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Allscripts Healthcare Solutions (NASDAQ:MDRX)

Q3 2012 Earnings Call

November 08, 2012 4:30 pm ET

Executives

Seth Frank - Vice President of Investor Relations

Glen E. Tullman - Chief Executive Officer and Director

Richard J. Poulton - Chief Financial Officer

W. David Morgan - Senior Vice President of Finance

Lee A. Shapiro - President and Corporate Secretary

Analysts

Charles Rhyee - Cowen and Company, LLC, Research Division

Andrew O'Hara

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

Glen J. Santangelo - Crédit Suisse AG, Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

George Hill - Citigroup Inc, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Zachary William Sopcak - Morgan Stanley, Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Operator

Good afternoon. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Seth Frank, Vice President of Investor Relations, you may begin your conference.

Seth Frank

Thanks, Anna. This is Seth Frank, Vice President of Investor Relations with Allscripts. Thanks, everyone, for joining us today. On the call are Glen Tullman, our Chief Executive Officer; Lee Shapiro, our President; Rick Poulton, our new Chief Financial Officer; and Dave Morgan, our Interim Chief Financial Officer. Before we begin, I'll read the Safe Harbor statement.

This presentation will contain forward-looking statements within the meaning of the Federal Securities laws. Statements regarding future events and developments, the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.

These forward-looking statements are subject to a number of risks and uncertainties, including our ability to achieve the strategic benefit of the merger with Eclipsys and other factors outlined from time to time in our most recent -- or on Form 10-K, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

And now with that behind us, I'd like to turn the call over to Allscripts' CEO, Glen Tullman.

Glen E. Tullman

Thank you, Seth. Good afternoon. Thank you for joining us today on our third quarter 2012 earnings call. We hope all of you, as well as your family and loved ones impacted by Hurricane Sandy, are recovering from this devastating event. For our part, we have been working closely with our clients to help them deal with the impact of the storm, enabling them to continue providing care to their patients. I want to acknowledge the efforts of our team members who worked with -- who worked to help our clients even if they encountered serious challenges of their own at home.

Today, I'll start with some brief remarks regarding our third quarter results. I will then update you on the progress we have made in solutions development and client experience. And before taking your questions, I will comment briefly on the strategic alternatives process.

Turning to the third quarter. Bookings came in at $161.9 million. Our results were impacted for 2 reasons: First, clients' delayed decisions in the quarter due to speculation about Allscripts' future corporate autonomy; and second, clients who continued to delay purchase decisions as they wait for new product releases.

I do want to highlight a few important new contracts across our solutions portfolio in Q3. We signed one new Sunrise client, Appalachian Health System, a 3-hospital system in North Carolina. This was a competitive opportunity and resulted in the displacement of a legacy system vendor. In terms of other notable agreements in Q3, we signed a new care management contract with Orlando Health and added a new enterprise EHR relationship with Hoag Medical Foundation in California. We also expanded important relationships with several clients, including Dignity Health, Summit Medical Group and Catholic Health Initiatives. And we saw improvements quarter-over-quarter in Performance Management solutions, including EPSi and Sunrise Clinical Analytics as health systems continue to focus on preparing for the shift to value-based care.

Mid-market ambulatory sales of our professional EHR also were in line with our expectations. The message to take away is despite all of the noise, we continue to compete and sell in the ambulatory, acute and post-acute segments of our business, and we remain increasingly competitive for new opportunities, as well as selling into our client base. Relative to our client base, maintenance revenue increased close to 5% year-over-year demonstrating strong retention and stability.

Turning to health care -- the Healthcare IT market. Our view is that industry demand will continue to accelerate, especially now that the uncertainty around Obamacare is gone. We expect to shift to value-based payments and away from fee-for-service to continue. To effectuate this change, providers of all sizes will increasingly move to accept both financial and health care quality risk for the care they deliver. At a minimum, providers need robust data capture and systems to drive care coordination and population health management. Further, regulatory changes such as Meaningful Use and ICD-10 will drive growth in Practice Management and revenue cycle solutions. These forces will support continued long-term industry transformation. In addition, managing chronic disease states is a burden on health care. Experts systems will be required to manage care of these populations more efficiently, and new entrants on the retail front will increasingly assume this burden.

For Allscripts, our open platform, robust clinical solutions, new revenue cycle management platform and care coordination tools that connect across for continuum of care will continue to be key to driving this industry transformation. Our Application Developer Program is also having increasing success, leveraging our open architecture to lay the foundation for an ecosystem of innovation beyond Allscripts' walls, opening health care for innovation from our clients and from outside third parties, much as Apple has done with its App Store. We currently have 35 partners and are adding more, all of whom are developing exciting new applications. In response to an applications challenge issued 30 days ago, we've already received 72 submissions from developers and clients.

