Allscripts Healthcare Solutions (MDRX) Paul M. Black on Q4 2015 Results - Earnings Call Transcript

| About: Allscripts Healthcare (MDRX)

Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX)

Q4 2015 Earnings Call

February 18, 2016 4:30 pm ET

Executives

Seth R. Frank - Vice President-Investor Relations

Paul M. Black - Chief Executive Officer & Director

Richard J. Poulton - President & Chief Financial Officer

Analysts

Robert Patrick Jones - Goldman Sachs & Co.

George R. Hill - Deutsche Bank Securities, Inc.

Michael Cherny - Evercore ISI

Charles Rhyee - Cowen & Co. LLC

David Ho - Barclays Capital, Inc.

Matthew D. Gillmor - Robert W. Baird & Co., Inc. (Broker)

Gregory T. Bolan - Avondale Partners LLC

Richard Close - Canaccord Genuity Group, Inc.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

David M. Larsen - Leerink Partners LLC

Dave Francis - RBC Capital Markets LLC

Sean W. Wieland - Piper Jaffray & Co (Broker)

Anthony V. Vendetti - Maxim Group LLC

Zack W. Sopcak - Morgan Stanley & Co. LLC

Steve P. Halper - FBR Capital Markets & Co.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Operator

Greetings and welcome to the Allscripts Fourth Quarter and Full-Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded and is scheduled for duration of 60 minutes.

I would now like to turn the conference over to your host, Mr. Seth Frank, Vice President of Investor Relations. Thank you, Mr. Frank, you may begin.

Seth R. Frank - Vice President-Investor Relations

Thank you, Chris. Good afternoon, everyone. Our speakers today are Paul Black, Allscripts Chief Executive Officer; Rick Poulton, Allscripts President and Chief Financial Officer.

Some of the statements that we'll be making today may be considered forward-looking, including statements regarding future investments and our future performance. These statements involve a number of risks and uncertainties that could cause our actual results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our SEC filings for more detailed descriptions of the risk factors that may affect our results.

Also, as management reviews the fourth quarter details as well as the 2015 full-year, please reference both our non-GAAP and GAAP financial statements as well as non-GAAP tables in our earnings release and the supplemental data book that's available on our Investor Relations website at www.allscripts.com/investors.

Now, I'd like to hand the call over to Paul.

Paul M. Black - Chief Executive Officer & Director

Thanks, Seth. We appreciate you joining the call today. Before we start, I'd like to welcome Melinda Whittington, Allscripts' incoming Chief Financial Officer. We're excited to have Melinda join us, she brings substantial big-company global financial expertise at Fortune100 companies. We appreciate you extending a warm welcome to Melinda.

I also want to acknowledge Rick for his leadership at Allscripts over the past three plus years, during which time many difficult decisions were made and important strategy was executed. All of which has yielded the results that we will discuss today. As previously announced, Rick is now President and he will ensure delivery of all operational priorities going forward.

This was an exciting time for Allscripts in 2015, the positive inflection point for the company. We exited the year with significant momentum and we're seeing the momentum carry into 2016. In 2015, we delivered record bookings of $1.1 billion, a 20% increase over 2014, recurring revenue growth of 6% during the year that totaled 76% of total revenue up from 72% in 2014.

Gross margin expansion during the year was significant growth in adjusted EBITDA and non-GAAP earnings per share both of which came in at the high end of the guidance range we laid out at the beginning of the year.

Cash flow performance was robust, we've quadrupled free cash flow year-over-year $244 million in 2015. Most importantly, we achieved all of this even as we continue to invest significantly and innovating the company solutions. I'm very proud of the strong financial results, we delivered for the year. The annual record bookings illustrates two facts. The stability and health of the Allscripts client base and the momentum we are seeing with new clients selecting Allscripts.

Looking first to the new client sales, we added over 730 new client relationships globally, and we are proud that new client bookings doubled in 2015. New client additions expand the continuum care including integrated delivery systems, hospitals, physician practices, payers, life sciences and post-acute providers.

In 2015, we secured seven new Sunrise relationships globally, representing nine new facilities that will run Sunrise Clinical Manager platform. In the ambulatory market, Allscripts physician practice EHR market share grew in 2015, based on survey data of clinical sites compiled by SK&A, a leading market research firm. The results with new clients is substantial, that's only part of the story. We can only succeed, when we ensure Allscripts existing clients are satisfied, invest more with us and spread the news.

Here, the numbers tell the story, even with the great growth in new clients, the majority of Allscripts total bookings are derived from within Allscripts' installed client base. Bookings from existing clients grew in 2015.

During the year, 90% of the top 20 Sunrise clients and 80% of the top TouchWorks clients accounts purchased additional solutions and services from us. This means they contracted for something new and contributed to the booking totals for the year. This represents a broadening and the scope of solutions, provided to these clients and additional footprint, we will support for them.

We are expanding client relationships as health systems by new facilities and as group practices employing more physicians and acquire local practices. This momentum continues into 2016. Earlier this week, we signed a major agreement with one of our large academic medical center clients that significantly expands and extends Allscripts relationship, principally around its use of the Sunrise platform. Across new and existing clients, total ambulatory bookings for software and services grew approximately 30% in 2015, as clients expanded their relationships with us.

Finally, many talk about population health but few do it. In 2015, Allscripts recorded over 21% of revenues from these solutions, making us a market leader in population health management. Allscripts comprehensive solution portfolio is positively impacting patient care and provider's bottom line.

Stepping back, we are proud of these results. We are there – the accumulation of focus and commitment to our client success. I want to express my appreciation to Allscripts associates for their dedication and to clients who have put their trust in us for the long-term.

If you look back three years to the fourth quarter of 2012, Allscripts was in a challenging position. The management team was influx, client confidence had eroded, and financial results were underperforming. At that time, we laid out a four point plan to get the company back to its competitive potential. The plan was to protect and defend the client base, transition the business model to a higher recurring revenue, invest in growth markets and become a leaner, more efficient organization.

We have taken decisive action against each of these to get us to where we are today entering 2016 with significant momentum. Client satisfaction is increasing and we have been recognized by multiple third-party organizations for the robustness of our solutions.

Just this week, Black Book Market Research published its annual healthcare information technology loyalty index. This organization conducts the largest user opinion poll of its kind in healthcare IT. So, it is noteworthy, but even more importantly, takes us a statistically validated approach to conducting their analyses, so results are more reliable. We are very proud that Allscripts had the largest positive job in customer loyalty in the last year, compared with every major vendor in the industry serving hospital clients.

We were ranked number one in client satisfaction for the third year in a row by large hospitals and academic medical centers over 250 beds. Client retention metrics across the base are stable and retention rates have improved significantly compared to the last several years. Recurring revenue is 76% of total revenue and is growing every year, and backlog is at a record level.

Over the 2013 through 2015 timeframe Allscripts invested an aggregate $1.2 billion in the solution portfolio through organic development efforts, acquisitions and strategic investments and growth market opportunities.

