Veradigm Inc (MDRX) 2011 Q4 法說會逐字稿

Good afternoon. My name is Adam and I will be your conference operator today. At this time I would like to welcome everyone to the Allscripts Q4 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). Thank you.

Seth Frank, Vice President of Investor Relations, you may begin your conference.

Thanks, Adam. Good afternoon and thanks for joining us, everyone. With me on the call today are Glen Tullman, Allscripts' Chief Executive Officer, Bill Davis, our Chief Financial Officer, and Lee Shapiro, our President. We would like to take as many questions as possible today, so we'd appreciate it if you limit yourself to one question and one follow-up.

Before we begin, I will 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 some 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.

With that complete I would now like to turn the call over to Allscripts' CEO, Glen Tullman.

Thanks, Seth, and welcome, everyone. I am excited to share with you what we believe are some very strong financial and operating results for both the fourth quarter and the full year. So let's begin with a quick overview of the financial highlights.

Bookings were a record $327.4 million, up 26% from the fourth quarter of 2010. Non-GAAP revenue in the fourth quarter grew approximately 15% over the prior year, our strongest topline growth quarter of 2011. Non-GAAP earnings-per-share in the fourth quarter were $0.25, up 22% over the prior year. For the year, Allscripts grew EPS by 23%, a very strong result.

Allscripts also reported record operating cash flow during the fourth quarter of over $100 million. In addition, we continued to repay outstanding balances on our debt while maintaining very solid cash reserves. We are fortunate to enjoy a very significant amount of annual cash flow, thanks in part to our large client base that provides high recurring revenue which, for the year, was approximately 64%.

When you look at our accomplishments, I hope you take away two key points. First we have consistently delivered on our financial commitment. In fact, we exceeded the guidance we provided in 2010 and then updated during the year.

Second, we are positioned perfectly in this market both where it is today and where it is going. Our presence in over 50,000 physician practices not only gives us word of mouth in bringing on new practices, but -- and this is a really critical point -- it is also central to any hospital CEO strategy of connecting to affiliated physicians. Coupling our client base with a solution set that now covers all points of care, we are the only comprehensive solution available for organizations that truly want to operate across a continuum of care.

Recent developments show that the market is moving in our direction in important ways. Earlier this month, for example, United Health Group, the nation's largest insurer announced it will be replacing its current fee-for-service payment model with a value-based plan that compensates hospitals and physicians for reaching quality benchmarks.

This is not a pilot program. United Health is implementing this value-based model across its nationwide network. And they are not done.

Forward-looking payers like Blue Cross Blue Shield of North Carolina, HighMark, and Humana -- who, by the way, signed a major fourth quarter agreement with us that I'll discuss in a moment -- have already made similar moves. And the largest payer of all, the US government, is moving in this direction as well.

To succeed in this new world of value-based reimbursement, health care organizations will require systems that allow them to connect providers across the community, coordinate care, and track and report quality outcomes. And that is exactly where Allscripts excels with our sophisticated, acute, and ambulatory analytics solutions.

It is becoming more clear that healthcare continues to move away from the hospital, the most expensive setting, and into the lower cost settings of the physician's office, post-acute care facilities, and the patient's home. And Allscripts is the leader in all three.

Many large payers as well as hospitals also continue to provide subsidies to physician practices that want to take advantage of federal stimulus dollars for electronic health record adoption. More than half the physicians in the market have yet to purchase an electronic health record, providing Allscripts with significant opportunities to grow.

While Bill will provide more detail on our quarterly financial performance and on our 2012 outlook in just a few minutes, I want to highlight three new client agreements from the fourth quarter that illustrate our success.

One good example is Ridgeview Medical Center in metropolitan Minneapolis. Ridgeview selected our Enterprise Electronic Health Record for their employed physicians and added the Allscripts Community Record to connect and exchange information with independent physician groups across the region. It helped that a number of those ambulatory groups were already using Allscripts.

Ridgeview plans to leverage the superior functionality of our community solution to provide their employed and affiliated physicians with a single view of the patient, independent of the setting of care or of the Electronic Health Record being used. Ridgeview illustrates how our strategy is beginning to work in the market where connectivity, interoperability, and physician practice choice trumps closed systems and the idea that a hospital can force independent referring physician practices to use the system the hospital requires.

On the other end of the spectrum our comprehensive Sunrise solution continues to win head-to-head competition for hospitals and health systems who want an open yet fully integrated clinical system, as well as those who want a single database.

During the fourth quarter. NorthCrest Medical Center in Tennessee selected Sunrise. Another fourth quarter Sunrise win was Long Island College Hospital, a 506-bed teaching hospital in New York. Long Island College Hospital is an academic affiliate of SUNY Downstate Medical Center, a longtime Sunrise client.

In addition to deploying our Sunrise acute-care solution, Long Island College Hospital will deploying our Sunrise Ambulatory Electronic Health Record for their physicians, storing all of the information in a single database. They join a growing list of Allscripts' clients in the New York area that includes North Shore Long Island Jewish Health System, Memorial Sloan-Kettering Cancer Center, Hospital for Special Surgery, Bronz-Lebanon Hospital Center and Columbia New York-Presbyterian Hospital, to name just a few of our prestigious clients.

