Allscripts Healthcare Solutions (MDRX) Q2 2018 Results - Earnings Call Transcript

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About: Allscripts Healthcare Solutions, Inc. (MDRX)
by: SA Transcripts

Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) Q2 2018 Earnings Call August 2, 2018 4:30 PM ET

Executives

Stephen Shulstein - Allscripts Healthcare Solutions, Inc.

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Analysts

Allen Lutz - Bank of America Merrill Lynch

Steven Halper - Cantor Fitzgerald Securities

Ross Muken - Evercore ISI

Richard Collamer Close - Canaccord Genuity Group, Inc.

Anne E. Samuel - JPMorgan Securities LLC

Dolph Warburton - Nephron Research LLC

Stephanie J. Demko - Citigroup Global Markets, Inc.

Mark Rosenblum - Morgan Stanley & Co. LLC

Charles Rhyee - Cowen & Co. LLC

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

George Hill - RBC Capital Markets LLC

Operator

Greetings and welcome to the Allscripts' Second Quarter 2018 Earnings 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.

I would now like to turn the conference over to your host, Stephen Shulstein. Thank you. You may begin.

Stephen Shulstein - Allscripts Healthcare Solutions, Inc.

Thank you very much. Good afternoon and welcome to the Allscripts Second Quarter 2018 Earnings Conference Call. Our speakers today are Paul Black, Allscripts' Chief Executive Officer; Rick Poulton, our President; and Dennis Olis, our Chief Financial Officer.

We'll be making a number of forward-looking statements during this presentation and the Q&A part of the call. These statements are based on current expectations and involve a number of risks and uncertainties that could cause our actual results to vary materially.

We undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer our earnings release and SEC filings for more detailed descriptions of the risk factors that may affect our results.

Please reference the GAAP and non-GAAP financial statements as well as the non-GAAP tables in our earnings release and the supplemental workbook that are both available on our Investor Relations website.

And with that, I'm going to hand the call over to Rick Poulton.

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

Okay. Thanks, Stephen. Good afternoon, everybody and thanks for joining our call today. We appreciate your time and your interest in Allscripts. I'm going to cover two key topics today. First, I'll make some summary comments on second quarter performance and highlight some important achievements we saw in the quarter. And then, I'll make a couple of comments and thoughts around our current portfolio.

So ,let's start with the second quarter results. We're pleased with our strong revenue and earnings performance. On a year-over-year basis, we reported 23% growth in GAAP revenue to $526 million, 25% growth in non-GAAP revenue to $536 million and 20% growth in non-GAAP earnings per share to $0.18 a share. Our recurring revenue was 80% of total revenue in the quarter, and this is the third quarter in a row at or above this level. So, it provides us with significant amount of revenue visibility over the near and medium-term and lessens our reliance on in year new bookings.

Speaking of bookings, while we faced tough bookings comps year-over-year, which would have presented a difficult comparison under any circumstances, we were a bit disappointed with this quarter's booking results of $278 million. As you've seen and heard as well from some of our competitors, with no regulatory event forcing buying behavior here in the U.S., the market has moved to ROI-driven demand. And this is an inherently longer sales cycle and more difficult to predict timing.

Additionally, in international markets, budget processes and layers of government approvals also make the timing of deals very difficult to predict. So, we remain very confident in our pipeline of opportunities, but we should continue to expect to see some quarter-to-quarter volatility in bookings. Combined with our record first quarter performance in bookings, our year-to-date numbers are largely in line with our revenue growth expectations for the year.

So, now, let me highlight some client activity during the quarter. In the hospital and health system market, we signed a multi-year deal for full IT outsourcing for a multi-facility hospital in Maine. This client looked to Allscripts to optimize their IT performance and centralized services. This is the first managed services deal with an EIS client since we completed the acquisition. We also signed a five-year deal with Clark Memorial Hospital to extend our business with the addition of Sunrise Surgical and Anesthesia modules. And we believe we're well positioned there to extend the relationship even further.

We saw the benefits of cross-selling or above the EHR solutions and we have a good example at Genesys, which is a 500-doctor practice which is part of Ascension. Genesys invested in our 2bPrecise solution, and the physicians are incredibly excited to be able to leverage this precision medicine technology to determine best practice protocols and deliver the best possible care. We believe this is just scratching the surface of the capabilities we'll be able to provide and deploy, and we are aggressively marketing 2bPrecise inside and outside of our EHR client base.

Turning to the ambulatory market, we also had a number of wins that I'd like to highlight. Grants Pass, an existing TouchWorks EHR client displaced a competitor's practice management solution and adopted Allscripts PM along with our revenue cycle management services. We're very pleased to announce that on June 15, we released a new version of Allscripts PM that delivers on our promise of continued automation and enhanced users' efficiencies. Client feedback has been extremely positive, and this release has allowed Concentra to accelerate their rollout of Allscripts PM to over 530 of their urgent care centers.

Also in the ambulatory market, Practice Fusion has achieved several tens of thousands of subscription sign-ups, and overall has exceeded our expectations. As a reminder, we acquired Practice Fusion in the first quarter, and we moved to the subscription model on June 1.

