Veradigm Inc (MDRX) 2013 Q1 法說會逐字稿

Good afternoon. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Q1 2013 earnings conference 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.

Mr. Seth Frank, you may begin your conference.

Thank you. This is Seth Frank, Vice President of Investor Relations with Allscripts. Thanks for joining us on our first-quarter 2013 earnings call. With us today are Paul Black, Allscripts President and Chief Executive Officer, and Rick Poulton, our Chief Financial Officer.

During today's discussion, we will reference supplemental financial tables on the Investor Relations home page of the Allscripts website at www.investor. Allscripts.com. In addition, we will reference both GAAP and non-GAAP financial measures on today's call. Reconciliations of non-GAAP financial measures are available in the news release which includes accompanying explanations to assist you in evaluating the financial metrics we will discuss on this call.

Before we will begin, I'll read our 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 factors outlined from time to time in our most recent Form 10-K, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.

Now, I would like to introduce Paul Black, President and Chief Executive Officer of Allscripts.

Thank you Seth. Today, we will discuss Q1 results and actions the Allscripts leadership team is taking to position the Company to execute on our vision and return to long-term growth.

Allscripts greatest asset is our vast client base. There is nothing more important than tending to, defending and growing our extensive global client base. Since taking the CEO position in December, I've visited more than 100 clients globally. These meetings have been valuable in providing direct feedback on the status of our relationship. The health and stability of the client base is improving, but we still have important work to do.

I know many of you have seen survey results or, in your own channel checks, have heard encouraging news about our progress. The key to ensuring client success and satisfaction is clear accountability and execution. That starts with me and expands throughout our organization into sales, services, hosting, support and our solutions development teams.

We have taken steps to streamline the organization's structure, aligning cross-functional teams and driving clear accountability by solution and by client. Our goal is to make sure we are aligned with our clients regarding their 2013 imperatives as well as their long-term strategic objectives, ensuring stronger client results and leveraging all of our capabilities.

One of the biggest obligations to our clients is delivering on Stage 2 Meaningful Use and ICD-10 upgrades. For Meaningful Use 2, we are beginning to see the early adopter programs for core EHR products which will continue through June. We have been working aggressively to ensure that these upgrades will be of the highest quality and adhere to strict timelines to help ensure meaningful use of asset station success across the client base. We anticipate general availability of the meaningful use upgrade at the end of June for Sunrise 6.1 and EHR 11.4.1 in August for Pro EHR 13.0.

In the interim, we made progress in executing new client activations, ICD-10 preparedness, enhanced integration of existing solutions, and improve support levels to drive improve client satisfaction. Illustrating our progress, we had multiple successful new client activations of Sunrise Clinical Manager in the first quarter and a series of successful upgrades. For example, Allscripts is proud that we have extended our partnership with Baylor Health Care System in Dallas, Texas. During the first quarter, three additional hospitals went live on Sunrise CPOE. We spoke about Baylor University Medical Center in February, one of our largest Sunrise activations ever, and added others, including Baylor Heart and Vascular Hospital, and Baylor Specialty Hospital. We also completed a fourth activation in April at Baylor Grapevine. These have gone well, on time, and on budget.

In addition, we had a series of new client activations last quarter, including a 200-bed community nonprofit hospital that was up and running with over 15,000 patient orders entered into the system and successfully processed within one week of go-live.

Another new acute-care client, a two hospital system in Pittsburgh, went live with SCM CPOE and implemented dbMotion to connect affiliated hospital community physicians and enterprise EHR for its own ambulatory services.

We also had success with multiple client upgrades from Sunrise 5.5 to Sunrise 6.0 in the quarter. These clients are seeing solid performance post upgrade. Satisfaction with our solutions and support has in some cases resulted in significant additional business.

John Bosco, Senior Vice President and CIO of the North Shore LIJ Health System, stated that their experiences with both Enterprise 11.4 and Sunrise 6.0 have been very positive regarding the quality of the code and the reduction in the amount of defects. This past weekend, North Shore LIJ upgraded their faculty practice to 11.4. He went on to say that the services we provided as part of the upgrade were also very strong.