I'm also pleased to report that across our portfolio, we are delivering on time the solutions development commitments we made back in the first quarter. All of our EHR upgrade releases, as well as Sunrise Financial Manager, our new revenue cycle management solution and our native integration technology, ADX 1.5, are currently or will be generally available this quarter, consistent with our prior expectations. These products are all ICD-10 compliant and includes significant new features and functionality. This marks the largest and the most ambitious new release cycle in Allscripts' history, and we are ready to go as we head into 2013.

Let me briefly review the status of the portfolio. Enterprise Electronic Health Record 11.4 became generally available in September. We believe this is the highest performing, most stable version of the enterprise ever released, a view that has been confirmed by our clients. We anticipate Sunrise Clinical Manager version 6.0 to be generally available this month with enhanced performance features. Sunrise Financial Manager will also be generally available this month. In addition to integrating clinical and financial applications, SFM offers unique visual workflow tools giving organizations and end-users significant flexibility to configure the system for their workflow.

With the release of SFM, we will have in the market a fully integrated single database solution for hospitals and physician offices. As many of you have heard, our native integration capability, ADX 1.5, is currently live at Weston Hospital in Illinois with several others coming online soon. And last week, we released the latest version of professional EHR 12, our solution for mid and smaller independent practices. It is ICD-10-compliant and features the latest version of Wand, our native iPad mobility application. With Wand, clients have access to a fully functional mobile Electronic Health Record, with clinical documentation, order entry and charge capture. We believe mobile is a game changer for a physician workflow. As is -- as in our intuitive -- as is our intuitive easy-to-learn user interface. Wand has close to 7,000 users today who have processed hundreds of thousands of patient encounters since February. A critical area for future -- for the future is care coordination, a key requirement for ACOs. Our solution, Allscripts' Care Director, a SaaS offering, will enable organizations to share information and manage patients across all care venues to achieve high-quality outcomes. We are targeting general availability for this solution in early 2013.

While we've been hard at work upgrading our current portfolio and developing new products and solutions, we've also been focused on improving the client experience in the industry's largest customer base, a key metric for continued strong retention. One measure of our progress came from a recent HIMSS analytic study that interviewed organizations who recently upgraded to either Sunrise Clinical Manager or Enterprise EHR. The results showed that clients reported a significantly improved upgrade experience. Perhaps more important, these clients, when asked their likelihood to recommend Allscripts, scored us at a 9.3 out of 10. So to sum up, while there were market distractions that impacted this quarter's financial performance, we continued to make solid progress in moving the business forward.

I would now like to introduce Allscripts' new CFO, Rick Poulton. Rick joined us October 29 from AAR Corporation, a New York Stock Exchange listed company, where he served as Chief Financial Officer since 2007. Rick brings a strong record of strategic financial management and delivering results. We're excited to have him on the team. Rick?

Richard J. Poulton

Thanks, Glen, for the kind words, and thank you for the opportunity to say hello. I'm very happy to join the Allscripts team in what is a very exciting time for the company. The Healthcare IT industry and its power to enable transformational change in both the economics and quality of health care delivery is very appealing to me. And Allscripts' vision and long-term strategy to be a leader in this industry made it very compelling for me to come here.

As Glen has just catalogued, the company's product portfolio is poised to take a big step forward, and I expect to be a driving force inside the company to maximize the value of this portfolio for the benefit of our shareholders, our customers and our employees.

Given that I just joined the company following the close of the quarter, I'm going to let Dave Morgan walk you through the third quarter financials. I will be available however, for the Q&A session of the call and look forward to working with you in the future. Dave?

W. David Morgan

Thank you, Glen and Rick. Before I discuss the results, please review the GAAP and non-GAAP financial tables in today's press release and the accompanying explanations to assist you in evaluating and reconciling the financial metrics we will discuss on this call. I'm going to focus my comments today on specific areas in the quarter to help you understand the results and put them in proper context.