In our payer and life sciences business, we experienced strong results for our pharma and CRO activity, and we see this trend continuing for the foreseeable future. As our PLS business now approaches 10% of enterprise revenue, we believe we are building critical mass in this high-growth sector of the market. Our strategy to invest in this area is paying off, and we continue to see some very strong results.

Our payer and life sciences team are successfully implementing our direct to biopharma strategy, to address the evolving healthcare ecosystem needs including use of real world data derived from the point-of-care and transforming clinical trial management to accelerate drug development and effectively reduce cost.

On the payer front, we signed a significant deal with Blue Cross Blue Shield Association for two plans, which collectively represent 7.5 million members to more efficiently connect them to their network of physicians at the point of care. We've got a great opportunity to expand this into the broader BCBS plan network.

On the consumer front, we closed the acquisition of HealthGrid in the second quarter. HealthGrid is a very innovative way to reach a very large patient population. They are an award-winning consumer engagement platform and we have a very widely deployed consumer engagement solution through FollowMyHealth. Combining these new capabilities with this existing footprint is exactly what the market needs right now.

If you look at overall patient engagement across the U.S. today, it's been primarily focused on patient portals. But when you dig into patient portals, their adoption rate is fairly low. We see 15% to 20% of the overall population actually using that tool. HealthGrid expands on this and expands on our approach to patient engagement and will communicate with you no matter where you are and no matter what device you're on. If you're at home, they'll use interactive voice solutions. If you're on your cell phone, they'll communicate via your cell phone. We see a meaningful opportunity to engage patients and grow this platform with our FollowMyHealth clients as well as selling it outside of our customer base.

On the international front, we're pleased to announce the new client as Maidstone and Tunbridge Wells NHS Trust selected the Allscripts Sunrise solution as its electronic health record. This is a move that significantly strengthens the company's position in the southeast of England. This Trust, which runs two major hospitals and a specialist cancer service, already uses the Allscripts' Patient Administration System, following a go live last October and now it'll roll out the Sunrise clinical suite in a phased deployment.

And finally, in the post-acute market, Netsmart experienced continued strong new customer acquisitions including more than 40 on its new cloud platform that I mentioned last quarter, called myUnity. Overall growth at Netsmart continues to be driven by new client wins and expanding services to existing clients. Also in the quarter, Netsmart closed the acquisition of the home care and hospice solutions of Change Healthcare. This was a deal we had previewed for you last quarter.

As we discussed at that time, this acquisition now cements Netsmart as a leading provider of solutions for the home care and hospice markets, adding to the leadership position they have long held in behavioral health and human services. So, seizing on the momentum we've created in Netsmart, during the quarter, we took further steps to position ourselves to unlock value for shareholders through monetizing our investment in Netsmart.

After researching and discussing several possible alternatives, we began detailed negotiations with multiple parties on the sale of our interest. We have signed a letter of intent and buyer diligence currently continues. Based on the work accomplished to date, we expect to answer a definitive documentation on the sale during the third quarter. We will continue to update you on any progress on these discussions obviously to the extent we conclude a transaction, we will cease to consolidate Netsmart in our financial results. And so, accordingly, we will update our financial guidance as close timing becomes more apparent.

So, with that, I'll now turn the call back over to Dennis to go through more of the financial details for the quarter.

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Thanks, Rick. As we review this quarter's numbers, please reference the schedules in the earnings release as well as the supplemental data workbook available on the Allscripts' Investor Relations website. For clarity purposes, let me make a few opening remarks before diving into the results.

First, my comments on the income statement will largely focus on non-GAAP metrics unless otherwise stated. Full reconciliations of GAAP and non-GAAP figures are available in the earnings release. Second, effective January 1 of 2018, we adopted the new ASC 606 revenue recognition standard using the modified retrospective approach. The adoption of the new standard resulted in a mid-single digit adjustment to revenue and income and therefore, did not materially impact our second quarter results. As such, all references to our current results are made after applying the new revenue recognition standard. Please review our 10-Q for further disclosures around the new standard.

Third, as a reminder, we closed the Practice Fusion transaction on February 15 of this year and began consolidating the results as of that date. Q2 includes a full quarter contribution from both Practice Fusion and from EIS, which closed back in October of 2017.

Lastly, the divestiture of our OneContent business closed on April 2 of this year and therefore, our Q2 results did not include a financial data from these business unit.

As Rick noted, Q2 bookings totaled $278 million in the quarter. As a result, our backlog now stands at a record $4.8 billion. This reflects both the impact of bookings as well as a substantial number of renewals in the quarter that are not included in the bookings metric.

Turning to the income statement, second quarter non-GAAP revenue totaled $536 million, an increase of $108 million or 25% versus Q2 of 2017. Non-GAAP revenue added $10 million in acquisition-related deferred adjustments in the second quarter of 2018. In the second quarter of 2017, this adjustment totaled $2 million. And therefore, the Q2 2018 GAAP revenue of $526 million, represents a 23% growth versus the second quarter of a year ago.