Of this total, we invested over $500 million in acquisitions and partnerships, spanning global markets, population health, revenue cycle management and precision medicine to ensure we are positioned with a vision to transform healthcare beyond the basic requirements of electronic health records.

Finally, we made tough, but necessary decisions to become a more nimble and efficient organization. We have reduced annual SG&A spending on an adjusted non-GAAP basis by over $70 million since 2012. In summary, we executed on the plan, put in place three years ago, and it's paying off. We predicted that we would experience significant operating leverage, while generating earnings, EPS and cash flow growth. 2015, is an exclamation point for this commitment.

Over the last few years, we have dramatically improved the effectiveness of the company, integrated our products, and businesses together substantially improved our quality and rankings and created a profitable and growing business, we are poised to grow.

Before Rick discusses the fourth quarter financial results, I want to make a few points on Allscripts' strategic growth priorities for 2016. Allscripts business is enabling healthcare transformation, we have a unique opportunity to accelerate the company's market position with the assets we have in place today.

We will fund R&D investments in 2016 to drive new innovations for Allscripts clients as we play offense in the marketplace. We are committed to an open ecosystem, full data interoperability and added community aware functionality to Sunrise Pro and TouchWorks platforms. This will bring harmonized consumer data from the community into the clinical workflow and result in actionable decision-making at the point of care with zero clicks to impact.

And we will continue to lead the industry in population health via a single platform solution that integrates connectivity, data liquefaction, cohort identification, proactive analytics, care coordination, and patient engagement. We call this platform Care in Motion, it will leverage existing point solutions in a modular integrated platform.

We are first movers in precision medicine and personalized healthcare in the IT industry. We expect to vigorously maintain this leadership position. We see this as significant long-term opportunity and Allscripts is well positioned with a client roster of global medical research leaders, including the National Institutes of Health, the National Cancer Institute, Memorial Sloan-Kettering and the Roswell Park Cancer Institute.

We also possess a vast network of primary care physicians who are critical to mass adoption of newfound medical insights, creating access to the citizens in rural and less populated areas of this country. We have exciting opportunities for 2016 and are focused on the continuing momentum we built in 2015.

And now, I'll turn the call over to Rick to take you through fourth quarter numbers in detail and the financial guidance for 2016. Rick?

Richard J. Poulton - President & Chief Financial Officer

Okay. Thanks, Paul. Good afternoon, everybody. Thanks for joining us today. I want to start by also welcoming Melinda to the Allscripts leadership team. I will continue to work closely with her to ensure smooth transition of responsibilities, and also continuity of dialog with our investors, as well as the analysts.

Paul gave you a great overview of the year, both where we have been and where we are going. So, I'll focus my comments on the fourth quarter results and some guidance for 2016. So, let me start with bookings. Fourth quarter 2015 bookings were $343 million, that's a 41% increase year-over-year and it exceeded our prior corporate record of $327 million, which dates all the way back to the fourth quarter of 2011.

This is the fourth quarter consecutive record total bookings quarter for Allscripts. And as Paul mentioned, we had the strongest international bookings quarter in four years. From a bookings mix perspective, approximately 45% was related to software delivery and 55% was related to client services. I was very pleased that both categories though grew double-digits on a year-over-year basis, both in the fourth quarter, as well as for the full-year. For the quarter, software delivery bookings increased 12%, compared to the fourth quarter of 2014, while services bookings grew 78% on a year-over-year basis.

So, let's take a look at a few key agreements from the fourth quarter, starting with some color on our international success. In the UK, we built on previous quarter's success in-country and took another step forward by penetrating the London market. We sold the first Sunrise system to a major academic teaching center in London and now proudly welcome King's College Hospital Foundation Trust to our Allscripts client family. King's is one of the UK's largest teaching hospitals.

Additionally, we expanded our agreement with the Ministry of Health in Israel, where they will now be using our data aggregation platform dbMotion to connect all healthcare providers across Israel. We're very excited about the collaborative potential of this agreement.

Domestically in the inpatient market, we also had some very nice wins. In December, Tuba City Regional Health Care Corporation selected Sunrise and our Care Director solution over competing offerings, to provide an integrated clinical and revenue cycle management system across a 6,000 square mile area serving the Navajo and Hopi Native American reservations.

Also Northwell Health, which is formally known as North Shore-Long Island Jewish is expanding with us again signing an agreement to implement Sunrise Clinical Manager platform at their Staten Island University Hospital.

Finally, a West Coast Hospital, who had purchased Sunrise Clinical Manager two years ago, signed a long-term managed services agreement with us in the fourth quarter, that's a terrific proof point on client execution.

In the physician market, Concentra, who is a large TouchWorks client selected us to provide hosting services. This comes on the heels of a similar fourth quarter agreement that we had signed with Advocate Health Care. You may recall the Advocate agreement was previewed on our third quarter earnings call. Both Advocate and Concentra also signed long-term extensions to continue use of the TouchWorks platform during fourth quarter, and we believe those are strong endorsements of the platform, as well as client satisfaction.

More broadly, we continue to have success selling add-on services, including managed services, value-based care services, and revenue cycle management services to our physician clients. Population health remains a strong catalyst for us as we continue to bring elements of our Care in Motion platform to the market. All told, more than 25% of bookings in the quarter came from our Care in Motion suite of solutions.

In particular, consumer engagement remains a paramount theme in the market. Catholic Health Initiatives continued to build this relationship with Allscripts by adding FollowMyHealth to their inpatient setting. This follows on the heels of CHI adopting FollowMyHealth for their ambulatory settings a year ago.

Also in the post-acute market, we continue to build on an industry-leading position of 19,000 post-acute facilities that we connect and with more than 12 million in referrals on an annual basis. So, after reflecting all of this fourth quarter sales activity contract backlog ended the year at $3.65 billion, that's a 6% increase on a year-over-year basis.

So, now let me transition to the P&L. Fourth quarter total revenue increased approximately 1% year-over-year, and we saw the same general trend as prior quarters, where we had growing recurring revenue, offset by a decline in non-recurring revenue. Recurring revenue consisting of our subscriptions, recurring transactions as well as support and maintenance, and recurring managed services grew 5.5% year-over-year and it constituted 77% of our total revenue. Recurring managed services revenue grew 19% fourth quarter, largely driven by hosting outsourcing and revenue cycle management services. So, again that's a subset of the overall recurring revenue bucket.

Non-recurring revenue declined 13% compared to the fourth quarter of 2014. Non-recurring revenue was impacted by lower demand for project-based client services, compared with the year ago period and also is impacted by the seasonal impact of the holidays, where we've seen in the past. And what that means is, our clients with the holiday schedule are not willing to or able to work as many hours as we would have another quarters of the year.

In our third quarter call, we indicated that we had expected some softness, but the impact was a bit more than anticipated at that time. All-in our non-recurring revenue totaled $79 million for the quarter and that's just below the $80 million to $90 million quarterly range that we had forecasted.

I'll comment a little more on that range, when I get to our – some commentary on guidance in a little bit here. Longer-term, we would continue to emphasize recurring revenue and our new sales activity and we do that in order to help provide more predictability and buffer what modest volatility we may have in the non-recurring buckets.