An Ohio hospital recently underwent a Big Bang upgrade in March after going live on Sunrise Ambulatory in 2012. They now have a single integrated inpatient and outpatient clinical record across their enterprise.

As a result of our collective efforts, we have been able to secure high levels of client retention. That said, you'll notice we did have a decline in maintenance revenue quarter-over-quarter. Rick will discuss the details in a few minutes, but overall our client retention has remained relatively stable year-on-year. I believe we have clearly identified remaining organizations who need attention and we're doing everything we can to deliver on our obligation to ensure client retention.

Finally, Allscripts is in a pre-existing lawsuit against a prospect that selected one of our competitors. This management team does not believe it is in the Company's long-term interest to pursue such litigation.

Looking at the market, we see early stages of a permanent change in the US healthcare industry. To survive, clients must reengineer client care delivery, streamline costs, assume financial risk, and comply with complex regulatory and financial reporting requirements. I have heard this consistently from our clients. The list is long and daunting, including public and private clinical quality measures, HIPAA, ICD-10, individual state Medicaid compliance requirements, as well as potential financial penalties under Meaningful Use.

Allscripts' position in the EHR market is strong. The key focus is to strengthen our competitive position with our Sunrise platform as a cost-effective yet sophisticated open solution for hospitals seeking an integrated architecture to upgrade or replace legacy systems. That said, we believe the complete or monolithic rip and replace approach in the hospital market will decrease in prevalence over the next several years. Simply put, this is not a practical solution for the vast majority of healthcare organizations. Rip and replace requires two scarce resources -- time and money.

I want to reiterate what I said last quarter. There is no leader occupying the virtual layer between the hundreds of different systems inside and outside integrated healthcare organizations. Focusing existing capability of our open strategy distinguishes Allscripts in the market today. We believe there is a better way. Specifically, innovation to accelerate our leadership in ensuring multivendor interoperability through open community architecture. Community and nonprofit hospitals, post-acute care organizations and physician groups are looking for flexible options to extend their pre-existing investments. They need to invest in unfunded depreciation and expand new hospital services. They want to maintain existing levels of charitable care, grow by acquiring physician practices and deploy strategies that catch up to where the puck has gone -- value-based care.

At HIMSS in New Orleans this year, The focus on interoperability in population health management was front and center. And a result, we had a successful showing registering approximately 1800 client and prospect interactions, representing solid growth over 2012. The dialogue on this subject is encouraging. We have committed significant capital to ensure that we capitalize on the industry-wide need for an interoperability platform connecting payors, big-box retail settings, small, medium, large physician groups, post-acute facilities and IDNs. We aggressively invested in Allscripts' competitiveness this quarter and continue to do so in 2013.

During the first quarter, we reported a 19% year-over-year increase in R&D spending. Between our research and development plan and the acquisitions of dbMotion and Follow My Health, formerly Jardogs, Allscripts is committing almost $0.5 billion to deliver against this large and growing global market demand in 2013.

In the first quarter, we initiated three full actions to advance our population health strategy. The first was the acquisition of dbMotion, which significantly distances us from our competitors thanks to the ability to deliver a powerful population health management platform to the industry now. DbMotion is a longtime Allscripts partner, and it serves as the foundation of our community strategy connecting hospitals, clinics and post-acute facilities to identify patient-specific records anywhere across the connected community regardless of the underlying EHR system. We extract the appropriate clinical information into a single patient-centered view. This creates a single community patient record, not a single architecture. This is a new source of truth for healthcare. This incredibly powerful technology is in use today across the country and internationally. There are over 220 different EHR systems that have been connected to and interoperate with dbMotion today.

Further, what makes dbMotion technology unique is the multiple applications it serves, depending upon the clients' need. For example, it serves as a health information exchange hub, but it also is a connectivity and analytics engine that enables true semantic interoperability across a community of heterogeneous EHRs. And it is a population house management platform that scales across some of the largest IDN communities in the US today.