Columbia Presbyterian, by the way, just recently went live on a meaningful used version of Sunrise in all five of their medical centers which includes both Cornell and Columbia Universities and over 2,400 beds. And they are subsidizing our My Way Electronic Health Record which is designed for small to midsize independent practices for all of their community physicians.

As these wins indicate, we continue to expand our Sunrise client relationships in the fourth quarter and in 2011, and we are optimistic about the opportunity for more growth in 2012. Key differentiators contributing to our success include our ability to connect with affiliated physicians, who are important sources of referrals, as well as our open platform.

On the international front, the fourth quarter was significant in that we had success for our full suite of Sunrise solutions as we closed a landmark agreement with SA Health in South Australia. This agreement finalized in December with the public health arm of the government of South Australia will result in the limitation of Sunrise for 80 hospitals with approximately 4,500 total beds across a broad geographic region.

In effect, we will become the connected community of health for the state of South Australia with over 1.6 million people served.

Moving to the ambulatory market, Allscripts continues to be the recognized leader in both mind share and market share in Electronic Health Records, practice management, and our entire ambulatory portfolio. During 2011 we saw accelerated growth in purchasing of systems for midsize and small practices. The appeal of our Electronic Health Records was confirmed through the fourth -- throughout the fourth quarter.

For example, national primary care provider, Concentra, which has 1,400 providers in 320 urgent care centers and which recently became a Humana company, signed an agreement to implement our Enterprise Electronic Health record beginning with 400 of their sites. We believe the agreement has the potential for meaningful expansion down the road.

Revenue cycle management also continued to provide another significant opportunity for us during the quarter, driven in part by upgrade activity associated with regulatory requirements by new offerings from Allscripts and by our existing industry-leading portfolio. In the fourth quarter Mammoth Medical Center in California selected our new RCM services offering, which gives physicians an end-to-end integrated financial and administrative hosted solution. We expect that revenue cycle will be an area of strong growth in 2012.

So as you can see, we have some very strong momentum to support our growth in 2012 and beyond, with a diverse and powerful portfolio of solutions that meet the evolving requirements of every sector of the market.

Now before we take your questions, I would like to turn the call over to Bill Davis to discuss our financial highlights. Bill?

Thanks, Glen, and good afternoon, everyone, and thanks again for joining our call today.

Before I discuss our results, I would like to suggest that you review the GAAP and non-GAAP financial tables in today's press release and the accompanying explanations to assist you in evaluating and reconciling the financial metrics we will discuss on today's call. The press releases and additional information regarding non-GAAP measure are available at investor.Allscripts.com.

I want to start out by echoing Glen's remarks. We are very proud of Allscripts' financial performance for the fourth quarter of 2011 and we are equally excited about the market opportunity for Allscripts in 2012 and beyond.

Our total bookings in the fourth quarter were $327.4 million. Again, this was a record for Allscripts representing 26% year-over-year growth.

Bookings in 2011 grew 17% to $1.051 billion for 2011, indicative of both the strong overall demand environment for healthcare IT solutions and also our competitive differentiation in the market. This figure is consistent with the total growth we expected to see in 2011 bookings as discussed on our last earnings call.

I wanted to provide some additional information on bookings, starting with the ambulatory. In Q4 we realized the significant sequential increase in physician or ambulatory bookings from enterprise as well as professional EHR solutions. Demand was strong among new clients as well as add-on sales to our existing clients.

Ambulatory demand continues to be solid with a shift to increased buying by mid- and smaller sized physician packages. This cycle is in the early stages and we expect sustained purchasing activity for first-time EHR buyers in 2012 and beyond.

In addition, the inevitable adoption of ICD-10 despite the delay announced today by HHS will likely lead to further acceleration of EHR in practice management system adoption as physicians swap out their old systems to manage the transition to a much more complex coding and reimbursement environment. I would emphasize as we have for some time that we see this demand curve as a rising tide with the industry enjoying multiple years of continued growth.

Within the hospital market, we saw strong demand across the board including new Sunrise clinical manager sales as well as add-on sales into our existing client base. SA Health in Australia contributed to our bookings in the fourth quarter, one of the largest Sunrise transactions ever, and one that marks the beginning of a long-term relationship between SA Health and Allscripts.

From a mix perspective, software to service transactions totaled approximately $82 million or approximately 22% of fourth quarter bookings. Let's briefly review our backlog.

Allscripts ended the fourth quarter with approximately $2.85 billion in total backlog. Up approximately $85 million compared with Q3. Approximately 82% of our backlog is derived from multi-year reoccurring revenue sources, including maintenance, [subscription] contract, and transaction processing fees. The reoccurring revenue portion of our backlog has remained consistent with the prior three quarters.

Our backlog breakdown is as follows. Software and related professional services backlog increased approximately $52 million to $524 million in total. This result reflects new client wins in both our acute and ambulatory client bases.