Turning to non-GAAP gross margins, we again saw improvement in gross margin, as higher margin software combined with continued solid performance in services to drive our non-GAAP gross margins of 47.3% in the fourth quarter.

Within software delivery, where we posted our highest margin ever at 65.3%, we benefited from a both favorable mix of owned software versus third-party software, as well as hardware, and we also improved our support and maintenance margins. So, while mix can change quarter-to-quarter, we do believe that the support margins are very durable. And looking ahead, we would continue to expect that to post better than historical average margins in this area.

Moving to operating expenses, Allscripts fourth quarter non-GAAP SG&A declined 6% from the year ago period. This result was consistent with our expectations for a slight decline, and we had previewed that in our third quarter call.

In the supplemental data book, we have provided a four-year look at SG&A expense, that illustrates that we've taken out over $70 million of core SG&A spending, that's comparing on an apples-and-apples basis since 2012, which is ahead of the goal that we set out three years ago.

I'm pleased to also say that for the first time in three years, we had zero non-recurring expenses in fourth quarter, which makes our reconciliation from GAAP to non-GAAP financials much cleaner.

Finally, looking at R&D, total gross R&D expenses during the quarter were $63 million, that's a 16% increase year-over-year. And of that, we capitalized $17 million to our balance sheet. As Paul discussed, we are executing multiple programs to innovate new platforms and solutions for our clients. So, as I look ahead to 2016, I would expect gross investment and net income statement impact similar to what we experienced in the fourth quarter.

Continuing down the P&L, adjusted EBITDA as illustrated in table five of our earnings release, with $65 million, that's a 24% increase year-over-year and represents a 19% EBITDA margin for the quarter. This is a strong performance and it illustrates the natural leverage we have in our business off of what is modest revenue growth.

As we discussed last quarter, accounting rules require us for GAAP purposes to apply equity accounting methods to our investment in NantHealth, this resulted in a non-cash charge of $800,000 to GAAP pre-tax earnings in the quarter, as we did last quarter this amount is added back for purposes of calculating adjusted EBITDA non-GAAP net income as well as non-GAAP earnings per share.

Below the operating line, we recorded approximately $3.3 million of non-cash interest expense, this relates to our convertible notes as well as amortization of some debt issuance costs. Again, as is customary these are included in the GAAP interest expense numbers, but excluded from our non-GAAP net income and adjusted EBITDA calculations.

Non-GAAP net income for the quarter totaled $26 million, that's a 51% increase year-over-year and non-GAAP EPS came in at $0.13 for the quarter. It's also worth noting that we now have swung to GAAP profitability both at a net income level as well as on an earnings per share level.

Looking ahead, investors and analysts should continue to assume a non-GAAP tax rate of 35%. We do not foresee Allscripts being a cash taxpayer for the foreseeable future and our reported GAAP tax rate will likely continue to be volatile.

So, while Paul already mentioned this, it is worth mentioning again that cash flow for the quarter was really a stand out. We generated $63 million of free cash flow in the fourth quarter alone, and again that brought the annual total to $144 million for all of 2015.

We would expect to maintain strong cash flow throughout 2016. So, let me wrap up by discussing our annual guidance for 2016. Our initial revenue guidance for 2016 is a range of $1.43 billion to $1.46 billion implying growth of 4% at the midpoint of that range.

Underlying this revenue range is an assumption of growth and recurring revenue of 5% to 7%, and a decline in non-recurring revenue of 2% to 4%. So, while we still expect some modest decline in non-recurring revenue, we are now past the large double-digit declines that we have experienced throughout 2015.

This combined with continued increase to recurring revenue at a run rate similar to what we experienced throughout 2015, should allow overall enterprise revenue to finally lift off, after three years of being relatively flat. The expected modest decline in non-recurring revenue means that for modeling purposes you should probably expect the quarterly range of $75 million to $85 million per quarter, as we go throughout 2016. And I would expect us to be at the lower end of the range in Q1, with higher amounts in Q2 and Q3.

For 2016, we are initiating an adjusted EBITDA range of $265 million to $285 million, that implies a mid-teens growth rate at the middle of that range. And then finally consistent with our comments at the industry conference earlier in January, we're providing a non-GAAP EPS range for 2016 of $0.55 to $0.62, which is a mid-20% earnings per share growth range at the middle of the range.

So with that, I'd like to open it up for questions. And we're happy to start, operator, when you're ready.

Question-and-Answer Session

Operator

Thank you, Rick. At this time, we'll be conducting a question-and-answer session. And our first question comes from the line of Robert Jones from Goldman Sachs. Please proceed with your question, sir.

Robert Patrick Jones - Goldman Sachs & Co.

Great. Thanks for the questions, Paul, Rick, and welcome, Melinda. Bookings, you have no doubt been very strong, over 20% in 2015, and yet you did come in just short of your 2015 annual guidance. And the outlook that you guys are providing today on the top line, around 3% to 5% certainly doesn't seem necessarily indicative of the type of bookings growth that you guys have experienced.

So, I know not a new phenomenon, but now that we have the outlook, I was wondering if maybe you could just talk a little bit about what type of level of bookings, do we really need to see here, to see revenue accelerate?

And Paul, fully appreciate that there is the mix shift going on, between software delivery and client services. But the disparity, I guess, between the really robust bookings growth and the top line seems to be a little bit further than just that mix shift so?

Richard J. Poulton - President & Chief Financial Officer

Well, I think, Bob, I mean, understand the question. I think, which – you can't lose sight of again is what we've been going – again going against all year, which is decline in non-recurring revenue. So, the pace of recognition of revenue is much shorter for items that are typically in the non-recurring buckets, such as upfront license software, or such as upgrade or installation type services.

Those types of activities, the duration of time between booking and revenue recognition are very short, same with hardware. And those would be the items that really drive the bulk of non-recurring revenue and those items translate again to revenue quite quickly, and conversely longer subscription deals, longer managed service contracts, come in ratably over time.

So, it does require a little patience to see the net of that come through, because as we've seen some declines in non-recurring revenue that's clearly dragged down overall enterprise lift, but the bookings are very real, the backlog is grown, we are working on augmenting some of our disclosure about backlog, to give a little more on transparency on how we expect that to turn into revenue over time. And so, as we get toward filing our 10-K, we're going to look to put a little more information out there on that.

Robert Patrick Jones - Goldman Sachs & Co.

Okay. Okay. Got it. That's helpful. And then, I guess, Rick, just on the gross margin, really strong in the quarter, highest you've recorded in some time. Understanding that part of this was due to the drop, the mix shift again. But I'm just curious, if maybe you could talk to us about, how we should be thinking about the progress of gross margins throughout the year? And any potential pushes or pulls that could get us even more expansion than what's baked in?

Richard J. Poulton - President & Chief Financial Officer

Yeah. I think based on the business that we see today Bob, the mix was as good as it gets. I think, this quarter, I actually thought that third quarter and that even got better in the fourth quarter.