Netsmart's Q2 non-GAAP revenue totaled $87 million in the quarter, growing 9% year-over-year. EIF contributed non-GAAP revenue of $72 million in the quarter. As a reminder, this excludes OneContent and is in line with our expectations for the EIS business. This also includes the EIS portion of the acquisition-related deferred revenue adjustment of $8.5 million.

Looking at our total revenue split, total recurring revenue grew 31% and non-recurring revenue grew 6% versus the same period a year ago. Thus, our total recurring revenue mix came in at 80%. As discussed in the previous couple of quarters, as we incorporate the ASC 606 revenue recognition changes in our 2018 recording, there will be some volatility in this measurement throughout the year. However, we expect to trend in the high 70% to the low 80% range during 2018.

Looking at revenue results by line item, total software revenue in Q2 increased 24% year-over-year and now totals $341 million. Recurring software revenue consisting of subscriptions, recurring transaction, support and new maintenance, increased 32% year-over-year. A large portion of this growth was driven by the consolidation of the EIS business. In the quarter, non-recurring software revenue decreased 13% year-over-year.

Turning to client services, consolidated non-GAAP revenue grew 28% year-over-year to $194 million in Q2. Recurring service revenue increased 29% year-over-year, driven by revenue cycle services and other multiyear service offerings and the addition of EIS. Similar offerings from Netsmart such as hosting, revenue cycle services, and managed services also contributed to this increase. Allscripts' non-recurring service revenue increased 26% year-over-year, driven primarily by the EIS acquisition.

Moving to non-GAAP gross margin, total gross margin was down a 100 basis points year-over-year, primarily attributed to acquisitions in our core business and at Netsmart. Our gross margin was down 30 sequentially as we removed the high-margin OneContent business from our portfolio. This in part offset some of the additional synergies we are seeing from the EIS acquisition. We still anticipate that we will see gross margin expand sequentially in the back half of the year.

Analyzing margin by component, software gross margin decreased by 60 basis points year-over-year and client services gross margin decreased 80 basis points from the same period last year.

Looking at operating expenses, non-GAAP SG&A totaled $122 million, a 27% increase year-over-year. The non-GAAP SG&A figure excludes transactions related and other expenses. The increase in SG&A is primarily a function of the additional acquired expenses from EIS, Practice Fusion and HealthGrid.

Non-GAAP gross R&D was $99 million up 36% year-over-year, reflecting the additional R&D expenses attributed to acquisitions at Netsmart and Allscripts. Non-GAAP R&D also excludes the transaction related and other expenses.

Our software capitalization rate in the quarter was 31%, within our expectation to be in the low-30% range in 2018. Adjusted EBITDA totaled $97 million, a 9% year-over-year increase. This equates to an 18% adjusted EBITDA margin.

As Rick already noted, as we stated last October when we made the acquisition, the EIS integration efforts will extend through 2018 and we would expect EBITDA margins to trend upward throughout the balance of the year.

Netsmart's adjusted EBITDA is trending in the mid-20% range as a percentage of Allscripts' total reported EBITDA, in line with our expectations and on track with the 2018 guidance range of between $110 million and $120 million.

Looking below the line, total cash interest increased 37% to $22 million, which compares to $16 million from a year ago. The largest contributor to this increase is the financing required to fund the EIS and Practice Fusion acquisitions.

GAAP EPS in the quarter was $0.36 and reflects the gain associated with the OneContent divestiture, less transaction related and other costs. Please note that GAAP results this quarter included transaction-related costs, severance fees and other costs of $45 million.

Finally, excluding non-cash adjustments and transaction-related and other expenses, non-GAAP net income attributed to Allscripts totaled $33 million and total non-GAAP EPS was $0.18 for the quarter.

As a reminder, non-GAAP EPS is calculated net of non-controlling interest to reflect Allscripts ownership portion of the partially owned, controlled and consolidated businesses. Non-GAAP net income attributed to Allscripts Healthcare Solutions grew approximately 20% year-over-year.

We ended the quarter with the principal balance of $694 million in secured debt and $345 million on convertible senior notes, an $85 million decrease in long-term debt quarter-over-quarter. The decrease reflects payments on our senior secured credit facility. Netsmart's total debt, which is non-recourse to Allscripts, but reported for consolidation purposes, totaled $645 million, down slightly quarter-over-quarter due to required repayments.

Turning to cash, Q2 operating cash flow totaled $8 million compared with $34 million a year ago. Q2 free cash flow totaled a negative $37 million after adjusting for capital expenditures, capital software and purchased software. Our free cash flow was negatively impacted in the quarter by one-time acquisition related payment, as well as the timing of certain receivables related to the EIS business as the substantial number of EIS contracts are structured to receive payment in the first and fourth quarters. As we've noted in the past, cash flow will vary from quarter-to-quarter. As we move into the back half of 2018, we expect free cash flow to improve as contractually time collections from the EIS business tend to increase in the fourth quarter.