Subscription and SAS backlog increased approximately $21 million to $652 million. Our SAS backlog growth was driven by increases in subscription purchases by both ambulatory as well as acute clients. Annual and multi-year maintenance revenue backlog increased approximately $40 million to $833 million. Our maintenance backlog growth was driven by a combination of new clients combined with annual maintenance adjustments across our install base.

Finally, we ended the quarter with approximately $840 million of transactions and other backlog. Our transaction backlog will fluctuate quarter to quarter, based primarily on the volume of new or expanded hosting and outsourcing agreements, along with the timing of related renewals.

Turning to the P&L highlights, we continue to see consecutive quarterly growth in our non-GAAP revenue in 2011, reaching 15% in the fourth quarter when compared to the same quarter a year ago, a very strong performance. Consolidated non-GAAP revenue grew 13% in 2011. Of our total Q4 non-GAAP revenue of $389.2 million, approximately 64% was reoccurring in nature.

Highlighting revenue by line item, our system sales revenue in Q4 grew approximately 14% year over year. Importantly, hardware revenue was down year over year and quarter over quarter, reflecting a shift in ambulatory market to a higher mix of smaller physician practice installations, which require smaller hardware configurations than the larger enterprise clients.

Also keep in mind that a shift to SAS transactions in the smaller segment of the physician market is driving additional revenue to be recognized through our transaction processing and other revenue line versus the system sales revenue line.

Non-GAAP perpetual service revenue increased 42% over the prior year fourth quarter to $71.5 million. Growth was driven by client demand across the board, including new system implementations and meaningful use upgrades. In particular, the deployment of larger volumes of professional and MyWay systems, in addition to a significant ambulatory upgrade cycle in Q4, led to the year-over-year growth.

We would anticipate a moderation in the professional service growth rate as we progress through 2012, reflecting a less intensive period of upgrade activity but with an increasing mix of new installations or new system implementations and other related work.

Maintenance revenue grew approximately 6% in the fourth quarter compared to the prior year to $110.1 million for the quarter. Our maintenance growth reflects the continued success in bookings we have seen in 2011 across our base. It is important to reemphasize the fact that much of our maintenance revenue is subject to only 1% to 3% annual growth. So 6% overall growth reflects a meaningful amount of activation of our new clients.

Finally, non-GAAP transaction processing and other revenue grew approximately 13% in the fourth quarter to $141.6 million, reflecting the addition of new subscription or SAS clients as well as higher revenue in our outsourcing as well as our remote hosting businesses.

Summarizing the fourth quarter gross margin performance, non-GAAP gross margins were down just slightly, 20 basis points, compared with the third quarter at 45.5%. System sales and professional service gross margins increased substantially but were offset by slightly lower maintenance and transaction processing margins. These latter two revenue lines constitutes 65% of our non-GAAP revenue in the quarter.

The improvements in system sales and professional service gross margin were anticipated and they were discussed on our third quarter earnings call. Specifically, system sales margins of 49.5% increased dramatically from 37.9% in the third quarter, reflecting again a smaller mix of hardware as well as a smaller portion of third party system sales.

Systems gross margins will vary, based on mix quarter to quarter. But we believe that mid- to high 40% non-GAAP gross margins is indicative of the type of gross margin we can generate over time in our system sales revenue line.

Non-GAAP gross margin in our professional service organization improved to 17.1% from 15.3% in the third quarter as we continued to drive greater productivity in executing on a meaningful use related services and realized additional revenue capacity from new professional service team members who were added to the team. Our longer term view continues to be that we can achieve professional service gross margin in the low to mid-20 range over the next couple of years.

One final item to note on gross margins relates to transaction processing and other, where non-GAAP gross margin declined to 40.5% from 44.5% in the third quarter. As I mentioned earlier, the mix of outsourcing revenue from quarter to quarter will cause this margin number to fluctuate somewhat and this was the primary driver for the change in the quarter.

Looking at operating expenses, total non-GAAP operating expenses in 2011 totaled $420.1 million. This represents less than 1% increase over 2010 with a similar percentage change when comparing our fourth quarter performance to a year ago. These results are indicative of the operating leverage in our business even as we continue to invest significantly in new solutions to drive future growth while experiencing a substantial decline in capitalized software compared with the prior year. Our ability to scale as well as our success with driving merger-related cost synergies helped improve our operating leverage.

Consistent with past communications, we anticipate an incremental $10 million in annual cost synergies in 2012 and an additional $5 million in 2013. Our gross research and development spend totaled approximately $44.6 million in the fourth quarter, an 18% increase year over year, representing over 11% of non-GAAP revenue. We continue to invest for growth while -- through a variety of initiatives that Glen already discussed, including product integration, new product rollouts and preparing for ICD-10, among other initiatives.

Capitalized software totaled $13.3 million or approximately 30% of gross R&D expenditures in the quarter. This is down significantly from 37% in the third quarter and 47% in the fourth quarter a year ago. This reduction is consistent with the expectations we had set out previously.

Amortization expense associated with capitalized software totaled approximately $6.9 million which was up $1 million over the third quarter and up $4.2 million over the fourth quarter a year ago. The increased amortization over prior periods reflects the impact of substantial capitalized R&D associated with meaningful use initiatives during 2010.

