architecture. And that is everyone's concluding that you need an open architecture that you can't just say, we're going to rip and replace everything. Because even at the largest organizations, they have to -- no one vendor can handle everything in healthcare, whether it's devices, whether it's portals. We already gave an example with EPSi, 4 out of 5 of the UCs don't use our software, but yet they come to us to get our analytics. So the idea that you're going to have just one database really doesn't make sense. Even the government has concluded that they don't want proprietary MOM space systems. They want open systems out there. The second piece is database. And I think there's been a lot of discussion about wanting one database. And the reality is, what the market wants, what physicians want is one comprehensive patient view. Not one database, because they realize you can't do that. In fact, interestingly, when you have a large healthcare organization and they're connecting with nonaffiliated physicians, you can't, by law, have one database because you can't co-mingle the data. So the whole idea we're going to have everything in one database, doesn't make sense if you really think about. What you do want is one patient view, and that's what we offer through our community products. And I think last but not least, in terms of those folks who do want to go with an approach that mimics that, we have that approach. And that is Sunrise allows you to have an acute and an ambulatory product all in one database, and that we have today. That said, Sunrise is also equipped with Helios, which allows you to connect to all the other aspects of the market. So again, just kind of to summarize, we see increasing momentum and acceleration. And the big issues out there are: Be open, give one comprehensive patient view and Allscripts has whatever you need in the market combined.

William J. Davis

If I could provide one word of caution though, going to your specific question, Larry, I would caution the market to not correlate kind of the frequency or rate of actual press releases to success or momentum that we are having in the market. The reality is that there's a lot of other considerations that go into the timing and the nature of the press releases that we put in the market. So I'm not exactly sure if that was your specific question, Larry, but again, I just would offer that word of caution.

Operator

[Operator Instructions] Your next question comes from the line of Jamie Stockton from Morgan Keegan.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

I guess the big acceleration in bookings that you guys saw during the quarter, Glen or Bill, whoever want to weigh in on this. The registrations for the government program looked like they really accelerated toward the end of the quarter. And I'm curious if you -- the end of the quarter is probably always strong for bookings, but you see a little more strength than you normally expected, especially in the ambulatory side.

Glen E. Tullman

Well, again, I think what we're seeing is we're seeing a momentum that continues to build. I think Bill and I have been saying this for about 6 quarters now that every quarter we see a little bit stronger momentum. Here, it's really starting to happen because you have the first payment starting to go out, you have physicians getting checks. We have a very substantial number of our clients who are in the queue waiting for attestation, they're in the process of attesting. And as Bill mentioned earlier, a good chunk of those in some areas, as many as half of our clients are kind of moving through the process right now in terms of attesting. So that's the big first bullous. I will say that this has really focused the market on what they need for what's next, which is value-based care. So I think there's as many people out there, who are saying we'll get through attestation. And then we'll start to look at a whole new set of tools of care coordination, care management and population management, analytics and the like. So net-net, we see the acceleration. We don't think it's unique. Right at the end of the quarter, we see it as a pretty steady built.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

Okay. And then just one other question, Bill, on the Australia deal. Is kind of $50 million plus still a reasonable expectation for that?

William J. Davis

Yes. And again, I think I gave a little bit more color on that last quarter, just north of $50 million. But why I was wanting to reinforce the amount of that, that was captured in our second quarter and then the residual amount that is expected in the fourth quarter. So again, I just would encourage the market to take credit for what was already booked in the second quarter.

Operator

Your next question comes from the line of Richard Close from Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just a clarification on the bookings, Bill. The 17% to 18% is off the, I guess, 899 last year, and that does include the remainder of the Australia, correct?

William J. Davis

That's correct. But also, again, as I've indicated before, we had just under I think $20 million in total -- somewhere between $15 million to $20 million of international transactions in last year's numbers. So again, it's not purely incremental from an international/domestic perspective, but absolutely taking that into account in terms of the 17% to 18%.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. And just a follow-up on the Professional Services. You had mentioned the implementation hours, and I was curious if you could talk a little bit about if you look at the Professional Services revenue in the quarter, if you could break out percentages maybe, implementation hours versus upgrade hours?