So, I think based on the business we're executing today, an enterprise wide margin of cut off 45% to 46% is a good modeling assumption. But then the upside from that is, and we've said this consistently for some time is our services margins are still, we believe, below their intrinsic opportunity, and that is an opportunity to continue to improve as we go out through the year. So, we would expect services margins to progress throughout the year and then be able to bring up that enterprise total.

Robert Patrick Jones - Goldman Sachs & Co.

Got it. That's helpful. Thanks.

Seth R. Frank - Vice President-Investor Relations

Sure. Thank you.

Operator

Our next question comes from the line of George Hill from Deutsche Bank. Please proceed with your question, sir.

George R. Hill - Deutsche Bank Securities, Inc.

Good morning, guys. Welcome Melinda. And Bob Jones I think jumped on a couple of my key questions. Maybe, Paul, I'll just step back...

Paul M. Black - Chief Executive Officer & Director

Hi, George.

George R. Hill - Deutsche Bank Securities, Inc.

Good morning. Good afternoon, guys. I kind of just want to step back and ask kind of the big picture question, piggybacking on what – where Bob was going which is, we've seen a bunch of companies in this space, I guess, over the last couple quarters, post either good bookings numbers, and softer revenue numbers kind of than expectations. And there just seems to be an elongation kind of that bookings to backlog to revenue that we're seeing across this space.

And I guess, Paul, I would just ask – Paul or Rick, whichever one of you guys want to jump on this, I guess, can you comment, is this something that's going on – like is it a contracting issue, that's driving this? Or is it something that we're seeing in the market? I guess, I'm just trying to get a handle on which – what's driving this trend kind of across this space?

Richard J. Poulton - President & Chief Financial Officer

Well, George, I mean, I think it's no secret right that, I mean, what's happening is the progression has been clients bought software and now they buy a much broader solution package. They also don't buy licensed software upfront as much anymore they buy it through subscription agreements.

And so, that's naturally elongating revenue recognition I think for everybody in the industry, certainly that's our case as well. I think there is an upside to that, which is as that revenue is recurring and more of its recurring, we all have much more predictable business models; but that is a consequence, is that revenues going to, I think have a slower pace to recognition.

So, for us, again, I don't want to be overly repetitive, but what I said to Bob, we have seen declines, I mean, look at 2015, we watched non-recurring revenue decline double-digits and that non-recurring revenue is the stuff that always translated from sales to revenue the fastest, okay? So, that would have been again perpetual licenses, hardware, upfront services, project-based services. And you don't have as much as that anymore.

And so the point is, I guess, that the upshot of that is I guess the backlog aging probably has aged a bit, but it hasn't aged radically, George. So, I mean, again, we're working on trying to give a little more transparency to that, but it's not like the average age of backlog has gone from one year to five years or one year to eight years or something like that. It's crept up a little bit in light of all these factors, but it hasn't made a radical shift.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. And then, Rick, maybe my follow-up would be to ask the question the other way then. I guess, as we look out towards the 2016 revenue guidance number, what is the company's level of visibility into that number, and what should we think about what drives the capability for the company to over achieve that figure?

Richard J. Poulton - President & Chief Financial Officer

So, the revenue guidance, I put out there – we have about 85% or so of that in backlog today or at the end of the year, I should say, not today. So, that gives us a pretty good base, the balance of our assumption and guidance has comes from sales activity during the year. But, that's a pretty high rate, it's much higher than it would have been – couple of years ago, if you ask the same question.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. I have more, but I'll hop back in the queue, and let more guys get on. I'll talk to you later, guys.

Paul M. Black - Chief Executive Officer & Director

Thank you.

Seth R. Frank - Vice President-Investor Relations

Sure.

Operator

Our next question comes from the line of Michael Cherny from Evercore ISI. Please proceed with your question.

Michael Cherny - Evercore ISI

Good afternoon, guys. And thanks for the details so far.

Paul M. Black - Chief Executive Officer & Director

Hi, Mike.

Michael Cherny - Evercore ISI

Hey, Paul. So, I want to dive in – Rick, this is going to be your last call as the CFO, and maybe talk a little bit about the margin leverage, as you see on a go forward basis? As you think about the buckets that you've succeeded on, relative to where you want to garner leverage over last year or two years? And then, maybe on a next year basis, where do you think you're kind of tapped out in terms of the most opportunities of leverage? And where do you think you're in a bit of the earlier innings, in terms of being able to right-size the business to the point that you want it to be at?

Richard J. Poulton - President & Chief Financial Officer

Well, look – so Mike, I'd say, here is my thoughts on that. Again, not to sound repetitive, but as we've watched non-recurring revenue go down, some other things that have gone down for instance are hardware, okay? We don't sell anywhere near as much hardware as we once did. That was very low margin stuff. So, that benefited a little bit, that – we've benefited from that kind of mix shift.

And I think there's still, while I said non-recurring revenue is not going to decline or we don't expect it to decline anywhere near at the rate it did in 2015, there's still a little bit of decline we're projecting in 2016 and who knows? I mean, eventually we could let that all go away and stop selling entirely and that would be boost margins, right? But that's in the software – think of that is in the software space, that's potentially another lever if we wanted to, is to continue to stay away from very low margin stuff, if we wanted to, such as hardware.

We've done a good job already I think of improving our mix of owned software relative to third-party software, and that also over – you know if you look back, relative to a few years ago, I think has helped us a little bit in the software space. So, we played that out largely, but there's potentially a little more room to go.

But I would say, in general, the software bucket, which is performing at all-time highs and representative of some of those factors I just discussed is probably largely played itself out.

The area of opportunity is services; I mean services, while we made really good progress from where we started the year to where we ended the year. Those are areas that have tremendous opportunity to continue to improve. And I think we've been fairly outspoken about, you know we expect to get our services margins up into the mid-teens as we progress through 2016. And after that, I believe there's still room to go. I mean, we're not earning anywhere near the intrinsic value of what those services provide. And you can see that by looking at you know what other competitors in the space are earning around that. So, that's opportunity for us.

Michael Cherny - Evercore ISI

Thanks. And then just one quick one, you know, the cash flow profile is really starting to improve. You've pointed out the strong cash flow in the quarter. Any changes to capital deployment priorities? Obviously, you're still carrying a pretty sizable debt load. Is there any desire to maybe bring that down on a near-term basis, in the absence of anything else?

Anything on the buyback, given that, I think you guys, expected your stock probably would be a little higher, given the (35:06) from JPMorgan? Or any other thoughts related to how you plan on deploying some of that cash?

Richard J. Poulton - President & Chief Financial Officer

Yeah. Look, we're very comfortable at our debt levels, so there's no urgency whatsoever to paying that down. And we'll continue to invest smartly in the business, so we'll plow back some money into the business as we see fit. But we're at a free cash flow yield of almost 6% right now. So, if that doesn't change, then I think, it's pretty obvious where we'll start using some of that cash.

Operator

Thank you. Our next question comes from the line of Charles Rhyee from Cowen and Company. Please proceed with your question.