Third quarter bookings of $161.9 million declined approximately 17% from the second quarter and 39% versus the third quarter of 2011. This decline in bookings is attributable to several factors. As Glen has indicated, market distractions associated with rumors about potential strategic alternatives had a negative impact in our ability to close certain business in the third quarter. Specifically, I'd like to highlight several key things that drove bookings results in the quarter. First, sales to new clients in the acute and mid- to high-end ambulatory space were down sequentially. This decrease is due to a combination of lower enterprise ambulatory activity than in recent quarters, lower international business compared to Q1 and Q2 where we added new SCM accounts in the U.K. and sequentially lower domestic acute business, which reflects fewer net new SCM deals compared to prior quarters. Small office physician sales were impacted by anticipation of changes related to our MyWay offering. We have since provided a clear plan to migrate clients to our Professional Suite solution. We expect a strong level of migration in light of our compelling no-cost offer.

Sales into our acute and mid- to high-end ambulatory client base continue to modestly recover from the low point we experienced in the first quarter. Finally, we were pleased with the continued strength in sales of our care management and Performance Management solution as health systems continue to focus on preparing for the inevitable shift to risk management, payment for value and population health management.

From a mix perspective, software bookings were a lower percentage of total bookings in Q3 as compared to Q2 and historical levels. Software-as-a-Service arrangements remained relatively constant to Q2, and as a percentage of total bookings, continue to track higher compared to 2011 levels.

Backlog totaled $2.83 billion, essentially flat with the second quarter. Our backlog break down as follows: System sales backlog was approximately $111 million, down from $122 million in Q2. System sales backlog declined primarily due to lower level of enterprise system sales in the quarter. Professional Services backlog was approximately $395 million, up from $381 million in Q2. Maintenance revenue backlog was $860 million, up approximately $10 million versus the second quarter. Maintenance backlog will fluctuate quarter-to-quarter based from the timing of planned activations and renewals.

Finally, we ended the quarter with transaction processing and other backlog of approximately $1.46 billion, down from $1.48 billion in Q2. This backlog will fluctuate quarter-to-quarter based on the amount of outsourcing renewals or new outsourcing sales activity.

Turning to income statement specifics. Non-GAAP revenue was down slightly sequentially, as well as year-over-year, driven largely by a decline in system sales and Professional Services. The decline in system sales was attributable to both software and hardware revenue in the quarter when compared with prior periods and was generally a result of the bookings result we've already discussed.

Professional Services revenue declined versus the prior year based on a lower level of upgrade activity, as well as few newer system implementation. Maintenance revenue increased versus the prior quarter and year, reflecting continued go-live activity and client renewals. Overall, client retention trends continue to remain stable.

Transaction processing and other revenue was flat sequentially, a relatively typical pattern given the recurring nature of these businesses. Approximately 72% of the revenue in Q3 was recurrent in nature and increased from 69% in the second quarter. Notwithstanding the lower mix of software revenue this quarter, corporate gross margin expanded 90 basis points, driven by improved margins within our recurring revenue line, mainly maintenance, as well as transaction processing, specifically SaaS operations and outsourcing.

System sales gross margins remain significantly below prior year levels due to lower software revenue and higher capitalized software amortization. This amortization, which flows in the system cost of sales line, was largely unchanged in Q3 at $8.6 million but was $2.8 million higher over the prior year. Professional Services margins declined due partially to advanced preparations for upcoming product releases.

Turning to expenses. Non-GAAP operating expenses were flat compared with Q2. Reductions in R&D gross spending, as well as G&A cost in the quarter were offset by higher selling and marketing costs. Breaking down key expenses: Gross research and development spend totaled $45.8 million, an 11% increase year-over-year; capitalized software totaled $11.6 million or 25% of gross R&D in the quarter, down from Q2 levels. Non-GAAP operating margin was flat at 13.8% versus the second quarter.

Moving below the operating line, we have revised our effective tax rate for the year downward to 29% from our prior view of 37%. The primary driver of this change is a higher proportion of profit being derived from international jurisdiction, which are taxed at lower rates than domestic income. Thus, our effective tax rate of 15% in the quarter on a non-GAAP basis reflecting a quarterly catch-up adjustment to align to our new effective tax rate for the year. On this basis, utilizing a 15% non-GAAP rate, non-GAAP net income was $39.4 million or $0.23 per diluted share after excluding certain amount, including stock-based compensation, acquisition-related amortization and certain nonrecurring items.

Cash flow from operating activities totaled approximately $31 million. During the quarter, we repaid approximately $29 million of our outstanding debt obligations. We ended the quarter with cash and marketable securities of $95.4 million.

Finally, as stated in our press release, we have determined that in light of the decision to evaluate strategic alternatives, which Glen will discuss in a moment, we are withdrawing our 2012 annual guidance.

I will now turn the call back to Glen.