William J. Davis

Yes. I don't know that I have that level of detail readily accessible. As I've, again, intimated in prior quarters, we've had a meaningful amount of our service organization involved in upgrades. That activity in terms of split between upgrades versus net new installation, we saw it peak in the July, August time frame. But I really -- honestly, would be guessing a bit in terms of that relative split other than to say that in some way, virtually all of our professional resources are involved in upgrade activity.

Operator

Your next question comes from the line of Sean Wieland, Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

On your new EHR deals, on the ambulatory side, can you say roughly what percentage of those are replacing existing systems versus greenfield? You touched on this a little bit, but I just want to get in a little more detail.

Glen E. Tullman

Yes. I think the reality, Sean, is that more of them, probably 3/4 of them I think are net new. They aren't really replacements, their greenfield deals on the smaller practices, and about 1/4 of them are replacement. That's I think when you're talking about the smaller market, there's a lot of folks out there who just don't have these systems yet. So we see another -- there was some chatter in the market about greenfield is done. I don't know what they're looking at, but as I already mentioned, we're in the hundreds of sales here. And if you talk to our resellers, our resellers are increasingly happy with what's going on. I mean, this is a very strong, very good market that's building here and not anywhere near done.

Sean W. Wieland - Piper Jaffray Companies, Research Division

And tell us a little bit about what the competitive landscape looks like in that small practice market.

Glen E. Tullman

Again, I think the competitive landscape hasn't changed a whole lot. We've seen 2 players, I think, who have done reasonably well and who serve as good competitors, V Clinical[ph] continues to be a good solid offering, and Greenway. I think those are the 2 folks that we run into. Where we gain an advantage is people and the buyers want to make sure they can connect, they want to make sure that the company is going to be around and increasingly in a number of these markets, as I was talking about our strategy, we have somebody like Blue Cross, Blue Shield in North Carolina providing sponsorship to a minimum of 750 physicians. That gets the physicians' attention and gets their practices. So again, Allscripts, we're unique because our coverage model includes direct sales, it includes bars, it includes hospitals as resellers through these start funding programs, and now it includes payers as well. So we think that's one of the reasons why we're moving forward pretty aggressively from a sales standpoint and why we're exceeding the numbers.

Operator

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

Jeremy Lopez - William Blair & Company

It's Jeremy for Ryan. I wanted to thank Steve for the comments you gave earlier. I'm curious you seemed like you hint at some potential new strategic hires within your organization. I'm wondering if you'd comment on that a little bit. And just overall, what are the size of your overall quota carrying sales forces, has it really changed much over the last year?

Steve Shute

[indiscernible] in the past into the organization where I know we're outstanding on execution, vision and customer satisfaction. So what I'm looking to do is just enhance our hand. Again, we have a tremendous team on the field today, just bringing some new talents from outside sources to the capital we have already. A lot of these folks with solution orientation, with solution selling perspective, so they bring a different set of skills into the organization.

Glen E. Tullman

I'll just jump in. This is Glen. One of the attributes that Steve brings is the ability to go in and sell the entire portfolio of solutions as opposed to individual product selling, which is a little bit of where we came from. And increasingly, our customers want to see what does the future look like, how you're going to connect, how you're going to address our acute problems, post-acute problems, how you're going to connect us to the community, those we own, those we don't own, give us a comprehensive view of what the future looks like and how you're going to address, not only meaningful use, that's the easy part. How you're going to address ACOs and value-based healthcare. And that's a big part of what Steve, I think, brought as a great addition to what was an already strong well-oiled sales team.

Jeremy Lopez - William Blair & Company

That's great. And one other one if I could. I know you've kind of throughout the quarter made a few announcements with respect to dbMotion and some traction you're getting there. And I'm curious if you could give us any color in terms of the relative mix of sort of these more reseller-oriented bookings within the overall kind of mix. I'm sure you probably don't want to give a precise number, but maybe just kind of characterize it, how it's trended throughout the year?