Charles Rhyee - Cowen & Co. LLC

Yeah. Thanks for taking the question, guys. So maybe, Rick, I can ask you – obviously, when we're talking about the system sales that have been declining a lot, can you talk about what you expect maybe for that? And I apologize if I missed that earlier, when we think about 2016, are we expecting that to decline further? Because, if I recall, maybe it was last quarter, you kind talked about we're kind of at a more stable run-rate here. How should we think about that, in respect to the 2016 guidance?

Richard J. Poulton - President & Chief Financial Officer

Yeah. Sure, Charles. So look, I mean system sales is just a subset of non-recurring revenue, right? And again, system sales is largely just a fancy word for hardware sales and upfront license sales. We've made comments already on the hardware and the upfront license, so, I don't want to be repetitive; but in general, the market is not really buying a lot of upfront license anymore, right? So, that's naturally going down. And as we do more remote hosting on behalf of clients, the opportunity to sell hardware naturally comes down as well. So, that's what drives system sales.

But again, the broader theme is around non-recurring revenue, Charles. And as I said earlier, I think from our perspective the good news is, we're done with the large double-digit declines, at least we expect to be done with the large double-digit declines in non-recurring revenue year-over-year. I think there is a little bit of modest decline that we're going to still face in 2016 and that was part of my breaking down the guidance.

Charles Rhyee - Cowen & Co. LLC

Sure.

Richard J. Poulton - President & Chief Financial Officer

Again recurring revenue which is becoming a bigger and bigger piece of the overall pie and has grew pretty steadily at a 5.5% to 6% clip all year long. We don't expect that to change as we look out through 2016. And so the benefit is now without the big declines in non-recurring weighing that down. That's for me, that's how you can – yeah, let's say, easily understand why – where our revenue guidance range comes from, let's put it that way.

Charles Rhyee - Cowen & Co. LLC

Sure, and I appreciate that. I guess, Mike, what I'm asking really is, how much of the solutions are still only sold on a license software basis? Or is everything that you're selling can be sold on a subscription, so in theory system sales could theoretically be zero at some point in the future? Or is there always going to be some level license sales, because some solutions are only sold that way?

Richard J. Poulton - President & Chief Financial Officer

Everything we sell now today, Charles, nothing is only sold on an upfront license basis. So, everything is capable of being sold on a subscription. And for new footprints, new opportunities, that's usually the method of choice for most clients.

So, I can say the only thing that stops me from saying, yes, in theory, it could go to zero someday, is to say that for clients who naturally grow with us, so let's say, a Sunrise client who is expanding or a TouchWorks client who has some expansion that tends to be yet another license sale, because that's the way they bought the first time around.

Charles Rhyee - Cowen & Co. LLC

But if they were a subscription person when they expand, they'll just be added to their subscription then?

Richard J. Poulton - President & Chief Financial Officer

If they started as a subscription, then you're right, they would add as a subscription. But there's a good chunk of our installed base, who didn't start that way.

Charles Rhyee - Cowen & Co. LLC

Right. Okay. Thanks a lot.

Seth R. Frank - Vice President-Investor Relations

You're welcome.

Operator

Our next question comes from the line of Eric Percher from Barclays. Please proceed with your question.

David Ho - Barclays Capital, Inc.

Thanks. This is David Ho on for Eric this afternoon. So my question is around the – it seems like a lot of the bookings in 2015 were – came from large managed services deals. And I was wondering if, one, is that fair? And then two, do you think you need more of those managed services long-term contracts, in order to show bookings growth in 2016?

Paul M. Black - Chief Executive Officer & Director

Yeah, I'd say that there is a lot of, if you will, from mix in our bookings for the year. We had white space where went back in and sold into the Sunrise accounts, emergency rooms, Sunrise record management, ambulatory surgery, and our Sunrise Financial Manager.

So, we had a fair amount of white space sales that constituted the total overall bookings. We had hosting, outsourcing, the new business we got from either hospital expansions that we've talked about or a large IDN was expanding their footprint, because of acquisition of other hospitals. We had the new business of the hospitals and new business for academic medical centers where we sold two in the United Kingdom and a large IDN here in the U.S.

So, I wouldn't characterize it as a large managed services deals, we did a number of them, but we also had a pretty good mix across the board of what we do. And then on the low end of the business, there's just a lot of transactions that occur here because of the number and sheer volume of small group physician practices that are buying additional features, additional functions, additional services from us, and that's a very large transaction-oriented piece of the business that adds up, when you have so many of them out there.

Richard J. Poulton - President & Chief Financial Officer

David, you offered – you asked with your starting premise was fair, I just want to point out, bookings activity is not just about managed services. I mean, as we said, we had in the quarter, 45% of the bookings came from software-related activities, and 55% came from services. And that's not the similar from what you saw year along. So, you have a fairly balanced sales activity going on right now between the two. And again, both of them grew at double-digit rates on a year-over-year basis.

David Ho - Barclays Capital, Inc.

Okay. Thanks. And I guess, my quick follow-up question is sort of around the other client services piece. I think in 2015, we had talked about it being down, due to client fatigued from implementations back in 2013 and 2014. Is that sort of the same assumption that we're holding, as we look towards this coming year?

Richard J. Poulton - President & Chief Financial Officer

Client interest in upgrades is – when you talk about other client services, their interest in upgrades varies a little bit. I think there is generally a theme I think of regulatory fatigue that we see with our clients, but most will do upgrades once a year, possibly twice a year, not every quarter.

So, in general, services volumes are down, because we don't have as much, we have more and more activities being provided on a cloud hosted basis or on a remote hosted basis, and the number of brand new footprints, while we had nice success during the year, number of footprints are just not what they were a few years ago, in terms of installs. So, and I think that's a trend that the whole industry is seeing.

David Ho - Barclays Capital, Inc.

Thanks.

Seth R. Frank - Vice President-Investor Relations

Thank you.

Operator

Our next question comes from the line of Matthew Gillmor from Robert Baird. Please proceed with your question.

Matthew D. Gillmor - Robert W. Baird & Co., Inc. (Broker)

Hey, good afternoon, everyone. Hey, I wanted to ask, there's been a couple of questions on revenues, and I wanted to ask more specifically about 4Q revenues. And Rick, I think you've made some comments around the holiday timing impacting some of the project-based revenues, but can you maybe provide some more details there? Just wanted to understand the dynamics around 4Q more specifically?

Richard J. Poulton - President & Chief Financial Officer

So, again, Matt, the fourth quarter difference relative to the full-year, right, full-year has been a story of non-recurring revenue going down. We've talked about significantly. In the quarter, fourth quarter, there is some seasonality you experienced relative to earlier quarters in the year, just because there simply aren't as many working days during the quarter as there are non-holiday periods.

And so, you don't have as much of an opportunity to have billable time with your teams. So, this year, we've protected margins better than we have in the past, but we – that's just – that's the fourth quarter additional add, if you will, to just the overall story of and we have experienced. And again, I think we've been fairly transparent with that. We expected to have lower non-recurring revenue. I mean, am I missing your question, Matt, other than that?