In the second quarter of this year, we repurchased $44 million of stock. For the first half of the year, we collectively have purchased $102 million of stock or 7.7 million shares at an average price of $13.28. As noted earlier, we announced today that our board approved a new stock repurchase program, authorizing the company to repurchase up to $250 million in common stock through 2020. This program replaces the previous existing programs, which had been announced in 2016.

Also, in the second quarter, we closed the sale of OneContent business to Hyland for $260 million. As a reminder, we acquired this business as part of the EIS acquisition in Q4. As a result of the sale, we realized a gain of $178 million in the quarter.

Turning to our outlook, we are maintaining our 2018 guidance which reflects the first-half performance as well as our outlook for the back half of the year. Specifically, we expect non-GAAP revenue of between $2.15 billion and $2.25 billion, adjusted EBITDA to be between $420 million and $460 million. Excluding Netsmart, adjusted EBITDA will be between $310 million and $340 million. And finally, non-GAAP earnings per share of between $0.72 and $0.82 per diluted share. And finally, as a reminder, we continue to expect an effective tax rate of 27% for the full-year.

And with that, I'll turn it over to Paul.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Thanks, Dennis. Let me begin by commenting on bookings and providing additional context. We continue to generate strong double-digit revenue growth. Our earnings per share in the second quarter of 2018 are the highest they've ever been under this management team. Our backlog stands at a record $4.8 billion.

As we've noted in the past, quarterly bookings can fluctuate. I want to highlight our record quarterly bookings in 12 of the last 14 quarters, the last record being Q1 of 2018. While this quarter's bookings results did not meet our expectations, we remain confident in the strength of our offerings. Allscripts portfolio has tremendous depth and breadth and our formidable software and services offering rivals any in the industry. This includes service solutions that provide significant and durable value to Allscripts clients who operate in a very cost conscious and ROI focused environment.

As we continue to invest in R&D, extend our capabilities and reposition ourselves in the market, I'm confident that we will win our share of new clients going forward. We remain focused on growing our core EHR offerings. We see significant opportunities in cross-selling our solutions to our EIS installed base, increasing our presence in international markets, maintaining our strong momentum in payer and life sciences, and driving adoption of our patient engagement platforms. We continue to invest in R&D for cloud offerings to enable more cost effective solutions for our clients. We believe this will help drive growth going forward.

Our open software and network communities continue to advantage our clients. Last week, the Allscripts Open API platform crossed the 4 billion data share milestone. This reveals just how many Allscripts clients and certified third-party software developers are embracing Open API innovation every day. They're using Open APIs to achieve the functionality they want and need without ripping and replacing what they already have.

Today more than 8,000 registered developers have accounts on Allscripts Developer portal. Over 2,600 clients use these third-party applications. This vibrant community of entrepreneurs and their collective innovation creates a key competitive advantage for Allscripts.

We also have a proven successful track record of identifying, integrating and growing strategic acquisitions which drive substantial value for our company and our shareholders. We have enhanced our core EHR offering with the EIS acquisition. These assets have enabled us to better serve our clients, increasing our scale to further drive our investment in innovation. Our acquisition of HealthGrid strongly positions us in the rapidly growing consumer side of the market. We look forward to cross-selling this platform across the base and to new clients. As Rick mentioned, our investment in the post-acute space through Netsmart has already generated significant value. We look forward to recognizing that value on behalf of our shareholders.

Finally our payer and life sciences business continues to demonstrate strong growth. We are extremely pleased with Practice Fusion performance as they converted their service to a subscription model. Thousands of doctors being convinced to pay for what was previously a free offering demonstrates both the platform's value and the leadership of this seasoned team.

On the data analytics side, we look forward to our unique offerings driving additional value from our pharmaceutical clients. Overall, our acquisitions recent divestiture of OneContent and investments in R&D allow us to create significant value for our clients and shareholders. We will continue to deploy a balanced capital allocation strategy as we will invest capital to drive profitable growth as well as return capital to shareholders.

We remain committed to the future growth opportunities and Allscripts' strategy going forward. I want to thank our associates for their hard work, our clients for their loyalty, and shareholders for your confidence. We expect to reward all three stakeholders with performance.

With that summary, let's open the line for questions.

Operator

Our first question is from Michael Cherny with Bank of America Merrill Lynch. Please proceed.

Allen Lutz - Bank of America Merrill Lynch

Hi. This is Allen Lutz in for Mike. On software delivery bookings, Rick, you mentioned the markets moving to this ROI model, so the sales cycle is longer. Has this intensified over the recent quarter or is it more of the same dynamic we've seen over the past year?

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

I think it's trending. I wouldn't say it was acute part of intensity per se in the quarter, but I think directionally, for the last several quarters, you see more and more ROI focused and I would say with that has come more and more, less predictability on close cycles. We've had more things pushing than we would have expected.

Allen Lutz - Bank of America Merrill Lynch

Got it. And then, a follow-up to that. What does Allscripts see as its highest ROI products? And are there any IT services the company is focusing on expanding where the ROI to hospitals and the physicians is relatively high?

