Veradigm Inc (MDRX) 2011 Q3 法說會逐字稿

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Q3 2011 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Please also limit your questions to one question and a follow-up. Mr. Seth Frank, Vice President of Investor Relations, you may begin your call.

Thank you, Rob. Good afternoon. This is Seth Frank, Allscripts Vice of President Investor Relations. On the call today are Glen Tullman, our Chief Executive Officer; Bill Davis, our Chief Financial Officer; and Steve Shute, our Executive Vice President of Sales.

Before we begin the call, let me briefly read the Safe Harbor statement. This presentation will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events and developments, the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates, or projections relating to the future are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties, including our ability to achieve the strategic benefits of the merger with Eclipsys and other factors outlined from time to time in our most recent transition report on Form 10-KT, our earnings announcements, and other reports we file with the Securities and Exchange Commission. These are available at 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. Now, I would like to turn the call over to Glen Tullman, Chief Executive Officer of Allscripts.

Thanks, Seth, and welcome to our third quarter 2011 earnings call. In the next few minutes, I will review our results, discuss what we are seeing in the market and why we are winning, and then turn it over to Bill Davis to provide more color on the numbers. So let's go ahead and get started with a brief review of our financial results. Bookings were very strong in the quarter at $267 million, a 34% increase over the third quarter of 2010. That level of growth is indicative of strong demand in performance across all of our segments. Notably, this is a record bookings figure, something we are obviously very pleased with.

Turning to revenue, our non-GAAP revenue was approximately $371 million, reflecting 13% growth over the third quarter of 2010 and an acceleration from the second quarter. We have made impressive progress on the upgrade front, while also continuing to bring new clients online. Our non-GAAP net income was approximately $47 million, which equals $0.25 per share, a 32% increase in diluted earnings per share over the third quarter of 2010. Bill will get into the details in a few minutes, but overall I'm very pleased with our financial results and believe this was a great quarter for Allscripts.

Moreover, it is a great market to be in. As you all know, while healthcare is highly complex, information technology has now taken center stage as a significant solution to the challenges facing healthcare. Relative to what we see driving the market, regulatory influences continue to be front and center. While meaningful use is on everyone's mind today, attention is beginning to shift to the required adoption of ICD-10 in 2013. Another influential factor is the significant revision to reimbursement underway at the federal level, fostering the move to a value-based system of care.

As an example, the Centers for Medicare and Medicaid services better known as CMS, published the final rule for accountable care organizations in October. Our clients need solutions like ours to shift from fee-for-service to fee-for- value. You can't get paid for quality outcomes unless you can capture, communicate, measure and share patient-centric information. And that is the essence of what we do at Allscripts.

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

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

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

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

And last but not least, Flagler Hospital is a key win with an outstanding organization that HealthGrades named one of America's top 50 hospitals in 2011. We beat Cerner and Epic at Flagler for two reasons. First, because Sunrise Clinical Manager delivers the insights providers need to generate positive health outcomes. And second, because Flagler like our open strategy, which will connect the hospital to community physicians, whether they use Allscripts or choose another EHR vendor.

We are also seeing strong support from our existing Sunrise clients, as they continue to invest in additional Allscripts solutions. One that I want to specifically highlight is Sunrise EPSI, our performance management solution, which brings together all the major components of financial management that a hospital needs. During the quarter, University of California Davis Medical Center became the fifth and final UC Medical Center to select Sunrise EPSI for performance management. The other four, UCLA, UC San Francisco, UC San Diego, and UC Irvine, have also selected EPSI. While UC Irvine is a long-standing, outstanding, long-standing and outstanding Sunrise Clinical Manager client, the others use our competitors. But, significantly, when they needed to understand key business metrics and analytics, they turned to Allscripts. Just after the quarter closed, we also signed Stanford University Center, adding to an EPS I client list of many of the country's most prestigious healthcare organizations, including University Hospitals in Cleveland, the Cleveland Clinic, Memorial Hermann Healthcare System in Texas, Catholic Healthcare Initiatives and Sutter Health in California, to name just a few.