Operator

Matt has left the queue. And our next question comes from Greg Bolan of Avondale Partners. Please proceed with your question.

Gregory T. Bolan - Avondale Partners LLC

Hey, thanks guys for taking the question. So, my primary question, Rick, and forgive me if I missed this, but so you're talking about service margin improvement. Obviously, that to us also seems like clearly, an upside opportunity for you guys, as you kind of progress towards maybe even getting above the 45% to 46% enterprise-level margin. But how do you get there, is it a function of scale? Can you maybe walk us through maybe a few efforts that you guys maybe have in play that will enable you to get those service margins up, please?

Richard J. Poulton - President & Chief Financial Officer

Yeah, I mean, so some of it is scale for sure. So, areas like hosting will benefit considerably by scale and adding more volumes to it. Some of it is about mix, so as a revenue cycle management services grow and we see the installation upgrades (46:42) services decline a little bit that's actually a positive mix shift. So, that will help as well. So, those are a couple of variables or couple of factors.

Gregory T. Bolan - Avondale Partners LLC

And just real quickly, just from the consolidation of facilities locations within the U.S., you guys are pretty much done at this point, right?

Richard J. Poulton - President & Chief Financial Officer

I would never say we're done Greg, but we – most of the heavy-lifting around getting our overhead costs on our SG&A base, right sized are behind us.

Gregory T. Bolan - Avondale Partners LLC

All right. Great. Thanks, guys.

Paul M. Black - Chief Executive Officer & Director

Thank you.

Seth R. Frank - Vice President-Investor Relations

Next question, please?

Operator

Our next question comes from the line of Garen Sarafian from Citi Research. Please proceed with your question.

Our next question comes from the line of Richard Close from Canaccord Genuity. Please proceed with your question.

Richard Close - Canaccord Genuity Group, Inc.

Great. Thanks for taking the question. Congratulations on a great year and turnaround. Paul, you emphasized momentum continuing into 2016, and I wonder if you could elaborate on that a little bit more? What gives you the confidence there? And then as a follow-up, I think it was from David's question earlier with respect to bookings, should we be expecting bookings growth in 2016 over 2015?

Paul M. Black - Chief Executive Officer & Director

Yeah, I'll start with the momentum. I think that in my comments and just in my day-to-day activities with clients. The type of questions we get today versus what we got three years ago. The type of interactions we're having with them about strategic initiatives that we're going to be working on versus a point problem they might have had, questions about whether or not we're going to make it through the MU2 cycle et cetera. Those are all things were extraordinarily important and very tactical, and we needed to make progress on that and we did.

And that then leads us to position today where as Rick referenced there was a bit of regulatory fatigue with regard to upgrade; the upgrades we did during the course of the year in 2015 were extraordinarily positive. We had a lot of credibly good feedback from our clients around usability about reduction in a number of clicks, about optimization, about new user interface that made the physician's day a lot easier to interact with the system, documentation, where they spend most of their time in a system, was a bunch of cool new features that we put inside of that, to make their lives better.

And this thing we call Fusion, which brings in, not only the local information off their electronic medical record, but it gives them a view of the other community data that are out there, that are specific to that patient that have not yet been reviewed by that caregiver, all of which provides I think a fair amount of momentum to the base, to have an increased confidence with us.

And when people are happier, as I said earlier today, they spread the news and they buy more. And we don't – there is an issue about them moving to some other supplier, which is manifest not only in the conversations I have with them, but in the data as well as the numbers.

And so, those are all things that I feel are – really supply a lot to the momentum. The only thing that I think is extraordinarily important to understand, when you think about where we've come from, as you know, you can be a really, really solid electronic medical record supplier to the marketplace and that's extremely important. But that won't be sufficient in order to be a long-term partner with these people.

They also wanted to have a population health management solution from you, increasingly, they're extremely interested in this precision medicine suite of initiatives that we have ongoing. And they all want to talk about how they're going to connect to their consumer not just engage the patients. All of which we have solutions for, all of which we have innovation around, and all of which are generating additional – good solid strategic dialog in the C suite of these organizations that we interact with.

So, when I think of momentum, I think about the base being covered, the base being happier, the base buying more and then us having spent our research and development dollars and making acquisitions in certain areas that were strategic, being very well-positioned as we look at the 2016 beyond marketplace.

Richard Close - Canaccord Genuity Group, Inc.

And bookings growth in 2016?

Richard J. Poulton - President & Chief Financial Officer

Yes. So Richard, I expect growth in Q1 and our momentum and pipeline, Paul has talked about a few times, feels really good. We have a very – we blew it out of the water in Q4. We had a really strong Q3, so I think it's a little difficult to predict the back half of the year right now, but we do expect the first half of the year to be positive.

Richard Close - Canaccord Genuity Group, Inc.

Thank you.

Seth R. Frank - Vice President-Investor Relations

Thank you.

Operator

Our next question comes from the line of Garen Sarafian from Citi Research. Please proceed with your question.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Hi, guys. Apologies earlier. I'm not sure what happened there. But I guess, at a high level – Paul, you started to touch on this, but could you just give us a sense of just the purchasing environment among providers, as you're heading into 2016? Just to sort of compare it against some of your peers who've also commented on it? And I guess, specifically, also post ICD-10, now with a few months under their belts, are they more or less inclined to invest in further projects on a financial side?

Paul M. Black - Chief Executive Officer & Director

I'm sorry, I didn't understand the second part of your question.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

With the impact of ICD-10 a few months under their belts, as to how that's impacting their purchasing behavior on rev cycle, or anywhere else for that matter?

Paul M. Black - Chief Executive Officer & Director

Yeah. I would say that, the overall marketplace for what I see, and when I'm out there talking in the marketplace is that folks, the C suites are extraordinarily interested in total cost of ownership. They're interested in optimization efforts that need to be working on with them, and they're interested in innovation platform.

So, when I think about those three in combination, I see them being extremely interested in figuring out ways to cut costs on our side, which allows us to have a dialog around perhaps consolidation of platforms that they may have, that are not Allscripts, on consolidation of services they may be doing, that we could be doing a little bit more cost effectively, because of our scale and an innovation agenda that we're going to work on with them for a multitude of years.

The overall spending percent, I'm sensing and seeing that, people have realized that post MU1, MU2, and broad adoption of electronic medical records, and now moving into population health, is leading to a sustained increase in percentage of their revenues that they're spending on IT.

I'm not sensing, or the research that I'm looking at, indicates that they had a blip – or if you will, a bubble in acquisition, and that's going to be over time, that's going to go away. I see that as a permanent change in the way that they do business. It's now completely electronic, and they have to have the systems, they have to have the infrastructure and the people in place to be able to support that completely digital platform that they now all operate on.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Okay. That's useful. And then as a follow-up to that, on international growth, I think in the prepared comments, it was record bookings. But given the macro environment for some of the reasons you saw in two, I guess, what are your expectations for 2016 versus what they were for 2015?