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

We have tremendous ROI benefits in our solutions. So we feel great about that. Software in general is still a great business and our – when we convince a client, they usually get a good reward off of it, because you're automating something that was manual or otherwise had some inverted inefficiencies in it, but it's a good return for us as well on the software side.

So, those are clearly where our best margins are. But we have some service opportunities that also provide very high returns to clients; our rev cycle services for instance have high returns to them. And they don't have to carry software margins, but they carry a pretty good return to us as well. So, we're very, very anxious to continue to grow that.

Allen Lutz - Bank of America Merrill Lynch

Great thank you.

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

Sure.

Operator

Our next question is from George Hill with RBC Capital Markets. Please proceed. George, are you with us? Please check and see if your line is muted. Okay, we'll move out to the next, which is Steven Halper with Cantor Fitzgerald. Please proceed.

Steven Halper - Cantor Fitzgerald Securities

Yeah. Hi. Just a couple of questions on the potential monetization of the Netsmart state. Would there be tax implications on that? And then, ultimately, what are the plans for the proceeds on that?

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

Yeah. So, Steve, I mean, we're progressing through conversations. And so, in that regard, I mean, that's why I brought it up, but obviously we got to get to the end game first. But assuming we got to a deal that was a cash transaction, yeah, it would trigger some tax implications, but between bases we have, some tax shield that we have unutilized, we think it's a fairly efficient transaction from a tax perspective.

So, more to come on amounts when we get to an end game, but it's a fairly efficient transaction for us. And proceeds – proceeds would be – I think we're interested in bringing down our debt levels a little bit and probably share repurchase as well. So...

Steven Halper - Cantor Fitzgerald Securities

And presumably, Rick, all that debt attributed to Netsmart on your balance sheet that would go away?

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Yes.

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

It all goes away. Our balance sheet would look massively different than it does today.

Steven Halper - Cantor Fitzgerald Securities

Okay. Thank you.

Richard J. Poulton - Allscripts Healthcare Solutions, Inc.

Thanks, Steve.

Operator

Our next question is from Ross Muken with Evercore ISI. Please proceed.

Ross Muken - Evercore ISI

Thanks for taking the (00:29:35) question. Just wanted to get a little bit more color on the bookings in the quarter, particularly on the software delivery side. So, it looks like off the back of a strong first quarter, you're tracking pretty much in line for the first half versus last year. Is there any color regarding the level of buying activity that you could provide? And then what you're expecting for the second half relative to the back half last year? Thanks.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

This is Paul. There's a number of decent size or large transactions that are out there that we continue to go after that we continue to work with over the course of the next, I'll say, four quarters. And those things are the things that take, at times, longer to process or get through. So, there's a fair number of sizable transactions that we would expect to close over the course of the next, I'll just call it, four quarters versus the rest of the year. But, I'm pleased with that pipeline of opportunity that sits out there.

There's also a fair number of cross-sell opportunities both EIS solutions into the Allscripts space, as well as Allscripts solutions into the EIS space. So, as an example, there's a lot of large multi-hospital organizations that don't have our Care in Motion solutions that are interested in that. And conversely, there are some specific departmental solutions that we have with the EIS acquisition that are traditional Allscripts Sunrise clients would be interested in. The strength of the performance continues with the payer life sciences component and the strength that we're seeing in the ambulatory marketplace also has been very robust.

And lastly, I'll just say, parenthetically that the Sunrise new business opportunities that we're working on as well as some Sunrise movements, if you will, from an existing client to additional Sunrise footprint, probably is the largest, if you will, suite of opportunities that we've been staring at for quite a while. Those aren't close, but just when I look at what the pipeline looks like, that creates a fair amount of encouragement for us to continue to do what we did today, which is reaffirm guidance.

Ross Muken - Evercore ISI

Got it. Appreciate the color.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

You bet.

Operator

Our next question is from Richard Close with Canaccord Genuity. Please proceed.

Richard Collamer Close - Canaccord Genuity Group, Inc.

You hit (00:32:08) on the life sciences and the activity there, I think you said 10% and you said enterprise. So, is that 10% of overall revenue? And then, I was wondering if you could just drill down into some of those products, elaborate a little exactly what you guys are selling there, what seems to be going well? And then, how big of a business can that area be for you guys going forward?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

So, Richard, the – so 10%, yeah, enterprise meant company wide. So, that's the answer to that question. What are we bringing? I mean, we fundamentally offer the following value proposition to these clients. For life science companies or CROs, we are using the longitudinal clinical dataset that we've captured over a long period of time and that dataset is quite helpful to them in doing some of their follow-on testing that they have to do or follow-on trials that they have to do. There's a whole number of uses for some of that clinical data information. We also can help them more efficiently recruit patients for trials that they're running. So, think of it as – that's the primary for the pharma CRO set.

And then, on the payer side, what you're doing, the payers have a lot of inefficiencies today in trying to connect to the clinical point of care and we can help eliminate a lot of those inefficiencies which obviously saves them a lot of money. So, that shows up in several different products that we actually productize to, but that's the core value proposition that we bring to them.