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

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

Finally, one region at a time is a strategy we've developed recently to our partnerships with large payers, in North Carolina and Pennsylvania to name two. Blue Cross & Blue Shield of North Carolina, one of the most (inaudible) announced in September that they will provide Allscripts electronic health records, training, and support for at least 750 physicians across the state. The announcement followed closely on an agreement with Highmark of Pennsylvania, one of the largest health insurers in the country. Both partnerships are representative of payers investing in healthcare IT to encourage their network providers to deliver higher quality care.

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

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

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

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

Great, thanks, Glen. And good afternoon, everyone, and thanks again for joining our call today. Before I discuss our results, I would encourage you to review the GAAP and non-GAAP financial tables in today's press release and the accompanying explanation to assist you in evaluating and reconciling our GAAP and non-GAAP financial metrics, which we will discuss on this call today. As Glen indicated, we are very pleased with Allscripts third quarter results. We demonstrated strong growth in bookings and non-GAAP revenue, operating income margins, as well as earnings-per-share on a year-over-year basis. We also aggressively reduced our debt in the quarter. Our financial position is strong, allowing us to make significant investments to drive future growth, while also delivering consistent improvements in our operating performance.

So let's discuss the quarter's financial highlights. Beginning with bookings, we are very pleased with the $267 million of bookings posted this quarter, representing 34% growth year-over-year. This result is indicative of healthy demand for our solutions, as well as Allscripts' favorable competitive position. Looking at new contract activity in the quarter, we had balanced success both within existing client base and new client sales. We continue to gain share within the market we serve, and also benefit from increasing client spend, given the strategic and long-term nature of healthcare IT investments across the industry.

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

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

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

Turning to backlog, Allscripts ended the third quarter with approximately $ 2.76 billion in total backlog, up approximately $34 million compared to the end of the second quarter. Approximately 83% of our backlog is derived from multi-year reoccurring revenue sources, including maintenance, subscription contracts, and transaction processing fees. The recovering revenue portion of our backlog has remained consistent over the past three quarters. Our backlog breakdown is as follows. Software and related professional services backlog totaled approximately $472 million. Subscription and SaaS backlog totaled another $631 million. Maintenance fees are represented approximately $793 million, and again, it's important to note that maintenance backlog consists of both annual maintenance fees of our ambulatory clients, as well as multi-year maintenance fees amongst our acute-care clients. Finally, we ended the quarter with approximately $868 million of transaction and other backlogs, which again, is principally made up of Allscripts' outsourcing, remote hosting, and transaction fees from our payer [pack] business.

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

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

Non-GAAP maintenance revenue grew approximately 9% year over year, which is a strong performance for us, recognizing the majority of our maintenance revenue is subject to what I call BPI growth. Thus, maintenance revenue benefited from robust go-live activity this quarter in both our acute and ambulatory segments. Finally, our non-GAAP transaction processing and other revenue grew approximately 11% year over year on a non-GAAP basis. Please note the sequential change, when comparing Q3 to our second quarter revenue, relates to approximately $2 million of non-recurring revenue being recorded in the second quarter associated with the hospital outsourcing client that required staff augmentation during the go-live of Sunrise Clinical Manager in one of their facilities.

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

Gross margins were also impacted by additional acquisition-related amortization, which we do not exclude from our gross margin calculation. The additional acquisition-related amortization drove a $2.3 million reduction in systems gross profit year over year.

On a sequential basis, our non-GAAP gross margins declined 230 basis points, which also were driven by revenue mix, specifically a lower proportion of software revenue and a higher proportion of third-party system revenue, as well as professional services.