Note that capitalized software amortization flowed through our systems sales cost of revenue line, impacting gross margin comparability over the prior periods. Also note that our net capitalization rate declined to 14% in the quarter from 23% in the third quarter.

Also, we would like you to note when evaluating our operating margin versus the fourth quarter of 2010 that we had $4.5 million left of capitalized R&D in the fourth quarter of this year. This factor, combined with the previously mentioned $4.2 million of incremental capitalized software amortization, equates to an $8.7 million expense swing year over year, offsetting some of the underlying operating leverage in the business.

Allscripts' non-GAAP net income grew 23% in the fourth quarter and 21% in 2011. Non-GAAP diluted earnings per share totaled $0.25 in the fourth quarter which equates to 22% growth. Non-GAAP EPS in 2011 equaled $0.93 or 23% growth for the full year.

Now turning to our balance sheet. We ended the quarter with approximately $159.5 million in cash and marketable securities. This represents an increase of approximately $73 million from September 30. The significant increase in our cash and marketable securities balance was driven by a truly outstanding quarter on the cash flow and collections front.

Allscripts' cash flow from operating activities totaled approximately $107.4 million, the best cash flow quarter in the Company's history. Free cash flow after capital expenditures in capitalized software total approximately $82 million.

Reflecting strong sales in cash collections, accounts receivable was down slightly versus the September 30 balance at approximately $362.8 million, equating the day sales outstanding of approximately 84 days. This represents a six-day decline from the last quarter. Our DSO this quarter reflects a level more indicative of our expectations for the future, although we will continue to be subject to some level of seasonality adjustment based on timing of billing for some of our annual revenue streams, most notably our maintenance streams.

Outstanding borrowings totaled $367 million at the end of the year, a $10 million reduction over the prior quarter. We repurchased approximately 80,000 shares of our common stock in the fourth quarter at an average price of $17.62 per share.

In 2011, we purchased approximately 3,000,000 shares of stock in total for approximately $51 million. As a reminder in April of 2011, we commenced a stock repurchase program under which we may purchase up to $200 million of common stock over the three years. As of December 31, 2011, the total value of common stock available for repurchase under the program is approximately $149 million.

Finally we ended the quarter with approximately 6,300 employees, which is up approximately 300 versus the end of the third quarter.

Now I would like to provide our 2012 guidance. We anticipate 2012 non-GAAP revenue of between $1.62 billion and $1.65 billion. This figure reflects the add back of acquisition-related deferred revenue of approximately $2.1 million. We anticipate non-GAAP operating income of between $345 million and $355 million which equates to an adjusted operating income margin of between 21% and 22%. This represents a range of 40 to 140 basis points of improvement over 2011 and remains consistent with our long-term view of driving operating margins to the mid-20 range over the next several years.

Non-GAAP operating income assumes the exclusion of the following non-cash charges, approximately $63 million in acquisition-related amortization expense and $48 million in stock compensation expense, both on a pretax basis. It also excludes the previously mentioned acquisition-related deferred -- I'm sorry, also includes the acquisition-related deferred revenue adjustment mentioned a moment ago.

Further, we will exclude as we indicated previously approximately $3 million per quarter of Eclipsys merger-related retention payments through the end of the third quarter of 2012 or approximately $9 million pretax from our non-GAAP operating results. Please note Q4 transaction-related expenses were approximately $3.9 million.

We also assume 2012 interest expense of approximately $16.5 million and an effective tax rate in the range of 36.5% to 37%. This equates to non-GAAP net income between $207 million and $215 million or a growth of between 15% to 20% over 2011. Non-GAAP diluted earnings per share are expected to be in the range of between $1.06 and $1.10, based on weighted average diluted shares outstanding of approximately 195 million shares.

Finally, regarding the first quarter we anticipate, as we have seen in the past, the impact of a seasonally slower first quarter. Nonetheless we still expect bookings to grow in the midteens over our first quarter 2011 results.

So in summary, we are excited about our results, their quality and our outlook for 2012. We think this quarter in 2011 illustrates our execution success and we look forward to delivering more of the same in 2012. We have a great deal of activity planned with the financial community in the coming six weeks so we look forward to seeing you at HIMSS and at conferences around the country.

Thanks as always for your interest and attention. And now I would like to turn the call back over to Glen for a few closing remarks.

Thanks, Bill. To wrap up, I'll just say that I am very pleased with our fourth quarter and 2011 operating results. We met our commitments to the market and we continue to add clients who believe in our vision of a Connected Community of Health.

I am confident that we have the right portfolio solutions, the right people on our growing Allscripts team, and the energy to lead the way to the future in healthcare. Thanks to our clients who give us the opportunity to make a difference, to our employees for their continued commitment to delivering on our vision, and to our shareholders for your continued confidence in Allscripts.

With that, we will now take your questions. Operator?

(Operator Instructions). Michael Churney from Deutsche Bank.

So thinking a bit more, Bill, about the commentary you had on 1Q bookings and I guess this push into 2012, it follows up on some of your big picture comments with regards to how you're [attacking] the market in the various different areas. As you think about, you know, we are past obviously the first year of stimulus checks with regards to meaningful use, how do you see the continued evolution of your product base in terms of where you are seeing success in the market? How do you see now that you have the integrated product portfolio more in market, how do you see that evolving I guess from a selling perspective going forward and how -- the different kind of sales strategy you will take for the various different areas of the market?