Glen E. Tullman

Thanks, Dave, and thanks again for your great service as interim CFO. There's one other important topic I'd like to cover today. As you saw from the release that we issued earlier today, we confirm that in light of ongoing interest expressed in the company by third parties, Allscripts is evaluating strategic alternatives. While we don't plan to provide additional detail beyond what is in our press release or take questions on the topic, I will say that regardless of the outcome, Allscripts' primary focus is and will continue to be serving our clients and delivering world-class solutions to our clients and the many new prospects who need to position their organizations for the future of health care and want to do so with innovative tools in an open platform. That's something we'll continue to develop and deliver.

So let me thank you again for joining us today. And with that, I'll turn it over to the operator so we can begin the Q&A session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Charles Rhyee.

Charles Rhyee - Cowen and Company, LLC, Research Division

[indiscernible] questions here. Glen, just really touching on the bookings and, Dave, maybe to some of your comments here, you gave a lot of details on where the miss came from. Can you -- relative to the second quarter, can you give us a sense on, was there more coming from the acute side versus the ambulatory? Could you give us a sense on the split? And then secondly, a lot of the more physician-oriented players have all talked about a softness in the market stemming more from macro as there's been less sort of emphasis by physicians to really move forward with buying EHR. Is that something you're also seeing because you seem to kind of indicate that as more product-specific for you on people waiting for new releases and stuff?

Glen E. Tullman

Yes, I'll cover both of them, and then we'll see if Dave would like to comment. The relative split is pretty much the same as the second quarter. Dave can comment more on that. That said, I will tell you that in light of uncertainty, some of the large Sunrise deals tend to push because people are making a 10-year commitment, and they have a big focus on making sure they understand what direction the company is headed in and the like. So we're continuing to see strong competitive positioning and vis-à-vis the hospital decisions that are being made in the acute side. Typically, it's 3 organizations that are being invited to these deals. And we think we're well positioned once we get past the noise. Relative to the market, we don't see a slowdown. I know others have talked about it. We do see some folks waiting for us because they're saying we're not going to upgrade now and then upgrade later to get Meaningful Use 2 or ICD-10, so there have been some delays waiting for our latest versions, which are all now starting to hit. As we mentioned, they're either GA -- will be GA in the fourth quarter or there'll be GA in the first quarter. So again, we see, as I said, the most ambitious product upgrade on the development cycle in the company's history, and we expect that to pay dividends in the future.

Charles Rhyee - Cowen and Company, LLC, Research Division

Glen, you're saying that people are waiting for these new releases. Are these existing clients or are these potential new clients?

Glen E. Tullman

Yes, I think when I -- I thinks that's consistent with what we said in the past, and those would be existing clients. Relative to new clients, generally, what we would be installing for most new clients is going to be the new releases anyway. So this is really a function of upgrading. That problem is starting to go away as these hit GA, as we just discussed.

Charles Rhyee - Cowen and Company, LLC, Research Division

So you're saying you're not seeing any necessary slowdown from activity from those people net new clients looking at Allscripts on ambulatory side?

Glen E. Tullman

We haven't seen it, no. I don't think we're seeing a slowdown in the market.

Operator

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

Andrew O'Hara

Andy O'Hara in for Ryan this afternoon. I was wondering if you guys can maybe break out what you think the proportion of weakness in the quarter was from client delays from the potential sale of the company versus potentially clients waiting for new product releases?

W. David Morgan

As I kind of went through in my prepared remarks, where we saw from a client base perspective, the acute and kind of what we call the mid- to high-end ambulatory base, that continued to see a modest recovery quarter-over-quarter. So from a client base perspective, we are seeing some modest recovery, but we're still kind of phasing the phenomena that Glen talked about relative to some of these new releases.

Andrew O'Hara

Okay. That is helpful. And then can you just talk about -- a little bit about the reaction from some of your customers to the MyWay announcement?

Glen E. Tullman

Yes, this is Glen. I think the reaction has generally been pretty positive. We -- what we did with MyWay was we offered people an opportunity to upgrade to the Professional Electronic Health Record suite. And given the strength of the professional product, along with the Wand mobility, what they've told us is that is, in many cases, more desirable than what they have. So that's a free upgrade process that we've offered to clients. That said, if clients want to continue to use MyWay, we've made that option available to them as well. So I think the way we handled it was appreciated by most clients. There's no question that certain clients who just finished training. If you just finished training on a new product, you're not nearly excited even if it's a better product of upgrading to the next version, having just finished training. The nice thing is they don't have to. They can get usage out of that product for a period of time and then when they're ready, upgrade. So I think it's been generally pretty well received.