The second action is our acquisition of a patient portal technology known as Follow My Health. This critical component of our community health strategy will serve as our platform for consumer engagement. We believe the portal technology we acquired is best in the market.

Thirdly, we announced the general availability of Allscripts community Care Director. Care Director is a web-based application. It's part of our integrated Allscripts care management offering. It is used by hundreds of hospitals to manage and coordinate postacute care. Care Director is targeted to the growing field of care navigators, ensuring they follow patient populations across all care venues, implementing individual care plans created in the hospital, homecare, or ambulatory setting. Care Director sits on top of our existing Care Management infrastructure and is deployed as a subscription-based, multitenant solution.

Allscripts also announced its participation as a founding member of the CommonWell Health Alliance, a partnership with other HCIT companies. The promise of this cooperative effort is to build stronger standards in interoperability along the National Patient Identity System and determine the location of patients' electronic medical records. It is early in its initiative, but we are hopeful additional IT companies will participate to help drive these important standards nationwide.

So this quarter, we moved aggressively on advancing our open connected community of health strategy, enhancing our competitiveness. In Q1, we were able to achieve stable bookings in what is typically a seasonally weak quarter. Bookings totaled $178 million, down just slightly from Q4 2012. That said, the first quarter was a challenge from a P&L perspective. Revenue and profitability are not indicative of our long-term potential. Rather, they illustrate the impact of the necessary steps we took to ensure Allscripts' future success and return to long-term sustainable growth. These actions are rooted in the execution on the strategic imperatives we discussed last quarter. These are, one, an unwavering client focus and commitment; two, unlocking and accelerating our competitive advantage; three, driving operational effectiveness; and four, reporting predictable, consistent financial results. So, while near-term results are not what we would have liked to have seen, we are doing the right things for the future.

At the IDN level, where many organizations want a single integrated solution across all points of care within their organization, we are making progress. The recent release of our enterprise revenue cycle management offering, Sunrise Financial Manager, allows us to meet their needs. The industry is looking at the transition to ICD-10 in 2014 as an opportunity to move to an integrated clinical and financial platform. This is a significant opportunity for Allscripts as approximately 75% of our Sunrise clients currently use third-party revenue cycle systems.

We also expect a robust opportunity among the 25% of our base using our legacy Patient Financial Manager system. We have signed seven Sunrise Financial Manager systems since its launch in Q4 of 2012. Sunrise Financial Manager is one factor impacting our ability to capture larger mindshare within our client base.

The significant expansion of Allscripts' relationship with the Phoenix Children's Hospital announced and signed in the first quarter is an example of this opportunity. Phoenix Children's committed to Allscripts across the enterprise, adding Sunrise Financial Manager for the pediatric hospital, as well as Sunrise Ambulatory for its own clinics and urgent care centers. In addition, Phoenix Children's is implementing the Allscripts Community Health platform to ensure the flow of critical patient data across the care continuum, including affiliated positions and urgent care clinics, extending organizational boundaries throughout Arizona and the Southwest. This is one example that illustrates the depth and breadth of our solutions portfolio across the healthcare continuum.

For me, this is one of the most exciting and differentiating aspects of Allscripts. We support care delivery in virtually every care setting. In my experience, this is unique.

Another example is the expansion of our acute care footprint with Resolute Health, a division of Vanguard Health Systems. Resolute selected Allscripts to deliver an integrated accountable care community solution to manage it population across the three-county region between Austin and San Antonio. This groundbreaking Greenfield approach Resolute is taking to automate an entire community to focus on chronic conditions among those at risk and those already diagnosed with diseases such as diabetes.

In the ambulatory market, current demand for standalone ambulatory EHRs is being impacted by several factors -- a rapidly consolidating landscape, community-based sponsorship by health systems to affiliated physician groups, and increasing penetration of EHR adoption among small and midsized physician groups. Recently proposed rules to extend the protections offered by the EHR exceptions to the Stark and anti-kickback laws are encouraging as an incentive for hospitals to drive adoption of EHRs by affiliated physicians. If proposed CMS and OIG rules are adopted, the current exemption will be extended to 2016, and potentially through 2021.