Yes, I will make two comments and Glen may want to give maybe even a little bit more of a strategic perspective on this. Specific to my comments on Q1 bookings I really just wanted to acknowledge for the market, there is some element of seasonality in our sales performance. It has been evident in as many years back as I can certainly remember.

So I am just wanting to call that out for your benefit. And that being said, if you look at our relative performance off of Q1 of a year ago we do expect improvement off of that.

So we do believe that the market continues to be very active in terms of buying decisions and I would just say that, in terms of what it means or how it correlates to our portfolio, as I intimated in several areas of my comments, we are seeing success across our portfolio. So it is not limited to the ambulatory or acute outsourcing or hosting. The reality is that it is all of the above and we expect that that trend will continue. Glen?

Yes, Bill, I would just amplify on your comments. One, there are a lot of ways for us to win. You know, we look at Sunrise and we see as I said continued growth in our Sunrise sites. People are buying into the open platform. They are buying into the fact that they are not all going to rip and replace and start over and want to use what they have and add our various elements.

I mention less than half the market in the smaller physician groups have actually purchased their Electronic Health Records. So we see great opportunity there and we have got a great distribution network to help us.

And last but not least, we have a lot of strength in the analytics and care management areas and particularly when you look at something like EPSi, we sell more of that to our competitors' customers than we do to our own. Because they don't have the capabilities that we have. So that is our surround strategy and it is one we are excited about. So we see great opportunity.

Great. And then just quickly thinking about Australia a little bit more, obviously, in the SA Health done was a key milestone. How do you see your approach expanding throughout the rest of the country? You know leveraging the position you have both at SA Health as well as some of the other successes you have had throughout your history in Asia, I just think about that strategy for that area of the world would be great.

Yes. We have a very focused strategy and we want to make sure we execute. So first and foremost at SA Health, we are focused on execution, taking the first steps there. We do see some potential expansion opportunity with SA Health, but right now we are focused on execution. We have been told that there is a lot of eyes on us there and that there's opportunities in the rest of the country if we deliver. So first and foremost it is about execution.

Relative to our broader international strategy that we are focused on a limited number of English-speaking countries where we have had success and also where we see future success. So we will continue. We have obviously got great opportunity and have had great success in Canada. We have done very, very well in Singapore and see more opportunity there. We see the UK as an opportunity area for us.

So, again, a lot of opportunity internationally but we are going to be careful about what we do internationally as well. So from that perspective, you know, that is what we are focused on.

Jamie Stockton from Morgan Keegan.

I guess, Bill, real quick. The sequential decline in the backlog for the transaction SAS and others -- actually not SAS but the transaction line. Was that an Eclipsys hospital that had been outsourcing their IT department to you guys that decided to do something else?

No. No. It really -- so there was no client departure driving that change as I indicated. It really is just a function of the timing of when those renewals occur. So as we work down that backlog, we will not replenish that backlog until that physical renewal is obtained. So but there -- it is not driven by any specific client departure.

Okay. And then I guess maybe taking a step back and thinking about the hospital market. It seems like some of the deals you guys have signed lately have been a little smaller hospital kind of around 100 beds.

You know, is your approach going forward going to be a little more in the let's call it 50 to 150 bed space in trying to get those facilities to really essentially pay up for a robust system as opposed to Eclipsys, when it was stand-alone targeting 150 beds and up? If you could just give us some thoughts around that, that would be great.

Yes, this is Glen. I think we are going to be opportunistic. We believe that we can compete very well in the largest academic medical centers and integrated delivery networks and you heard me list some of our clients. They are the premier clients in the entire world. Folks like Columbia-Presbyterian, in terms of cancer, Memorial Sloan-Kettering and on and on. So some of the largest.

That said, we also see an opportunity because of the change with some of our competitors in the midsize to smaller hospitals and some of the community hospitals as well. And the nice thing about our system, aside from being open, is it is flexible. So we can move it up and down the chain and do so very cost-effectively. So I think we are going to pick the right size of hospitals again.

What I called out here was one hospital, 506 beds. You know, another one was a smaller hospital. And if you look at South Australia, you see some very, very large hospitals and then you see some really small hospitals in the Outback which we would probably call clinics. So you see a tremendous range there. We are able to operate in all of them.

So I think you're going see a nice mix of our Sunrise wins across the board.

Charles Rhyee from Cowen and Company.

Bill, just want to talk about not only really the fourth quarter bookings here because if I look at the sort of the range you gave the last quarter, seems like we came towards the bottom end of that. And if I -- and then combined with looking at the first quarter here, so if we think back to last year in the first quarter, you highlighted a couple of deals that got pulled forward into the fourth quarter kind of explaining why the fourth quarter was quite strong and why the first quarter was relatively weak.