Andrew O'Hara

Just a real quick follow-up, how large is the customer base on that product?

Glen E. Tullman

I don't think we've actually sized the customer base, but what I would say is it's in the thousands.

Lee A. Shapiro

And just one quick addition here. I'm reading from an e-mail, this is Lee, from one of the customers who just went through the process. And they were talking about our team and saying that, "The team that came out to visit, they are both wonderful, the trainer and demonstration of pro, they were able to demonstrate to me that Allscripts' Professional is really a better solution than MyWay." So hopefully that closes that off.

Operator

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

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

Glen, can you talk about the pent-up demand for the integrated Sunrise Clinical revenue cycle solutions?

Glen E. Tullman

Sure. Basically, what we've seen is that there is significant demand both within the base and outside the base for SFM or Sunrise Financial Manager. One, it is integrated. But I think most important, if you look at the industry, there hasn't been -- it's been years since a new financial and revenue cycle management system has been developed. And the one that was developed most recently, frankly, have pretty significant challenges with it. So people have a great expectation. Sunrise Financial Manager, in its design has taken account of both the needs of ACOs and value-based management in health care. It's ICD-10 compliant. And most important, what we talked about is the ability to use what we call visual workflow. And that allows people to configure the financial process in a way that suits their ACO. And frankly, they may have to configure it differently depending on whether it's an ACO claim, whether it's a cash claim, whether it's a different payer. No one really gives them that flexibility and capability. So we think this system is not only a me too. This offers very substantial new capability to the industry, and we're very excited about it.

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

And then maybe just as a follow-on, not to be repetitive here, but we've heard about some snafus with a vendor's acute revenue cycle solution integrating with physician practices, and I was wondering if that might be part of what's creating some opportunities for SFM.

Glen E. Tullman

Well, there's no question that if you step outside of what I think one of your counterparts referred to as the Big 3, the 3 typical vendors that are being considered, there are a number of challenges with some of our competitors out there that open up opportunities for Allscripts. That said, it's been incumbent on us to, one, make sure that we execute and the HIMSS analytic survey I think demonstrates that we are, in fact, executing today well on the upgrades and the new product installs. And number 2, we've had to get these products to market, and they ought to be ICD-10-ready, Meaningful Use 2-compliant, 1- and 2-compliant, and bring some of these great -- some of the great new advantages to market. So for example, you heard Lee talk about Professional. If you look at Professional with mobility, I think mobility is a game changer. And when somebody can pick up an iPad and something like 60% of all physicians now have iPads, the training level goes down. The intuitiveness of the user interface goes up. So they're up and using it faster, it's more flexible. They can involve the patient. And so this kind of -- I mean, I think we're at a turning point between the open architecture, the interoperability and the new mobility platform. I think things are going to change. So you've got some old systems out there that are harder to connect and harder to upgrade, and you've got a slew of new technologies starting to hit the market. That's when whole sectors change, I think that's our opportunity.

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

And then on Professional, Glen, have you guys chosen a patient portal vendor to collaborate for Stage 2, or is that something you guys are trying to build out on your own?

Glen E. Tullman

Well again we have a solution that we work with and that's Intuit. It's a partner with us. But I'll be very clear, part of being open is to make sure that we can collaborate with a variety of different players out there. So someone has chosen a different platform. Our salespeople don't love it, but we're happy to work with them. But that said, we have a solution. It's Meaningful Use Stage 2-ready, and that's the one we're going forward with our client base.

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

Okay, great. Just last one, just with several of these newer products being GA-ed, I mean, obviously this month, but is there any way probably guys could possibly talk about the trend of bookings in October, the month of October? I figure I might try.

Glen E. Tullman

Yes, I could -- no, I really can't. So -- but I think the try was admirable.

Operator

Your next question comes from the line of Glen Santangelo.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Just a few quick ones. You talked about some of your competitors outside of the Big 3 having some challenges. Could you give us an update maybe on what you see with respect to the displacement or replacement market, if you will, as we sort of evolve through stage 2 on the Acute Care side?

Glen E. Tullman

Well, I think it's -- what I would say is that we've seen -- if I go alphabetically, Allscripts, Cerner and Epic are very strong players and strong competitors. And outside of that base, I think there's a lot of folks who are looking around and evaluating. And I continue to believe that there's going to be changes even within the base, and I think you'll see that for some Epic customers and for some Cerner customers, for some Allscripts customers, but by and large, those folks who've made an investment are going to optimize that investment. I think others, especially in cases where someone says you have to rip out our system to upgrade, at that point, people say, well, if we're going to have to go through this enormous rip out and replace, maybe we should look at alternative systems. Second, there have been folks who haven't made the commitment, whether it be to mobility, whether it be to an open platform, whether it simply be to a go-forward strategy that makes sense vis-à-vis value-based health care and ACOs and care coordination, and that's causing people to look hard at the market. So I think you're going to see, again, continued growth and change out in that area.