Our strategy in the ambulatory market is to continue to own a leadership market position. We are aligning ourselves with health systems sponsoring EHRs to affiliated physicians. We also see a robust replacement market opportunity emerging as physicians recognize many of the EHR-like and other niche products will not solve their long-term needs.

Due to physician consolidation, Allscripts clients, some of the largest groups in the country, are growing in size as they hire and acquire other groups. One of our large West Coast clients, HealthCare Partners in California, significantly expanded their enterprise EHR relationship with us in Q1, reflecting its physician growth and desire to expand their use of Allscripts' Enterprise electronic health records.

We are also expanding the automation of clinical records in emerging lower-cost, primary care settings such as retail clinics, occupational health and urgent care settings. This footprint is important as high-frequency, high-volume primary care shifts to lower-cost settings. Year-to-date we have signed two new agreements to provide fee services to large multistate for-profit enterprises.

On the heels of our acquisition of dbMotion, we signed a community health platform agreement with Holston Medical Group, a large primary care independent physician group in the Mid-South. This Allscripts client created an ACO and is using our community platform to connect all of its participating physicians, regardless of EHR supplier. Our solution is unique due to it quality reporting and revenue cycle capabilities. Holston is partnering with Allscripts to help drive additional EHR adoption among those practices, looking to automate their medical records and actively connect to and participate in the ACO.

Another community platform agreement with a large multistate IDN in the Midwest will help develop real-time retrospective and prospective analytics and reporting information. The client was looking to operationalize that information and to effective management of the populations providing actional feedback to physicians using evidence-based clinical practices. By offering dbMotion technology plus our Allscripts clinical quality solution, our CQS analytics, we successfully provided a scalable, secure, and interoperable solution that works regardless of the underlying EHR system, a clear competitive differentiator, along with the actional feedback enabled by dbMotion.

In addition, decision-support quality reporting analytics business, including solutions such as Allscripts CQS and EPSI, had a solid quarter. These solutions are sold into our client base as well as outside of it. CQS delivers paid-for-performance content, including physician quality reporting systems as well as [heated] measures between payors, caregivers and physicians. EPSI is our best in class cost accounting and financial decision-support platform for health systems. These solutions are utilized both inside and outside of our core client base. CQS and EPSI bookings were up double digits year-over-year.

Looking across the rest of our portfolio, we had a successful quarter within our postacute and care management business. In care management, we enjoyed double-digit year-over-year bookings growth this quarter. Transaction size has also increased markedly with two seven-figure agreements in Q1. Care management currently used in over 900 sites in the country, consists of three modules, including discharge planning, utilization management and clinical documentation integrity. The system can be fully integrated with Sunrise Clinical Manager to support a host of workflows by interdisciplinary teams, including physicians, case managers, and other caregivers.

In our clinical transactions businesses, this quarter, we signed a new agreement with a large national pharmacy benefit manager to connect directly with physicians and caregivers and gain valuable insight at the point of care to support quality initiatives such as clinical messaging programs.

Before I hand the call over to Rick, I want to provide a brief update on our efforts to drive improved operational effectiveness. We initiated a major site consolidation plan in the first quarter which is ongoing, and we are on target to achieve the synergies we outlined. Many of our smaller facilities are winding down as we speak. We also are migrating clients from our MyWay to PRO platform. That program is well underway and we have clients live today on the migrated hosted platform and will continue to make progress on this transition through the summer.

We have also recognized some of our SG&A and corporate functions. We have also reorganized some of our SG&A and corporate functions and will continually reassess for opportunities to become more efficient. Finally, we are in the process of standardizing vendor relationships in key expense areas such as travel and procurement, leveraging our scale.

With those comments, I will hand the call over to Rick who will discuss the quarter in detail and also provide an update on our goal to increase the predictability of our financial improvement over time.