And then so if we kind of maybe normalize for some of that and shipped it back, let's say to the first quarter, A, it looks like you had maybe high teens growth, ex South Australia in the fourth quarter. Just wanted to make sure that's sort of how -- the right way to think about it and then secondly when we think about the first quarter guidance, then, you know you are coming off a fairly weak number and we are talking midteens. Glen, you mentioned the strength that the business is -- the strong position that you have across all your markets and yet you are growing -- you are sort of projecting sort of a midteens which I would say is maybe market -- a little bit above market growth at this point. Can you talk about --? Thanks.

Yes, Charles, there was a lot there in that question. So I will try to just address a couple of the points that you had asked about. One is specific to the fourth quarter, again from our perspective, it was a very strong quarter. It represented 26% year on year growth. I talked to the market about the fact to really drive our topline we need to see system sales in the high teens, low 20s. So from that vantage point it was better than what I intimated before. In the context of the guidance that I provided in the third quarter I guess I would have characterized it as being very much in keeping with what I told the market we would do there and, again, it was obviously contributed to by the South Australia closure.

As for the Q1 comparison I guess my recollection was, in the context of the Q1 of 2011, the comment was really pertinent to Q1 of 2010 where there were a significant number of acute transactions that had moved from the fourth quarter of 2009 into Q1 of 2010 that made a very difficult comparable in the first quarter of this year. As we go into 2012, as I intimated in my guidance I said that the relative comparability of Q1 of 2011 and lining up our expectation for 2012 I think is a fair comparison.

So I just -- I sincerely don't believe in adjustment of any nature in Q1 of 2011 would be appropriate. Nor do I think it is consistent with what I've conveyed on earlier calls.

Yes. You know, you are right. I'm sorry I misrecollected that. That's -- thanks for correcting that. I guess just a follow-up then. If we think about the market share -- the market out there today, particularly on the hospital side, and we think about potentially vulnerable vendors out there you know why -- when do you think if you have the ability to attack that share and you know is that sort of implied within this guidance that you gave for the first quarter and if not we do think we might start to see that? Thanks.

Yes, again, what I would say is I would say the guidance for the first quarter is taking into account again the seasonality of Q1, the relative contribution of South Australia in the fourth quarter that is obviously not going to repeat itself in the first quarter. So as we intimated earlier we were seeing activity across our portfolio and so our expectation is is that our total portfolio is going to contribute to our success in Q1 and I think nothing has changed my views in terms of A, the market, the market demand and, second, what is necessary in terms of overall growth over the course of a year to drive our topline growth that we have committed to the market.

So there is nothing necessarily unique about Q1 that I foresee. It really is just more execution-based taking into account the seasonality that I called out.

Atif Rahim from JPMorgan.

So, Bill, when you look at your bookings growth targets for maybe the first quarter even the full year, what percentage of that comes from your existing base versus new customers? And when you think about new customers I would guess most of this is going to be displacement activity with the markets you're in. So how do you look at your share in the displacement activity changing if there were X numbers of deals maybe you own a certain percentage of that, what do you think that number will be in 2012?

Again a content-rich question in terms of a lot of pieces. What I would tell you is that we bought our bookings guidance, you know, my view is that in order for us to grow our topline in that kind of low to midteens we need to be seeing bookings growth overall kind of in that high teens to make that math work, given our recurring revenue base.

So I don't foresee that changing in the course of 2012. To your question of mix between within our install base versus net new, that will fluctuate from quarter to quarter. But generally speaking, I tend to think about a third, maybe as much as 40% from within our install base to 60-plus percent coming in terms of net new.

To your comment of is it replacement part or is it greenfield, I think you really have to delineate between the ambulatory market and that of acute. We have often said on the acute side it is largely replacement. We are displacing a lot of kind of legacy players that are not doing particularly well in the marketplace; but on the ambulatory side we still see close to two thirds of that market being greenfield opportunity. The huge caveat there and, again, I tried to convey that in the prepared remarks is that there is a shift going towards medium to smaller sized practices.

So it manifests itself in the little bit smaller deal size just because of the number of physicians or providers involved in those deals. But there, the conversion to revenue can be a little bit quicker just based on the deployment cycles on those tend to be a little bit shorter. So there are a lot of moving pieces here but the overarching message we would convey is we see demand for our product portfolio across the board.

Thanks. And then a follow-up related to transaction-crossing gross margin that came in weaker. Just go over that again and how I mean, I guess, relate to us how that should play out in 2012.

Yes. That, as I indicated, that is where we capture our outsourcing relationships. Outsourcing is typically margin profile high teens all in to the mid-20s and so the degradation, if you will, in terms of margin profile there I would point primarily there to a lesser extent in terms of our hosting business that has very similar type of margin profile. So it is good business and we are seeing a lot of demand for it but its margin profile just happens to be a little bit different.

Okay so the mix was higher this quarter?

It was a little bit higher most notably on the outsourcing side. That is correct.

Okay. Got it. Thank you.

Ryan Daniels from William Blair & Company.

It is Jeremy for Ryan. Glen, I just wanted to circle back to the comments you made regarding the concentration you have. You outlined a bunch of accounts you have in the New York metropolitan area. I am curious if your concentration there or maybe other places in the country are on the ambulatory and or in-patient side. Has that afforded you with opportunities with payers to specifically target care management or other opportunities in those communities? I'm curious if you have had any discussions along those lines and whether -- what could that look like for Allscripts going forward?