Glen J. Santangelo - Crédit Suisse AG, Research Division

And, Dave, I may have missed this in your prepared remarks, but I was kind of curious with respect to this quarter's bookings, how much of that came from existing customers versus new customers?

W. David Morgan

It was approximately -- about probably 60-40, 40 being from new.

Glen J. Santangelo - Crédit Suisse AG, Research Division

40 being from new. And then, Glen, just my last question, and I'll jump off. It kind of seems like the company finally is where it wanted to be with respect to Sunrise 6.0 or the integration Software Financial Manager. Given that they're all going to be generally available this month, and it seems like there's some pent-up demand for these new solution sets. Why is now the right time to be exploring strategic alternatives, particularly with the stock down almost 50% in the last year, like, why now?

Glen E. Tullman

Yes, first of all, I appreciate you acknowledging what we believe, and that is with this very substantial investment that we made in the product base and not only bringing it up to speed but really putting the company in the leadership position relative to the Open platform and mobility and care coordination, we do think the company is very well positioned. And I give Cliff Meltzer and his team in solutions development a lot of credit for enormous amount of work that's going on. Now relative to strategic alternatives, as we indicated, I think very clearly that there's been ongoing interest expressed in Allscripts by third parties. And the company and the Board has an obligation to listen, to understand and then to evaluate when people bring forward strategic alternatives, so that's what I'd say.

Operator

Your next question comes from the line of Jamie Stockton of Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess, Glen, maybe the first one is when you talk about the distraction around the strategic alternatives and the MyWay transition. It seems like both of those hit either like on the last day of the third quarter or the first week of the fourth quarter. And so when we think about the impact of that, should we be thinking about it more of a fourth quarter phenomenon versus a third quarter phenomenon?

Glen E. Tullman

Well, I'd say 2 things. One, I occasionally read the analysts reports, and I think they've been talking about this for a long time. And frankly, our clients read the analyst reports as well. And so since the stock price went down, a lot of people outside the company have believed that the company was undervalued. That caused a lot of speculation to occur. What happened on the last day of the quarter is I believe Forbes came out -- or I'm sorry, Bloomberg came out with some detail about a rumored strategic process with a lot of specifics that the company hasn't confirmed in any way, but that drove even more concern among the customer base. But it was already out there. Relative to MyWay, the only thing I'd say is as we began that process, we were careful in terms of not accelerating any of the sales at the end of the quarter. Now what I would say is that, overall, there were a number of agreements that were -- they basically said, look based on this news, we want to talk to your senior team, we want some assurances that frankly, we couldn't really give them. So I think some of that pushed forward. And our view is that we're not -- we don't believe any of that was lost, but we do believe that some of that will probably sit until this process comes to a close.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay, and then maybe just one other question. Obviously, system sales have been under pressure. Is there any discussion internally about looking for ways to cut costs to try to improve the profitability, or is this essentially a situation where you're saying, all right, let's wait until the new products come out, and see what kind of reception we get in the marketplace before we take any actions like that?

Glen E. Tullman

Well, I think the company is always evaluating ways to either cut cost to deliver more efficiently, and so I would never want to step away from that. I want our folks to think that we're anything but thrifty. That's the way we've always run the business and will continue to run the business. So we'll look at that. Our sense is that there continue to be opportunities within the business for cost savings, but that's not the primary strategy on a go-forward basis. This is about growing the business.

Operator

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

George Hill - Citigroup Inc, Research Division

Just 2, Glen. Number one I jumped in on the call a little late so I don't know if you touched on this. I guess, one of your -- another company has basically talked about seeing lengthening sales cycles in the low and mid-end of the ambulatory market, I was wondering if Allscripts is the same, as long as there's an impact?

Glen E. Tullman

Yes, George, we kind of covered it, but I'm happy to just touch on it again. We haven't really seen that. We see a consistent demand for the products, and we see that across the sectors. That said, we have seen 2 issues that have impacted our sales specifically. One was related to the noise in the market, the rumors, that have been out there, and the second one is some of the clients have said, we want to wait until the new products hit rather than upgrading on a standard cycle or buying more. We'd like to make sure that we're getting the new GA products that are just starting to hit in the fourth quarter and some have already gone GA. So that's been what we attribute the slowdown and the impact to sales in the quarter 2.