Paul M. Black - Chief Executive Officer & Director

We have a much different profile going into 2016, than we did going into 2015. We have more client success. We have more new business sales. We have a very good brand recognition in multiple countries, because of the delivery there.

We haven't had any projects whether it's been major issues, headlines et cetera. Of the headlines, we're getting that people are getting results and they are getting the outcomes that we both set out to achieve when they bought from us.

And so, most of the progress and most of the news out of each of the organizations and countries we're working in have been positive, including the results that we got out of the country of Israel. So, I see that momentum being carried forward into 2016 and we always expect to grow that business. We always expect that the team that we have in place that there'll be productivity out of the team, that there'll be additional business coming out of there, that we potentially we're not competing for in the 2014 and 2015 timeframe.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you very much.

Seth R. Frank - Vice President-Investor Relations

Thanks for the question.

Operator

Our next question comes from the line of David Larsen from Leerink Partners. Please proceed with your question.

David M. Larsen - Leerink Partners LLC

Hi, can you talk about the King's College win, and also the country of Israel win? Who are you competing with, and what ultimately led them to select Allscripts? Thanks.

Paul M. Black - Chief Executive Officer & Director

Yeah, King's College in London, it's a very competitive marketplace, they actually procure off a vehicle they have, that's been pre-approved and there's certain suppliers that are on that list. The suppliers are some local folks, but it's the other folks that we compete with in the United States, the two that you hear about the most. So, the folks that we competed against, at that large opportunity were a very large set of the normal suspects, if you will. And that's why, another reason why we feel very good about that win.

In Israel, it is a, I think manifestation in multi-year work with that government, with the various hospitals that are there with the payment mechanism that they use in that country, with the retail providers that are there, and the ambulatory suppliers that provide the holistic end-to-end healthcare, from the provider side, the retail side, as well as through the payer.

And so, that's a really, if you will, complex and very comprehensive solution that we're putting in place for those folks that we're extraordinarily proud of. There are some local organizations that we competed with, that we quite frankly don't compete with outside the United States or – excuse me outside of the country of Israel. And then there are some people that are over there that we compete with in every marketplace that we see.

David M. Larsen - Leerink Partners LLC

Okay. Great. Congratulations on those wins. And thanks very much.

Seth R. Frank - Vice President-Investor Relations

Thanks, David.

Operator

Our next question come from the line of Dave Francis from RBC Capital. Please proceed with your question.

Dave Francis - RBC Capital Markets LLC

Good afternoon, guys. Just one quickie, bigger picture, if you look at the population health suite of solutions this year that you're selling, and look to be continuing to develop today, can you just size the market opportunity that you see, relative to the EMR opportunity that you guys have? Like for example, take a Lakeland that you just signed on the enterprise side, would that be a 0.5x, a 3x? What's the revenue opportunity relative to the EHR side? Thanks.

Richard J. Poulton - President & Chief Financial Officer

Dave, I think it – what happens is they tend to get bought modularly. So, you don't see it quite the way you're asking the question yet, but we're really more and more pushing more of a platform approach to that. I think when you put the whole package together, it's probably between a 0.5x and a 0.75x, if you go to the whole platform.

Dave Francis - RBC Capital Markets LLC

Great. Thank you.

Operator

Our next question comes from the line of Sean Wieland from Piper Jaffray. Please proceed with your question.

Sean W. Wieland - Piper Jaffray & Co (Broker)

Hi, thanks. I'm just trying to piece together some of the data points you gave us around the non-recurring revenue range that's going to be around $75 million to $85 million a quarter, versus historical $80 million to $90 million. How much of it is simply not – I think as you said, a number of new footprints, not what they were? Can you give us any insight, as to the reasons behind that forecast?

Richard J. Poulton - President & Chief Financial Officer

So, Sean, I mean, I just want to make sure let's not talk past each other, $80 million to $90 million is a range we put out there a couple of quarters ago to kind of help people with modeling the rest of the year. If you say historically, non-recurring revenues to be considerably larger than that, right?

I mean, if you go back to 2013, 2014, I mean you were averaging kind of more of $100 million a quarter and so that's the trend line we've been fighting against. I think we've talked extensively about why that's the case, why it's changing. And so really the purpose of updating that range is really for folks like yourself who do modeling, but the broader message is just that again glass half-full is I don't – from our perspective is, we're not going to see the kind of year-over-year declines we saw in 2015 and because of that will allow some of the real momentum on the recurring revenue side to finally show through, and bring up enterprise revenue. So, we're good with that. But I'm also telling you I think there maybe a little bit of erosion still to go. And that's the reason why I changed that range to $75 million to $85 million.

Sean W. Wieland - Piper Jaffray & Co (Broker)

I see. Okay. And then a quick one, when you sell a subscription deal, does it fall into software delivery bookings?

Paul M. Black - Chief Executive Officer & Director

Sorry, Sean, you broke up there a little, could you please repeat?

Sean W. Wieland - Piper Jaffray & Co (Broker)

Sorry, when you sell a subscription, does it fall into software delivery bookings?

Paul M. Black - Chief Executive Officer & Director

It gets decomposed, Sean. So, there is typically some services elements that go with it, and those get classified in services and conversely the software piece goes in software.

Sean W. Wieland - Piper Jaffray & Co (Broker)

Okay. Thank you.

Paul M. Black - Chief Executive Officer & Director

Sure.

Operator

Our next question comes from the line of Anthony Vendetti from Maxim Group. Please proceed with your question.

Anthony V. Vendetti - Maxim Group LLC

Sure, thanks. So, the UK has obviously driven some of the bookings number. And I was just wondering if we could talk a little bit about, as we move into 2016, I know you said first half should be up year-over-year, but how much of that do you anticipate, or a rough percentage should be from the UK, or new business? And how much of the bookings number should be from existing clients?

Richard J. Poulton - President & Chief Financial Officer

Well, I mean, let's be clear. The UK, it's been talked about a lot, because we've had some really good recent success, and we continue to believe it's a good market opportunity, but it's not the only international outpost for us at all. In fact, we're expecting good things in Canada this year as well. And also our other big foothold is in Australia, and kind of the Southeast Asia regions around that. So, we expect growth in all of those areas.

And as a result, we expect our international business to continue to be a grower, and contribute to success in our overall bookings, but we haven't disclosed exactly how much comes from international, and we won't start that now. But, the UK is definitely a piece of the story and it feels pretty good.

Anthony V. Vendetti - Maxim Group LLC

Okay.

Richard J. Poulton - President & Chief Financial Officer

I'm sorry, you had a second part of the question. I forgot.

Anthony V. Vendetti - Maxim Group LLC

Yeah. That's okay. Just the last follow-up then is on dbMotion. Just can you talk about how much dbMotion is still driving new business wins, and just in general, a little color around dbMotion?

Richard J. Poulton - President & Chief Financial Officer

DbMotion is a data aggregation platform for us, and we believe not withstanding what lots of people claim in the industry, it's still is differentiated in its capability of how it can aggregate and harmonize data. And it's a big piece of our overall Care in Motion platform.