Well, I think the concentration which we have in a lot of different areas is in fact drawing the attention of payers. It is also allowing us to really focus on [inside do you have] a Connected Community of Health. That concentration -- remember with 50,000 ambulatory offices we have great ambulatory concentration in a number of areas and payers are looking to us to basically say, we want to get messaging to those physicians to help them manage care better, to help them enforce quality standards, report on quality standards.

So we see a lot of that happening. But for sure if you look at -- I often call out the leadership of Blue Cross Blue Shield in North Carolina, and that is specifically related to the fact that I believe the statistic is more than half of the physicians in North Carolina operate using Allscripts software. So again very -- from that perspective, again, that concentration really helps.

So we are seeing a lot more interest, and a lot more focus from payers.

The concentration in New York in particular is leading to conversations with clients in health plans in that area about, again, how we manage populations. And the other thing I would say is our new set of tools, our leadership and care management, the Humedica offering which is garnering a lot of attention. I was just at Columbia-Presbyterian two days ago with their CEO, Steve Corwin, and we were talking specifically about their recent purchase of Humedica and how they are going to use that to manage populations.

Now if you look at somewhere like UMass Memorial they are using a third-party app that was built to sit on top of our open platform called MyCareTeam, and they are managing their diabetic population and starting to see meaningful results. And that is really the future of healthcare, what we are talking about.

Then finally if we go out to a place like Brown & Toland out in San Francisco, they are a pioneer ACO. They are an outsourcing client, they are looking at our portal community, Humedica, pretty much across the board there, [bought] into the products suite and what are they doing? They don't own the hospital. They are specifically managing populations and working closely with payers.

So you see that, the concentration is working for us, the strategy is working, the focus on ambulatory with the best hospital product out there and then a lot of great surround products.

Great and then one, switching gears a little bit. I know you've had quite a few quarters now under your belt with Misys and I know the big justification or the big part of the strategy there was the captive practice management base that they had. And I am curious if you can offer up qualitative or quantitative statistics on or thoughts on how the cross sell has gone into that base, you know, what inning we are in relatively speaking in terms of the HR adoption opportunity there. Thanks.

It's interesting. We have seen in our practice management base across the board we have seen a lot of stability. Those products work well. We think the opportunity with ICD-10 in part is, as those folks start to upgrade we are going to see upgrades that are both on the practice management as well as the Electronic Health Record side.

The other thing you find is people don't want to move from what the companies are comfortable with. And that is especially true in payment processing. You know our payer PASS organization processes -- you know, we are the third largest payment processing organization in healthcare and, specifically, relative to physician processing, I think we processed more physician direct payments than anyone. So that is something that people don't want to generally mess around with.

So we see ICD-10, a lot of activity there. A lot of movement there. We think the delay was beneficial because it will give people a little bit of breathing room amidst all this change. But frankly, folks are focused on it moving toward that and we are continuing to see not a lot of attrition and a lot of positive movement in the former Misys space.

But in terms of -- I mean can you give us a feel for where you're at in terms of the cross sell of EHR, you know the Allscripts professional and I would assume MyWay into that base. You know are we in the third inning of that, the fifth inning? I mean how far along are we in terms of are you in terms of executing that strategy?

I think we are in the third inning. I think we have a lot of upside. We've made good progress. But I think we had a lot of upside in terms of selling Electronic Health Records. And again, what is interesting about this is that it's -- there is a lot of product that we have to sell.

So we are meeting our plan; we are doing what we expected. But we also see a lot of upside potential as well. So I think we follow the penetration nationally. About 35% is where we are and I think that is kind of where we are going.

Eric Coldwell from Robert W. Baird.

Could you just give us an update on where you are with Sunrise 5.5 upgrades and also just on your incumbent ambulatory base, where you are in the upgrade cycle to stage I solutions?

First of all, in terms of Sunrise let's start there. I mentioned New York Presbyterian. We just finished upgrading all of theirs. When you start off with any of these major upgrades especially in hospitals, they are a little bit rocky.

The beauty now is we are knocking these out. If you talk to New York Presbyterian they would tell you that we had a seamless upgrade and we are continuing to do that. So we are in great shape. We have upgraded more than half the base, now to 5.5. That positions those organizations for not only for meaningful use but it positions them to take our new financial products. It positions them to work closely with our community products and it gets everybody on the same software. So we are very pleased with that.

If you go to the ambulatory side of the equation we are, again, substantially more than halfway in terms of our ambulatory upgrades. And when you consider the sheer number of offices we have and the breadth of our user base that is a pretty amazing accomplishment.

I think from the standpoint of the statistics and this is a general figure, but we are doing more every month than we probably did every quarter last year. So it's dramatic capability enhancement.

That is going to be important because the future of healthcare is going to be a lot about meaningful use 1, 2 and 3. It is about ICD-10, it is about new upgrade information systems. And our ability to do that quickly, seamlessly, across a huge base is going to be a strategic advantage for us.