Richard Collamer Close - Canaccord Genuity Group, Inc.

So, as a follow up to that, is that area experiencing any of the delays that the provider side hospital and ambulatory side is experiencing now?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

I think the financial situation of those end market customers is different than providers and allows them to make decisions in shorter time periods.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Great. Thank you.

Operator

Our next question is from Anne Samuel with JPMorgan. Please proceed.

Anne E. Samuel - JPMorgan Securities LLC

Great. Thanks for taking my question. I was hoping maybe you could speak a little bit to the competitive environment, some of your competitors have spoken to heightened competition. Just wondering, are you seeing anything new or different in the marketplace?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

I wouldn't say anything new or different. I mean, we, I think, have been talking before anybody in the industry about how the market here in the U.S. certainly for electronic health records and revenue cycle systems is what I think you would all consider to be a mature market and mature markets create higher levels of competitive intensity. That's not necessarily the case for some of the above the market – above the EHR opportunities and certainly not the case in international markets right now. So, for those of us who have access to those markets, I think it lessens some of that, but yeah, if you're in the business of just electronic health records and PM systems, that's a pretty competitive market right now.

Anne E. Samuel - JPMorgan Securities LLC

Okay, great. Thanks. And then, you spoke about a lack of regulatory events out of Washington. What do you think is necessary to catalyze industry growth?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Well, the Washington environment may continue to dictate new requirements at some point. It's just saying right now, we're in a little bit of a lull. So, I don't think you should walk away thinking that nothing else will come out of the regulatory world. But, well catalyzed growth is – I mean, look, in the end of the day, I think our – what we believe we have to offer to the provider base is a way for them to help reduce their costs, either our software tools help them become more efficient or our services tend to be lower costs and they can do it for themselves. And so, as providers continue to struggle with more and more financial pressures, we actually think our value proposition gets stronger and stronger. But that said, there takes them longer and longer to kind of think through their alternatives and make decisions sometimes.

Anne E. Samuel - JPMorgan Securities LLC

Great. Thanks very much.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Sure.

Operator

Our next question is from Eric Percher with Nephron Research. Please proceed.

Dolph Warburton - Nephron Research LLC

Hi. This is Dolph on for Eric. Thank you for taking our questions. As we look for the Q3, I think we're looking to – I think you're lapping some strong software revenues from last years. And so, two questions. Like one, how should we view the organic growth going into Q3? And two, from a total growth perspective, do you continue to see that the attrition in the EIS business has bottomed out? Thank you.

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Yeah. This is Dennis, I'll take that. So again, we don't provide specific guidance on a quarterly basis, but what I can do is help provide some clarity in Q2. So, we've already provided you some information to help you get to an organic growth number, right. We've given you the Netsmart revenue and we've given you the EIS revenues for the quarter. The only major other piece that you would need to back into an organic growth number is the Practice Fusion revenue number, which the acquired Practice Fusion revenue is in the mid-teens in the second quarter of the year.

So, if you adjust for those components, our organic growth in the quarter would be approximately 4% versus the same period a year ago, absent the impact of acquisitions. So again, that's how I look at Q2. When we look at the second half of the year, I think you could do the same type of math for the full year relative to the guidance that we provided. We think that as we said last quarter, and I think it's consistent again this quarter that the EIS revenue, the number that I spoke of, the $72 million in the quarter I think will be representative of what we would expect to get over the second half of the year.

Dolph Warburton - Nephron Research LLC

Great. Thank you.

Operator

Our next question is from Stephanie Demko with Citi. Please proceed.

Stephanie J. Demko - Citigroup Global Markets, Inc.

Hey, guys. Thank you for taking my questions.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Thank you.

Stephanie J. Demko - Citigroup Global Markets, Inc.

So, the first one I noticed is, when we asked you about the uses of the cash for Netsmart, M&A was noticeably missing. Does this kind of mark a bit of a shift in your uses of cash strategy or is that just not an interest in buying a large sized acquisition?

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

No. I mean, look, I mean M&A has never been our strategy. Our strategy is when we find targets that we think help achieve – we can get synergies from either by giving us greater scale or leverage our distribution footprint, that's what we've usually jumped on. And so, that's driven some of the activity you've seen over the last six months, but it's not indicative of the M&A as a core part of our strategy.

That said, we'll continue – nothing will change with regard to us looking to continue to build a vibrant franchise for the long-term. So, if we see something we like, we'll buy it. This – clearly, a transaction like this, if we get it done and completed, we'll reload the balance sheet and we'll have plenty of power to do what we want to do.

Stephanie J. Demko - Citigroup Global Markets, Inc.

All right. Good to hear. Good to hear on that. And then, just a follow-up on the organic growth question you had before, the 4% organic growth is a pretty meaningful pick up from kind of your recent rate. Is that – is it safe to assume that that is a healthy level of forward top-line organic growth or are there any one-timers in the quarter to call out?