George Hill - Citigroup Inc, Research Division

Okay. And then maybe a quick follow-up to Glen's question. You talked about reading analysts' reports every once in a while. I wrote a while ago that as you guys had a lot of repair work to do on the product, it might have made sense for the company to be a private entity and not do this work in public view, with all the new products that are getting ready to be GA-ed. And with the feeling that the company might be turning the corner from an operational and product development perspective, I guess, can you comment on why you would continue to evaluate strategic alternatives when the company and shareholders might be getting close to being in a position to realize value from all the work that you've put in?

Glen E. Tullman

Yes, I think -- well, first of all, what I'd say is that when products are first going GA, and we still have work to do and there's more work to do, but really, the evaluation of strategic alternatives come from the fact that there is a significant amount of interest based on the current valuation of the company. And the Board has an obligation to evaluate that and understand that and understand from a strategic standpoint those alternatives. That doesn't mean that we'll do anything, that means that we've got to evaluate, and that's the process that's underway.

Operator

Your next question comes from the line of Dave Windley of Jefferies.

David H. Windley - Jefferies & Company, Inc., Research Division

So on your MyWay to Professional, have you established bogeys or targets of the percentage of MyWay clients that will shift over to Professional under this upgrade plan that you have?

Glen E. Tullman

Yes, we expect the vast majority to switch over. That doesn't mean they'll all do it next quarter, but over a period of time. We've given them time that they can get Meaningful Use to -- to kind of double use those words, Meaningful Use out of their investment in MyWay. And then when they are ready, when the customer is ready, they can then switch over to the Professional platform, but that's a free offer. And so we expect and we've already seen many of them signing up. Lee, any other thoughts you have on that?

Lee A. Shapiro

This program will run through October 2013.

Glen E. Tullman

Yes, so again, as Lee mentioned, October 2013 is the -- where the free offer is there. That means they get signed up for that, and we expect that most will do so.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay. And kind of different version of the earlier question, in regard to the products that are going GA here in the fourth quarter, can you give us a sense of how much you primed the pump -- how much kind of you expect bookings to lift in the fourth quarter as a result of that? I mean, given your cycle time here, it's about 45 days or maybe less than that, how much can bookings reflect the GA on several of these products that quickly?

Glen E. Tullman

Well I'll only say a few things. Number one, part of the challenge is we've got multiple things going on. So it's not a clean answer because you've got a lot of noise in the market. So some people are sitting on their hands waiting right now until they see the outcome to the extent there is any outcome of the strategic alternatives process that we just announced, so that's one thing to say. The second thing is that part of our GA process now is we get the products out to a few critical early adopters based upon some time. So we make sure when the product hits, that they are high quality, that they don't have bugs in them, and we can go forward. And lastly, in terms of priming the pump, I wouldn't want to try to guess when folks are going to adopt. One of the challenges right now is to the extent they're using one of our products, they know they have a solid upgrade path, then we'll work with them to plan when it fits into their cycle. They just want to know the products are there, that they're ICD-10-ready, that they're Meaningful Use 2-ready, and that gives them a level of comfort. It also allows us to balance how many of those clients hit and do that in a managed way. So but I don't think that I would want to project in the fourth quarter.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay, Glen, and then last question so behind these products that are going GA, how would you describe your readiness or your progress against analytics overlays, data sharing capabilities, things like that, behind these products relative to your competition?

Glen E. Tullman

Well I think this is a big focus for us whether it be analytics, whether it be care coordination, whether it be interoperability, connectivity and mobility. All of those are -- will absorb higher and higher percentage of our R&D budget, which continues to grow. And we think that we will have significant advantage. Some of our competitors are locked into architectures that don't allow for the kind of innovation that we can bring. And with our open ecosystem that we're creating, with all the third parties starting to develop on that platform, we think we can extend significant competitive advantage as those folks developed for us. So that's really the model. One, we'll internally shift more dollars to those 4 innovation areas. And second, the number of folks who are out there, innovating like -- innovating in those areas is substantial will be especially well positioned to take advantage of that innovation.

Operator

Your next question comes from the line of Ricky Goldwasser of Morgan Stanley.

Zachary William Sopcak - Morgan Stanley, Research Division

This is Zach Sopcak in for Ricky. And I just wanted to ask another question about the bookings. And looking back at last quarter, you mentioned your expectations for the second half of the year was flattish bookings. I'm wondering looking now retrospectively, would you -- when you were giving that commentary, were you expecting it to pick up actually when you started having products getting to GA? Or did the, I guess, amount of the impact from clients waiting for products reaching GA exceed your expectations?