Just a quick follow-up. The [195 million] diluted share guidance for the year is a fair amount higher than I was expecting, given the buybacks and the relative I'll call it stability in the stock price here recently. Can you give us an update on what is driving that growth in the share base? Are you not modeling aggressive repos during the year? Are there more grants with the hiring? Just any update on what is driving that model.

Yes, it is -- you just hit the nail on the head. It is really a complement of not modeled in incremental share repurchases in 2012. Just not knowing with a great degree of specificity how those will come in. I did not think that was prudent and then secondarily we have done a meaningful amount of hiring in 2011. We have built in our plan a meaningful amount of hiring in 2012 so we will have the full year effect of the hires and a couple of notable executive hires in 2011 that will get the full year effect next year. But so it is really a complement of those two factors.

Great. Thank you.

Stephen Shankman from UBS.

Bill, wanted to touch on the use of free cash flow during the quarter. Obviously it was pretty strong but again just $1.5 million of repurchases and about $10 million of debt paydown. Any reason for not using the rule of thumb of two thirds for debt paydown and one third for repurchase? Perhaps there was a reason for building up the cash balance during the quarter?

Well, it is a couple of things. You have to think about the timing of when that cash came in in the quarter. It is not linear over the three months, number one. But we tend -- we are committed to the two third, one third guidance that we have talked about previously but we tend to take a much longer time horizon in terms of its application.

As I think you know, we were very aggressive earlier in the year both on the cash -- on the debt reduction as well as the share repurchase. So it's a very frequent conversation that management is having. We are in turn having it with our Board just in terms of the allocation of capital amongst cash on reserve versus our debt balance versus the aggressiveness on the share repurchase front.

So but just in all candor, we are taking a much longer term view to our analysis of that.

Okay and then a quick follow-up there. So that is the way we should think about it in 2012 as well kind of a two third, one third dynamic?

Yes, I am not at all troubled. Again it's not to any one specific quarter but if you look over the course of the year I'd think, again, those are good guidelines to be thinking about.

Richard Close from Avondale Partners.

Just real quick. I was wondering if you guys could give us the number of new Sunrise clinical customers in 2011 and how that compares to 2010.

I don't know that we are going to get into the measuring business only because you have this issue of are we talking about customers? Are we talking about sites? You know the reality is that we are substantially up from where were last year and that is what we will work toward next year as well.

So we expect a very significant increase but I don't want to get into the kind of count game because again what you really run into is we have already identified is it smaller, is it larger, is it one customer with two sites or three sites and we are just not going to get into that individual detail.

I think one of the unique things about our business is we can win in a number of ways. So we win when we sell a big acute site. We win when we get their ambulatory business. You know, we win when we get the surround business. We win when we do their payment processing. We win when we do outsourcing. So we look at a lot of different ways to win there and try not to get into the really detailed aspects of any one particular area.

Yes, Richard, I would though try to give you some context. We saw in 2011, both an increase in volume from an [SEM] deal value perspective as well as -- I was very encouraged, kind of back to the earlier question about size. You know, we saw nice improvement just in terms of overall deal value in those opportunities.

So we are being very -- to Glen's earlier comment -- very selective in terms of where not only can we be successful but they can yield the right economic benefits of the business as well. So I for one was very pleased with our SEM performance in 2011 and looking for more positive momentum in 2012.

I would just add one other piece to that and that is this was the year that a lot of people said, your first year you have got to -- you've got changes in the sales force. You have got to learn the product, et cetera, et cetera, all of the integration issues and nobody expected a lot. And frankly, I think we delivered a lot.

So our folks are chomping at the bit now that they are really fluent in the whole language of Sunrise and SEM and how it all works together and fits into not just products but in integrated solutions. So that really where we are.

I think we have time for one more question.

Is that it? Operator, do we have another question?

I'll ask another one.

Okay, go ahead, Richard.

So, Glen, you talked about Concentra, and then you left it a little bit open I guess with the opportunity to expand. Can you go into a little bit more on that relationship in terms of was it just dipping the toe in the water with respect to what happened in the fourth quarter or just any additional details?

Well, again we talked about 400 licenses, and while that is not the full extent of what they can do because we already talked about how much larger they are, it is a significant commitment and we are working very closely with them, not just in the concentric piece of the relationship but in the information parts of the business. So from that standpoint, we expect a lot more from that relationship and we will begin with a very significant commitment upfront but their intention and our intention is to continue to expand on that.

And we have no further questions at this time. Now I would like to turn the call back over to CEO Glen Tullman.

Again, I just want to thank all of you for joining us today. We think it was a very strong quarter both from a strategic standpoint, from an operating standpoint, and from a financial metric standpoint. We think that the Company is very well-positioned as you see healthcare moving to a new model that is focused on not just volume but value that where we see the entire continuum of care matters, and we are the only provider, the only company that operates across the full continuum of care with products -- leading products in the acute area, in the ambulatory area and the post acute area and in a set of solutions that not only connects those but helps from an analytical standpoint.

So we think we are well-positioned. We think we are going to continue to see strong results from the Company and we appreciate your support today. So thanks, everyone, for joining us. We'll talk to you soon. See you at HIMSS.

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