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Yeah. We're pleased with the 4%. We think that's a good number in Q2. In terms of going forward, we're going obviously as Paul mentioned, there's opportunities to grow that number. At this point, we're not providing any additional guidance over and above what we provided in terms of our annual guidance.

Stephanie J. Demko - Citigroup Global Markets, Inc.

All right. Understood. Thank you taking my questions.

Dennis M. Olis - Allscripts Healthcare Solutions, Inc.

Thanks, Stephanie.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Thanks, Stephanie.

Operator

Our next question is from Ricky Goldwasser with Morgan Stanley. Please proceed.

Mark Rosenblum - Morgan Stanley & Co. LLC

Hey, guys. This is Mark on for Ricky. I just had a question on just the general market environment. So, you've seen a little bit of a slowdown in demand. Should we think about this as a new normal or is there going to be a point where kind of the booking softness laps over the next year or two?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Well, let's just be clear what we've said. What we've said is, it's an ROI driven demand, not regulatory. And as a result, it's a little less predictable on sales cycles and timing. So, that's what we're saying. And we've never been into giving guidance on bookings. And so, we won't start that now, but I think what you should take away is, we feel good about our pipeline and we feel good about our solutions that we're offering, but it's a changing demand environment which is a little less predictable than it used to be.

Mark Rosenblum - Morgan Stanley & Co. LLC

Got you. Okay. That's helpful. And is there any specific pockets? Is it more on the ambulatory side, more on the hospital side, just any color?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

I'd say the hospital side is probably the least predictable at this point in terms – because sales cycles tend to be longer there.

Mark Rosenblum - Morgan Stanley & Co. LLC

Okay. Thanks, guys. I appreciate it.

Operator

Our next question is from Charles Rhyee with Cowen and Company. Please proceed.

Charles Rhyee - Cowen & Co. LLC

Yeah. Hey. Thanks for taking the question. I just wanted to follow up more on Netsmart here and I understand you're saying you want to monetize – unlock value for shareholders here, but it seems like if I recall correctly, over the last several quarters, the post-acute space has been a great area of growth. Obviously, a lot of care is moving outside the four walls of hospitals and the alternate sites care seems to be where a lot of volume is going to. Can you talk about sort of the thought process maybe of not acquiring the rest of Netsmart, is there something about that that was not attractive to you, maybe you can just explain a little bit more about sort of the thinking behind it? Thanks.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Charles, we entered into the ownership structure we have today, with all of the beliefs that you stated at the beginning, that it was a good space, it was going to grow faster, et cetera. And two-plus years later, we're happy to sit back and watch how we've created tremendous value off of that intuition. So, we feel good about it. From the beginning, we set up a ownership structure that was not sustainable for the long term. It meant we were either going to be a seller or a buyer ultimately of the rest of that. And so, what our shareholders are clearly telling us today is they don't put a lot of value on our ownership in that today, based on where our stock is.

And you're probably pretty familiar with what's happening at some of the post-acute assets right now which are trading at very high numbers. And so, we think it's in the best interest of our shareholders to let somebody who values this more own it and will reward our shareholders with the benefits of that. It's really been more of a financial asset than a strategic asset for us and I think it's the right thing for us to do.

Charles Rhyee - Cowen & Co. LLC

All right. That's helpful. So, then when we think about and just to follow-up someone else question, the earlier question about sort of the M&A strategy then going forward, is – does it still make sense to move further into adjacencies where care is going? How should we think about your strategy then going forward now that you'll sort of clear up the balance sheet here and have sort of clear off the balance sheet here and have more capital deployed going forward? Thanks.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Look, it continues to make sense to leverage the strategic assets we have for value. And so, our assets, our solutions, our footprint, our distribution network and we take our brand as well and we'll continue to leverage them in different ways for more value. And I'm sure there will be some more acquisition behavior in the future, but that's not what's triggering what we're telling you today about Netsmart. And that's again not a strategy in and of itself, that's something that we'll use to augment our broader strategy. So, we'll keep talking to you how we're going to position the company as we go forward, but it's incumbent on all of us in the industry to find opportunities to go beyond just being an EHR provider. We want to be a full suite healthcare (00:46:09) company.

Charles Rhyee - Cowen & Co. LLC

Great. I appreciate the comments. Thanks a lot.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

All right. Thank you.

Operator

Our next question is from Sandy Draper with SunTrust. Please proceed.

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

Thanks very much. Just want to follow-up maybe on Paul, some of your comments. I wasn't quite clear now, I was jumping a little bit late about the some of the activity around Sunrise being at a higher level. I just wanted to sort of flesh that out a little bit and understand what sort of – what's driving that is that really with opportunity within existing Sunrise customers to expand or was that potential new footprint? I missed some of that and it sounded interesting. Thanks.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Yeah. Thanks, Sandy. It's a little bit of the both. In that, we have, just going through the forecast meetings that we've been through and tracking some new clients, so these would be – will new logos, new acquisition of folks that are interested in us where we are in contract negotiation or some advanced state of work with them. And there is a large number of them, one of the highest that we've been looking at for a while, it's not 3x what we've been doing in the past, but it feels comfortable. Again, when you think about what that means to the forecast, what it means to the full year component that that keys the business drives to our overall guidance that makes you feel comfortable.