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

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

Our gross research and development spend totaled approximately $41.3 million in the quarter, a 7% increase year over year, and a 9% increase over our second quarter. Even with this additional investment, we produced solid operating margin improvement over the prior year. Capitalized software attributable to R&D totaled approximately $15.3 million, or approximately 37% of gross R&D spend in the quarter, which is up just slightly from 34% in our second quarter. Our development organization delivered important innovations during the quarter, including mobility applications that were showcased at our national user group meeting, ACE, in August. Consistent with what we said previously, we expect to exit the year with software capitalization rate in the low to mid 30% range. Capitalized software amortization totaled approximately $5.9 million in the third quarter, which is up from $5.4 million in the second quarter, yielding a net capitalization rate of approximately 23% in the quarter, up from 20% in the second quarter of this year.

Turning now to net income and earnings per share. Non-GAAP net income totaled $47.3 million in our third quarter, which equals 28% growth over the third quarter of last year. And our non-GAAP diluted earnings per share totaled $0.25 per share in the third quarter versus $0.19 in the third quarter last year, which equates to 32% growth. You will note that our non-GAAP effective tax rate was 34% in the quarter, lower than prior quarters and our previous guidance. The lower rate this quarter adjust our year-to-date rate to be more in line with what we expect for the year, which is approximately 37.5% to 38%. The third-quarter tax rate contributed approximately $0.02 to our earnings per share results in the quarter.

Turning to our balance sheet. Allscripts ended the quarter with approximately $86.5 million in cash and marketable securities, a decrease of approximately $30.9 million versus our June 30 balance, reflecting in part, substantial debt reduction in the quarter, which I'll discuss in more detail in a moment. Cash flow from operating activities totaled approximately $42.2 million, while free cash flow after capital expenditures and capitalized software totaled approximately $14 million.

Accounts receivable for the Company totaled approximately $371 million, which equates to DSOs of approximately 90 days, which is up two days from June 30. The slight uptick in DSO this quarter was due to collection timing. I'm very pleased to report that we have made substantial progress already in the fourth quarter, and I anticipate a reduction in our DSOs this quarter.

On the leverage front, Allscripts reduced its outstanding debt significantly in the quarter, electing to deploy free cash flow, as well as some cash on hand, to reduce our outstanding borrowing by approximately $45.5 million, which represents the largest quarterly pay down to date. This resulted in outstanding borrowings of approximately $377 million as of September 30. Since the inception of our credit facility in August of last year, Allscripts has repaid approximately $193 million, or close to one-third of our total borrowings. As we have stated previously, our general goal on an annual basis is to deploy approximately two-thirds of our free cash flow to repay debt and the remainder towards share repurchases. This quarter, we elected to exclusively pay down debt in light of our strong share repurchase activity in the second quarter and desire to aggressively reduce our debt levels. Finally, we ended the quarter with approximately 6,000 employees, up from approximately 5,900 at the end of our second quarter.

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

We continue to anticipate our non-GAAP operating margin to be approximately 21% and non-GAAP net income of approximately $175 million to $179 million, this equates to new non-GAAP EPS range of between $0.91 and $0.93 per diluted share. Within our assumptions, we've adjusted our anticipated interest expense given the rate at which we have been reducing debt. We anticipate total interest expense in 2011 to be between $20 million and $21 million. We have also adjusted our tax rate assumption from a range of 38% to 39.5 % to 37.5% to 38% range.

Finally, regarding our booking expectations in the fourth quarter. Recognizing the fact that our third-quarter bookings performance was stronger than expected, and it did not include any international bookings, I expect our domestic bookings in the fourth quarter to be sequentially up by a modest amount. Our anticipated South Australia transaction will be additive to our domestic sales performance. Specific to South Australia, please note approximately 10% of that transaction was booked in our second quarter, and the balance is expected to close in the fourth quarter. Our anticipated fourth quarter bookings performance should positioned the Company to deliver 17% to 18% total bookings growth for the year, when compared to 2010's pro forma balance.

I hope you're as pleased with our results as I am. We have tremendous opportunity ahead, and we look forward to updating you on our continued progress. Thanks as always for your attention, and I will now turn the call back over to Glenn for a few closing remarks.

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

(Operator Instructions). Your first question comes from the line of Atif Rahim from JPMorgan. Your line is open.