Glen E. Tullman

Yes. And Jeremy, that's absolutely what I was referring to when I talked about our system sales mix in a greater dependency on third-party products. By far, dbMotion, was the most significant in that overall mix. Humedica was second, which both represent investments for the company that we have. So in relative terms, we have seen very nice growth from those products. I would suggest that their kind of overall growth rates, if I compare Q3 to a year ago, would be kind of solid double digits. I would guesstimate probably in the 25%, 30% range would be my guess, but I'm doing that from recollection.

Jeremy Lopez - William Blair & Company

So would you say that the overage generated in the quarter was not entirely because of these sales, it was more broadly across. Is that the way we should think about it?

Glen E. Tullman

Yes. It's absolutely more broad than third-party product. As I indicated before, coming into the quarter, we honestly did not anticipate that we would land all 3 of the Sunrise deals in the quarter. So that was a contributing factor. I'm going to touch on the fact that we saw relative strength on the ambulatory side, all the way down into the smallest of practices. And then obviously third-party products and community play, obviously contributed as well. So there was no one area of our sales efforts that compensated to the other. We saw strength across the board.

Operator

Your next question comes from the line of Sebastian Paquette from Goldman Sachs.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Just a quick question on the cross-sell penetration of your ambulatory products into the Sunrise base. I was wondering, first off on the quarter, what percentage of your ambulatory bookings were referring physicians to your Sunrise hospitals? And then on the guidance following the Eclipsys acquisition, I think it was about $820 million in a revenue cross-sell opportunity to the outpatient footprint. Do you have any thoughts on kind of an updated number where we stand following the first 3 quarters here?

Glen E. Tullman

Tell me, I didn't pick up the whole second question, just the second part of your question?

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Just updated guidance of how far you've gone into that $820 million of cross-sell opportunity, revenue cross-sell opportunity into the outpatient base that you provided earlier in the year?

Glen E. Tullman

Yes. So in terms of cross-sell, again, there was some meaningful contribution in the quarter. I would band it in the kind of 15% to 20% range of kind of overall booking performance was cross-sell activity. And in terms of kind of progress to date, not necessarily against the $800 million but against the full $1.2 billion of revenue cross-sell potential. You could think about that over the first 5 quarters quickly approaching about $300 million of that $1.2 billion. Just to be very clear though, the distinction, and that's a revenue cross-sell number not the bookings cross-sell number. So what's contemplated in that is the kind is the 5-year total cost of ownership, which contemplates the maintenance and whatnot. So just be cautious if you're trying to translate that back into booking contributions.

William J. Davis

The another way to say it, we have a way to go.

Glen E. Tullman

Yes. We do.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Understood. And then an update on your implementation capacity. Just how many clients on your in-patient, your Sunrise, are you able to implement a 5.5 per month? And then also for your new client wins maybe using lump up value, maybe as an example, are you able to begin implementations immediately?

Glen E. Tullman

Yes. I'll just touch on that. One, we are, and I think the market generally, is starting to close some of the capacity issues. We've been successful in doing that. So we don't see large shortages. We planned ahead and we've managed that well, so we're able to move pretty quickly on getting folks on site. And you mentioned Lompoc, specifically. Again, we'll begin moving on that very quickly. So it wouldn't surprise me to know that there's folks on site, they're now or in the next week, 2 weeks, 3 weeks, who are starting the initial planning and work through of that. More generally, on the upgrade process, again, we are doing, I mean, as a sense, we're probably doing more upgrades in a quarter than we did business last year. So that's become a very efficient machine in terms of our ability to implement. And we expect we'll continue to see gains there and efficiency there.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Okay. But you said that you've completed half your base in terms of upgrading the 5.5 right?

Glen E. Tullman

That's correct.

Operator

Your next question comes from the line of Charles Rhyee from Cowen.