There's also a fair number, actually even a larger number of EIS clients that are looking at Sunrise, which is a nice additional benefit of that base, that we were probably not necessarily planning on, you expect it just from a – and from an executive management standpoint, but that was not baked into any of the projections that we had when we bought the business, that with some of those clients we're going to be moving from where they are today to Sunrise, and we're seeing a pretty nice uptick from those folks.

And just so you know when we do that, it's typically the playbook which is Sunrise, it's hosting, it's managed services, in some cases it's a fair amount of outsourcing. So those deals, if you will, are pretty decent in size, and those will also be long-term engagements.

Sandy Y. Draper - SunTrust Robinson Humphrey, Inc.

Got it. Appreciate that. Thanks, Paul.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Yeah. Thanks for the question, Anne.

Operator

Our next question is from George Hill with RBC Capital Markets. Please proceed.

George Hill - RBC Capital Markets LLC

Hey, guys. I appreciate you taking the question. I guess, Paul and Rick, can you talk about the opportunity that's been created by some of the instability at some of your competitors, you had kind of one competitor in the sale process, a couple have got, a guy having a re-platforming, a guy having regulatory issue, I guess are they – do you feel like those are providing attractive sales opportunities, or are those client proving stickier than you expected?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Little bit of both, George. I mean, yes, it's providing opportunities. I don't know if you've got to hear all of our prepared remarks, but I talked about us knocking out a PM client at one of the companies you're referring to. And that's indicative of what we think is some good new turf to go after, because you're right, there is differing degrees of chaos going on at several of our competitors. So, I think, it does create an opportunity. but I mean, it's not just like a day at the spot to switch out your IT solutions, so it takes a little bit of work too.

George Hill - RBC Capital Markets LLC

Okay. And then, maybe – I don't know if that came up earlier on the call. I was also bouncing around the like, churn within Allscripts, I guess can you talk a little bit about client stability and what you guys are seeing there?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Yeah. Adding on to what Rick just said, the appetite for people to go make a switch is typically driven by the fact that you're not performing well for them or in some cases they got acquired by somebody else. So, our overall, if you will, hygiene on that topic, George is pretty good. And we're pleased with that. The multi-year investment we've made in electronic medical records, whether it's Pro, TouchWorks or Sunrise, it's created a bit of a mote around some reasons why historically people would leave.

We still continue to spend a lot of money on R&D to show them the future roadmap and the reasons why they should stay with Allscripts. So, we're giving them lots and lots of reasons to continue to believe in us. We think quite frankly, this cleanup of the balance sheet on the Netsmart thing will actually interestingly create a little bit of the momentum with regard to that's been on new business side, somewhat at times a concern or a question mark just because of the overall debt when unfortunately people roll everything up and not give us credit from the non-recourse nature of what that actually represented. So, all in, combined with your prior question, what's going on with the other guys, you don't get in a mature market. A lot of times, this much instability. So, it's up to our guides to take full advantage of that and make sure that we're out having their proper conversations with people that would drive new logos.

George Hill - RBC Capital Markets LLC

Okay. I appreciate the color. Thanks.

Paul M. Black - Allscripts Healthcare Solutions, Inc.

Thanks for the call.

Operator

Our next question is from Richard Close's line with Canaccord Genuity. Please proceed.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Great, thanks for the follow-up. Just back on the life sciences, having to beat 10%, what has that grown from, I guess, maybe in the 2017? And what do you think the total addressable market can be in that life sciences area and payers?

Paul M. Black - Allscripts Healthcare Solutions, Inc.

So, Richard, I'm not going to say what it's doing year over year, but let's just say, in our tenure as running the company, it's probably fourfold what it was when we got here. So, it's gone up nicely. Certainly, the addition of Practice Fusion has accelerated some of that. So if I didn't give the year-over-year numbers they would be significant growth, but overall, it's grown very nicely organically and with that acquisition.

The answer to your second part of the question is, the answer these markets are huge, payers and life science companies and CROs spend a ton of money, trying to do trials and follow-up trial work and trying to connect to the point of care and communicate effectively with their providers that are in their networks in the case of payers. So, these are very large markets.

Richard Collamer Close - Canaccord Genuity Group, Inc.

Thanks.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back over to Stephen for closing remarks.

Stephen Shulstein - Allscripts Healthcare Solutions, Inc.

Thank you. As a reminder, we've made a number of forward-looking statements during this call. These statements include, but aren't limited to our outlook related to non-GAAP revenue, adjusted EBITDA, and non-GAAP EPS, as well as statements related to growth outside of our core businesses and in our international footprint, the timing of the integration of businesses recently acquired by us and the anticipated sale of our ownership in the Netsmart joint venture including our ability to enter into and complete the transaction and the expected timing and use of proceeds related to the transaction.

Thanks everyone for joining and have a great evening.

Operator

This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.