W. David Morgan

What we communicated previously is that, and this is really coming out of the -- initially coming out of our Q1 call, that we had expected essentially bookings to remain consistent with the Q1 levels, which was about $194 million, $195 million through the rest of the year. Given that a lot of these product offerings, Sunrise Clinical Manager, Sunrise Financial Manager, the latest version of Enterprise were all either end of Q3, end of Q4 in terms of GA. That was something that we factored in when we were looking at some of those original thoughts on the year.

Zachary William Sopcak - Morgan Stanley, Research Division

Okay. And could it be possible to get any more color on the tax rate changes that you made? And I know you stated that more of the -- you expect more sales becoming internationally. Can you give any more color as to why that's changed and what's driving that?

Glen E. Tullman

Well, as you look at your results in the third quarter and you look at the relative outcome of our bookings in the third quarter, as we kind of look at our numbers for the rest of the year, when you make your initial tax rate estimates, you can make an estimate of where you think your income is going to come from, whether it be domestic or international. And just as a result of the trends that we're seeing, there's going to be a greater proportion of our earnings coming from our international markets. And since that -- they're at lower tax rates, you have to adjust for that. So it's really just something that has been emerging coming out of Q3.

Operator

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

Sean W. Wieland - Piper Jaffray Companies, Research Division

So can you connect the dots for me between your statement of evaluating strategic alternatives and pulling guidance? I'm not sure I understand what one has to do with the other?

Glen E. Tullman

Well, I mean, obviously, as we are going through looking at various strategic alternatives and the various processes that potentially are involved in that, we felt that it was prudent to withdraw our guidance and kind of let that process run its course.

W. David Morgan

Sean, I think that when you look at the impact that these kind of reports and discussions have on the selling process, it adds a level of uncertainty that frankly makes it very difficult to stand behind the standard ways that we give guidance. And so to the extent that, that process continues, that there's continued rumors and leaks and things like that, and what the company says, all those impact our ability to deliver on guidance. So with that uncertainty, our Board and the management team concluded that the best thing to do at this point, while this is underway, was to withdraw guidance.

Sean W. Wieland - Piper Jaffray Companies, Research Division

All right. So my follow-up then is, you say that the bookings are weak on the rumors that you're evaluating these strategic alternatives, which you've clearly just confirmed, so how do you expect that to turn around?

Glen E. Tullman

Well, I think first of all, I didn't say they were weak, but I think what we've said is they've been impacted. In fact, given some of the noise, you could argue that they're strong relative to the questions about the company out there because especially as people are making long-term decisions, they'd like to know the impact. As an example we had an outsourcing deal recently and what they said is because you're going through this process, we desperately want to do business with you, but we want a 1-year provision to exit the agreement written into the agreement. And that means that from a bookings standpoint, while we recognize something like $3 million in bookings, we would have normally recognized $7 million in bookings, but we couldn't take the rest of that because of a simple provision in the agreement. So that's the kind of stuff that gets in the way of our ability to do that. In terms of what will turn this around, we believe that to the extent the Board concludes that we should move forward, and that information is given to the market or we decide not to move forward, as the market stabilizes relative to that news, then you have a clean, unencumbered selling environment to go forward. That happens at the same time that all of these new and upgraded products are out there in the market. And so we expect that there'll be good results once we get the noise out of the market.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Okay. Could you tell us if you think that this is going to be the low watermark on bookings?

Glen E. Tullman

I didn't want to speculate on what it is. And again, part of the reason that we withdrew guidance was based on what gets announced, when it gets announced and if there's any announcement, all of those have a very material impact on whether people want to make an agreement or not.

Sean W. Wieland - Piper Jaffray Companies, Research Division

All right. And I'll just try one more question. Can you tell us how many physicians today are using a currently marketed product from a -- on the PM side as well as the EHR side?

Glen E. Tullman

I don't think -- we haven't disclosed that. I mean, it's not a way we track it per se and report on it, so I wouldn't want to start now.

Well, again, I just want to thank everybody for joining us on the call, and we'll continue to stay focused. I appreciate those of you who have acknowledged the significant progress that we've made on the portfolio. We'll continue to drive that forward. And we do believe we're building something very unique in the industry with an open platform and with the kind of products that the industry wants. So we're excited about that, and we appreciate you joining us on the call today. Thanks very much.

Operator

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

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