Hi. Thanks, and good afternoon. A couple of questions. One, on the upgrade cycle for existing clients, Bill, could you highlight just where you stand in terms of the meaningful use upgrades? And as we look to the end of the year, if you have the majority of those done, what that means for professional services margins next year?

And then, secondly, if Glen or Bill, you two could talk about the future opportunities that you highlighted beyond meaningful use? ICD-10 and value-based purchasing, just highlight those products you have that address those areas, and if you could put numbers around those that would be great. Thank you.

I'll take the first question and let Glen take the second one. As it pertains to the upgrade cycle, as I mentioned last quarter call, we did in fact peak in terms of monthly volumes in the July-August timeframes. Yet, they continue to be a meaningful part of our overall service delivery model, and will continues to be through the balance of the year. Rough estimate at the end of third quarter, we had about 50% of both our acute and Enterprise client basis are through the meaningful use upgrade cycle. And a little over 2/3 of our Pro and MyWay base, and again, that will continue through our fourth quarter and be glad to update it on our fourth-quarter call.

Great, to take the second piece of that, beyond meaningful use, let me start by saying that meaningful use stretches out a long time. So, we are talking about in terms of meaningful use, mid-2012 to get the final rules for stage two, just to give you a sense. Then you've got stage three after that. That said, we see ICD-10 as an enormous opportunity. You're going to have to replace essentially, every practice management and revenue cycle management system out there. And that is an enormous task.

Then of course the whole analytics area. That is one of the reasons that we focused on EPSI, because as you can see, we have a substantial lead in terms of who the market looks to when they look for analytics data. Whether the interesting thing about EPSI is, more sales of EPS I go outside the traditional Allscripts base than are inside the Allscripts base. So, very strong there. We also have new offerings we are bringing along. Humedica is one that the market is very excited about, and we are excited about as well. And then our own offerings, which include some of the offerings Sunrise Clinical Analytics is one good example of where we are able to do that. So again, we have real opportunity there.

I did not answer the second part of your first question, Atif, the outlook in terms of service margins in general. I continue to believe mid to high 20%s is a realistic expectation for our service line of business. As Glen, indicated meaningful use upgrade activity will continue to be something we have to service, so I don't think it will happen necessarily in one quarter. But as we look towards 2012, I'm absolutely expecting that you are going to see margin expansion in that area of our business.

All right. That's great. Thanks very much for the color.

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

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

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

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

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

Okay. Hopefully I heard that wrong. And how about, what is contributing what is driving the tax rate lower?

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

I guess it's safe to assume that should be sustainable, right?

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

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

First very positive. The loyalty to Allscripts has been terrific. It has been a very warm reception.

Great thanks for the color.

Your next question comes from the line of Michael Churney with Deutsche Bank. Your line is open.

Hi, guys. Congratulations on the nice quarter. I'll get the quick housekeeping question out of the way. Bill no share buybacks in the quarter. Remind me again, you have about $150 million left on your current outstanding authorization?

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

Perfect, and I guess just to re-cut the bookings question another way. When you think about where you had success in the quarter, you talked about across your entire platform. Looking down more the small end of the market. Obviously, I think the general view is that was going to be an are of the market that might lag from adoption perspective. If you start to see the impetus on their part, the catalyst where they are starting to realize that they need to get moving now, and start seeing acceleration of bookings on that front, or just talking about activity, particularly in the small end of the market would be great.

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

Great, thanks for the color.

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

Good afternoon. A couple of thoughts, first, for you, Bill. The bookings one more time, I know it's about $30 million above what you would suggest we should expect this quarter. You highlight a lot of momentum of different areas. Is there anything in particular that drove the $30 million or so beat, or is it pretty much across the board?

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

Okay, very good. You've been very consistent announcing these Sunrise Clinical Management Enterprise awards, a 2 in Q1, 2 in Q2, 3 in Q3. It sounds -- you said the past expect 200 Enterprise decisions across the country in the next year or so. How do we think about the pace of these announcements from you and your organization here in the next year? Do we look for real acceleration in these announcements?