Anthony V. Vendetti - Maxim Group LLC

Okay. Great. Thanks, guys.

Seth R. Frank - Vice President-Investor Relations

Thanks, Anthony.

Operator

Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please proceed with your question.

Zack W. Sopcak - Morgan Stanley & Co. LLC

Hey, this is Zack for Ricky. Just one quick one on the replacement opportunity, you've got a competitor who's going to be sun-setting in the near-term. Any thoughts on how that impacts the replacement opportunity in 2016, or if that's more of a longer-term opportunity?

Paul M. Black - Chief Executive Officer & Director

Yeah, there is a number of providers in the marketplace who have announced that they're getting out of the current – they're no longer going to be providing R&D investments in, nor they're going to support MU3, both on the ambulatory side as well as the inpatient side. And that's falling short on us if that's an opportunity, where they're either going to move to a parallel product or some successor product inside of that family, that's owned by that supplier or they're going to be force to go to market because of the board's wanting to take a peak at what else is in the marketplace. And we expect to prevail in a number of those opportunities.

We know, as I think everybody does where these are and we know by name and location and zip code where they are. So, our teams are out there, our teams are talking to them and there is a fair amount of activity in that regard.

Zack W. Sopcak - Morgan Stanley & Co. LLC

Okay. Great. Thank you.

Paul M. Black - Chief Executive Officer & Director

You bet.

Operator

Our next question come from the line of Steve Halper from FBR. Please proceed with your question.

Steve P. Halper - FBR Capital Markets & Co.

Hi, just a quick question on cost side. The company has done a great job of taking costs out of the infrastructure. And we heard the comment before that you've never done, but is 2016 sort of the last big year when you get that bump in profitability from the cost save efforts in 2015?

Richard J. Poulton - President & Chief Financial Officer

Well, I mean, let me parse your question, Steve, I mean. Will there be a residual full-year benefit in 2016 from some of the efforts we had in 2015? Absolutely – absolutely, so I again – and if you look at full-year 2015 compared to our outlook for 2016, I would expect – operating margins as well as EBITDA margins will probably go up a couple of 100 basis points.

So, some of that's from continued good management, but a lot of that is just carrying annualizing efforts that have happened. So, that's real, does that mean the party is over and there is no other way to drive out efficiencies, I don't believe that at all.

I think, again, the heavy-lifting on the overhead is done. If you break down cost, you have your kind of SG&A overhead, you have your solutions investment and then you have cost of sales, both the direct labor you have and then a lot of third-party content providers and service providers that you have.

So, we have hit the overhead hard. We've increased our investment and our solutions. We've done I think good job last year of getting our workforce right sized for the level of volumes. And now I think there's an opportunity to kind of focus on that last bucket that I referred to, which is some of our third-party content providers and service providers.

Steve P. Halper - FBR Capital Markets & Co.

So, just to ask it another way, so do you think the magnitude of the margin expansion in subsequent years could be the same? Or will it simply diminish slightly from the 2016 levels?

Richard J. Poulton - President & Chief Financial Officer

Will diminish from the 2016 levels or the expansion diminish?

Steve P. Halper - FBR Capital Markets & Co.

Will the expansion diminish? Right. The goal is always to improve margins, but does that rate start to slow down, because of all the efforts that you've done in the past?

Richard J. Poulton - President & Chief Financial Officer

I don't know, the way I look at it Steve is from 2013 to 2015 on our non-GAAP basis we expanded gross margins 150 basis points and we've gotten nice leverage down the P&L from also taking out overhead.

I think we will continue to – I think we have another 150 basis points of margin improvement at the gross margin level. And I think we have some other costs – we should be able to get leverage off of our SG&A by letting top line grow and not having SG&A grow at the same rate. And so that will all contribute leverage to operating margin and EBITDA margin targets.

Steve P. Halper - FBR Capital Markets & Co.

That's very helpful. Thank you.

Paul M. Black - Chief Executive Officer & Director

Thanks.

Seth R. Frank - Vice President-Investor Relations

Thanks, Steve.

Operator

Our next question comes from the line of Nicholas Jansen from Raymond James. Please proceed with your question.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Hey, guys. My question is on free cash flow conversion, obviously quite strong. Your EBITDA grew about $40 million year-over-year, but free cash flow grew over $100 million. And just wanted to kind of get your sense of should we think about 2016 as a year where that growth slows more towards normalized levels? Or do we have another year, where working capital can be a good guy, and you should get outside free cash flow growth? Thanks.

Richard J. Poulton - President & Chief Financial Officer

Well I'll start by saying, I appreciate you noticing the balance sheet side, we're very proud of managing the balance sheet, like we did in 2015. I think, again, we are predicting EBITDA growth and we've talked in other forms about what our CapEx expectations are. Can we get positive cash flow contribution from balance sheet, we won't stop and we still obviously have a lot of outstanding receivables and things like that. So, we won't stop trying, but I think there is certainly free cash flow growth opportunity that will naturally come off of our earnings growth opportunity.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Thanks, guys.

Seth R. Frank - Vice President-Investor Relations

Thank you.

Operator

Our next question comes from the line of Mohan Naidu from Oppenheimer. Please proceed with your question.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

Thank you very much for squeezing me in. Rick, maybe one quick question for you. Thanks for all the details so far. You talked about project-based work being weak in Q4. Can you give us a little bit more details on what specific details on what you're working on, is it project-based works that are not going to come back to you guys again? Or is this just a seasonally weak quarter for a project-based work?

Richard J. Poulton - President & Chief Financial Officer

No, what we mean by project-based work is again usually installation efforts of new footprints or upgrades for existing clients. I mean that's generally what we're talking about when we say project-based client services. You don't lose those effort. I mean it's not like we lose them to somebody else. So, it's really just about the pace of activity and how much can get done in a certain time period.

Mohan Naidu - Oppenheimer & Co., Inc. (Broker)

All right. Thank you very much.

Richard J. Poulton - President & Chief Financial Officer

You're welcome.

Seth R. Frank - Vice President-Investor Relations

Chris, any more questions? Chris, are you there?

Operator

Yes. I'm here.

Seth R. Frank - Vice President-Investor Relations

Okay. Are there any more questions please?

Operator

There are no further questions at this time. Gene's mic was live, he was not speaking.

Seth R. Frank - Vice President-Investor Relations

Okay. Very good. I'd like to just hand the call back to Paul for concluding comments.

Paul M. Black - Chief Executive Officer & Director

Thank you very much for being on the call this evening. For those of you, who'll be attending, HIMSS, we look forward to welcome you a week from Tuesday at the Allscripts Seventh Annual Financial Town Hall at the Sands Expo Hall at the Venetian Palazzo in Las Vegas on Tuesday March 1, from 6 PM to 7.30 PM Pacific Time.

Rick, I and along with other executives from, some clients will be there, Melinda will be there and we look forward to seeing you. Thank you very much for your time this evening.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your time and participation. Let me disconnect your lines at this time and have a wonderful rest of your day.

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