Charles Rhyee - Cowen and Company, LLC, Research Division

If I can just touch on, I guess, some guidance-related questions. But you know first, a point of clarification. Bill, you talked about gross margins being impacted by sort of an increase in the acquisition-related amortization, I think you called out about $2.3 million impact on the system sales line. Was there more than that in the quarter? Didn't you just called out one piece of it, or was it just the $2.3 million?

William J. Davis

I'm not sure. Your question specifically to deal-related amortization or, I'm really not following your question, sorry.

Charles Rhyee - Cowen and Company, LLC, Research Division

You were talking about earlier about the thing that impacted gross margin in the quarter?

William J. Davis

I was just acknowledging, when you look at gross margins Q3 of last year to Q3 of this year, this year has $2.3 million more in deal-related amortization, and the reason for that is just the timing of the transaction closing mid-quarter last year, whereas this year has the full quarter effect.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. I get it. Sorry about that. And you're basically just saying the sequential change than is really just for the first to, really, the recognition of greater third-party systems?

William J. Davis

It's a complement of the mix of third-party systems, and then the other call out I made is the incremental amount of amortization of capitalized software, which is also impacting those margins, which is look to be about $0.5 million in the quarter as well.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. So then when we think about next quarter, and you said we're going to return to more normalized margins, where would you say it's really coming from? Because I also noticed the transaction processing margins were down sequentially as well.

William J. Davis

Yes. So again, I think on the system sales line, it really will be a function of mix in terms of what's sold and recognized in the fourth quarter. We just anticipate a little less in the fourth quarter coming from third-party products. So that's really going to be the driving force on that line item.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. Great. And then my last question I guess is, obviously, really strong bookings quarter here. The fourth quarter guidance looks, in my mind, pretty good here as well. Maybe a little too early to think about next year, but if you could just remind us sort of again what your sort of how the long-term model looks for you? And as we think about some in the outer years, is it fair to still think of a mid- to upper-teens sort of consistent bookings growth? Is that an achievable target?

William J. Davis

Yes. Our intention is to -- in really reverting back our historical practice is to provide 2012 guidance on our fourth quarter call. So I really would be hesitant to get in to any specific color at this time other than, hopefully, what's coming through loud and clear is the requisite amount of enthusiasm around the market dynamics that certainly as we talked about longer-term growth rates of revenue in the low- to mid-double digits and then high-teens, low-20s profit growth. It's certainly nothing from this vantage point that leads me to believe that's not attainable. But in terms of getting the specifics, I really would like to defer until our fourth quarter call when we intend to give more fulsome guidance.

Charles Rhyee - Cowen and Company, LLC, Research Division

That's fair. If I can just sneak in one more in here. Can you remind us again where you are in terms of the cost synergies that you outlined when the deal was closed? I think it's suppose to be $25 million in the first year. Sort of where are we sort of at that run rate or do we still have more to go?

William J. Davis

Yes. We're tracking that if not $1 million or $2 million above that for the year. So we feel very good about the $25 million. And then as we work through our planning process for next year, remain confident in the incremental $10 million that will get us to $35 million and then ultimately the $40 million in 2013. So our perspectives on our ability to achieve those committed synergies still remains very positive.

Operator

This concludes the question-and-answer session. I'll turn the call back over to Mr. Tullman.

Glen E. Tullman

Well, great. Well, I'll just conclude with a few comments, a few key takeaways. One, I think it's pretty clear how strong this market is, and we had a very strong performance by our team. I think we're taking advantage of the strength of the market. And we remain very optimistic about Allscripts and how we're positioned in the market. And we believe the market, the clients especially in the acute area are starting to understand both the value of our Sunrise Clinical Manager software, as well as the importance of an open platform and connecting to communities. So again, I want to thank our clients for their partnership, all of our employees and team members for their commitment. And of course, our investors for their continued confidence in us. So again, we'll look forward to talking with you next quarter. We appreciate your time on the call today. Thanks very much.

Operator

This concludes today's conference call. You may now disconnect.

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