And just to follow-up with that too, the seam of single-platform providers for stage 2 do you anticipate more of that happening? Or you will see, in your words, more rips and replaces of inferior systems to your platform here in the next year?

Yes, Larry, this is Glen. A few things, first of all we do see momentum building here. The message is starting to get out. The message, which is pretty clear is, we believe Sunrise, SCM is the best software on the market. If you look at the folks using it, Columbia, Presbyterian, Memorial, Sloane, Kettering, you go out to UC Irvine just across the board. University Hospitals in Cleveland, all the best names are out there using Sunrise. That message is getting out.

The other piece of that is of course it is open. That allows you to connect to the community. It is not outdated software; it is brand-new software that can allow organizations to connect to the community without ripping and replacing. Oliver Wyman did a study that said 93% of the healthcare organizations in the country can't afford to rip and replace. They need software that is going to play nice with the other elements of what they have already installed. We see real momentum building there.

Relative to your question on a single vendor, single database, there's really three pieces to that. One is architecture. And that is everyone is concluding that you need an open architecture, that you can't just say we are going to rip and replace everything, because even at the largest organizations, they have to -- no one vendor can handle everything in healthcare. Whether it's devices, whether it's portals, we already gave an example with EPSI, four out of five of the UC's don't use our software, but yet they come to us to get our analytics. So the idea that you're going to have just one database really doesn't make sense. Even the government has concluded that they don't want proprietary [mum] space systems; they want open systems out there.

The second piece is databases, and I think there's been a lot of discussion about wanting one database. And the reality is what the market wants. What physicians want is one comprehensive patient view. Not one database, because they realize you can't do that. In fact, interestingly, when you have a large healthcare organization and they are connecting with non-affiliated physicians, you can't by law, have one database, because you can't co-mingle the data. So, the whole idea of we are going to have everything in one database, doesn't make sense, if you really think about it. What you do want is one patient view, and that is what we offer through our Community products.

I think last but not least, in terms of those folks who do want to go with an approach that mimics that, we have that approach and that is, Sunrise allows you to have an acute and an ambulatory product all in one database. And that we have today. That said, Sunrise is also equipped with Helios, which allows you to connect to all the other aspects of the market. Again just to summarize, we see increasing momentum and acceleration. And the big issues out there are be open, give one comprehensive patient view, and Allscripts has whatever you need in the market to buy.

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

(Operator Instructions) Your next question comes from the line of Jamie Stockton from Morgan Keegan. Your line is open.

Good afternoon, thanks for taking my questions. I guess the big acceleration in bookings that you guys saw during the quarter, Glen or Bill, whoever wants to weigh in on this. The registrations for the government program look like they really accelerated towards the end of the quarter. I'm curious if you -- the end of the quarter is probably always strong for bookings, but did you see a little more strength than you normally expected? Especially in the ambulatory side?

Again I think what we're seeing is were singing a momentum that continues to build. I think Bill and I have been saying about six quarter now, at every quarter, we see a little bit stronger momentum. Here it is really starting to happen, because you have the first payment starting to go out. You have physicians getting checks. We have a very substantial number of our clients who are in the queue waiting for attestation. They are in the process of a testing. As Bill mentioned earlier, a good chunk of those in some areas as many as 50% of our clients are moving through the process right now, in terms of testing. That's the big first bullet.

I will say that this has really focused the market on what they need for what's next, which is value-based care. So I think there's as many people out there who are saying, we'll get through attestation, and then we will start to look at the whole new set of tools of care coordination, care management and population management analytics and the like. So, net-net we see the acceleration, we don't think it's unique right at the end of the quarter, we see it as a pretty steady build.

Okay then one other question, Bill, on the Australia deal. It's $50 million-plus still a reasonable expectation for that?

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

Okay thank you.

Your next question comes from the line of Richard Close from Evandale Partners. Your line is open.

Thank you, just a clarification on the bookings, Bill. The 17% to 18% is off the I guess [$899 million], last year. And that does include the remainder of the Australia, correct?

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

And a follow-up on the professional services, you had mentioned the implementation hours. I was curious if you could talk a little bit about, if you look at the professional services revenue in the quarter. If you could break out percentages maybe, implementation hours versus upgrade hours?

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

Okay thank you.

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

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

I think the reality, Sean, is that more of them, probably 75% of them I think are net new, they are not really replacements. They are Greenfield deals on the smaller practices, and about 25% of them are replacements. That's --you talk about the smaller market, there's a lot of folks out there who just don't have these systems yet. So we see -- I know there was some chatter in the market about Greenfield is done. I don't know what they are looking at, but as I already mentioned, we are in the hundreds of sales here. And if you talk to our resellers, our resellers are increasingly happy with what's going on. This is a very strong, very good market that's building here. And not anywhere near done.

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

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

Sounds good, thank you.

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

Hi, thanks. It's Jeremy for Ryan. I wanted to thank Steve for the comments you gave earlier. I'm curious, it seems you hint at some potential new strategic hires within your organization. I am wondering if you could comment on that a little bit, and overall, whether the size of your overall quota-carrying sales forces has really changed much over the last year?

Well, I'm bringing on several colleagues I've worked with in the past into the organization who I know are outstanding on execution, vision and customer satisfaction. What I'm looking to do is enhance our hand. Again we have a tremendous team on the field today. Just bring in some new talent from outside sources to complement what we have already. A lot of these folks are solution orientation from a solution selling perspective, so they're bringing a different set of skills into the organization.

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

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

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

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

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

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

Good morning, or good afternoon. Yes, a quick question on the cross sale penetration of your ambulatory products into the Sunrise base. I was wondering first off, on the quarter, what percentage of your bookings, ambulatory bookings, were for referring physicians to your Sunrise hospitals? Then on the guidance following the Eclipsys acquisition, I think it was about $820 million in a revenue cross sell opportunity to the outpatient footprint. Do you have any thoughts on an updated number of where we stand following the first three quarters here? Thanks.

Tell me, I did not pick up the whole second question, the second part of your question?

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

Yes, we -- in terms of cross sell, again there was some meaningful contribution in the quarter. I would band it in the 15% to 20% range of overall booking performance was cross sale activity. And in terms of progress to date, not necessarily against the $800 million, but again the full $1.8 billion of revenue cross sell potential. You could think about that over the first five quarters quickly approaching about $300 million of that $1.2 billion. Just to be very clear though, the distinction, and that is that is a revenue cross sell number, not a bookings cross sell number. So what's contemplated in that is the five-year total cost of ownership, which contemplates the maintenance and whatnot. So just be cautious if you're trying to translate that back into booking contribution.

Okay.

We have a ways to go.

Understood. An update on your implementation capacity. Just how many clients for your inpatient, your Sunrise, are you able to implement to five-five per month? And then also for your new clients wins, maybe using Lompoc Valley as an example, are you able to begin implementations immediately?

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

Okay. You said that you've completed 50% of your base in terms of upgrading to five-five, right?

That's correct.

Okay, great. Thanks, a lot.

Your next question comes from the line of Charles Rhyee from Cowan. Your line is open.

Hi, guys. Thanks for taking the questions here. If I could touch on guidance-related questions. First a point of clarification, Bill, you talked about gross margins being impacted by an increase in the acquisition-related amortization. You called out about $2.3 million impact on the system sales line. Was there more than that in the quarter, and you just called out one piece of it, or was it just the $2.3 million?

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

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

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

Okay, I get it. Sorry about that. The sequential change then is really just for the first two -- the recognition of greater third-party systems?

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

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

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

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

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

That's fair, and if I could sneak one more in here. Can you remind us again where you are in terms of the cost synergies that you outlined when the deal was closed. I think it was supposed to be $25 million in the first year? Where --are we at that run rate, or do we still have more to go?

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

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

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

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