Thanks Paul. Good afternoon everyone. As I make some comments on the numbers, please utilize the GAAP and non-GAAP financial statements in our earnings news release as well as the supplemental datasheet available on the Investor Relations section of our website. These schedules include historical and current quarter metrics, including bookings, backlog, revenue metrics and capitalized software and amortization details.

I'd like to start by making a few general comments and then I'll get into some more of the detailed numbers. As indicated in the release, first-quarter results reflect a combination of factors, including our continued efforts to focus on the existing Allscripts client base as well as significant investments in R&D. Also, as we indicated earlier this year and as Paul has talked about, we are taking steps to cut long-term costs and become more efficient. These efforts manifest themselves in lower services margins as well as higher operating expenses during the quarter. While our non-GAAP financial presentation adjusts for certain of these costs, other amounts such as increased R&D investment and increased nonbillable services hours are not adjusted in the non-GAAP results.

In addition, as you know, we completed two acquisitions in the quarter, dbMotion as well as Jardogs. Both are important components of our population health management and coordinated care strategies. We see significantly enhanced demand for these solutions as we look out in the future. By integrating and controlling these assets in the future, we will benefit from the positive revenue contributions as well as improved gross margins by selling these solutions ourselves as opposed to through third-party partners. We closed these acquisitions in early March and since we already had distributed dbMotion solutions and given the subscription nature of the Follow My Health portal platform, the financial contributions from these transactions were very immaterial during the quarter. Please note that we did record transaction related costs of approximately $2 million associated with these acquisitions during the quarter.

So now let me walk through some of the numbers. We posted flat bookings of $178 million compared with the fourth quarter of 2012. We are pleased with these results since the first quarter is typically a seasonally slower quarter compared to the fourth quarter and they slightly exceeded our plan for the quarter.

In terms of bookings mix, we saw growth within the Sunrise base. Acute client sales were the highest in absolute dollars that they have been since the first quarter of 2012, and this is an encouraging sign to us. Our SAS and description transactions were 25% of total bookings, which is up 600 basis points on a year-over-year basis. While this percentage is down from Q4, it does continue a trend for the last several quarters of mid 20s% and above and helps contribute to our increasing level of recurring revenue. As you will see in the datasheet, recurring revenue represented 74% of total revenue during the quarter. This is our highest total ever.

Total non-GAAP revenue was $348 million in the quarter and this is a 5% year-over-year as well as sequential decline. Systems sales revenue continued to be a challenge as the market shifts to longer-term subscription contracts. In addition, much of the business we are signing on a license basis has longer implementation periods which creates extended recognition in software revenues.

Our maintenance revenue declined approximate $5 million, or 4%, versus the fourth quarter and is down approximately $1 million year-over-year. Let me give you some context for those numbers. In the fourth quarter, we had adopted a new accounting policy whereby we elected to discontinue recognizing revenue on an accrual basis for certain clients with long-aged Accounts Receivable balances. And we took a cumulative charge to reflect the change at that time. Had this policy been adopted at the beginning of the year rather than at the end of the year, we would've reported lower maintenance revenue in each period during the year relative to what was actually reported. So taking this into account, maintenance trends in Q1 really reflect stability overall compared to 2012 numbers.

I'd also like to make a comment about maintenance revenue backlog. As you will see on the datasheet, we are reporting this as down $32 million or almost 4% from the year-end figure. This is largely a function of the accounting change I just mentioned working its way into our backlog calculation rather than a function of significant client attrition in the quarter. Overall attrition rates from our core products continue to be relatively low and as expected.

Professional Services revenue declined versus the fourth quarter given the large domestic activation we completed during Q4. We were, however, encouraged by our services bookings during the quarter, and we would expect services revenue to pick up in the second half of the year as client upgrade work accelerates.

Our transaction processing and other revenue grew slightly over the prior year, driven by growth in SAS and subscription revenue, outsourcing as well as remote hosting. Trends here were generally flat with Q4.

Switching to margins, in order to aid your understanding and analysis of our systems sales performance, we've classified all non-cash amortization as a separate line in our cost of sales category on the income statement. We've also provided significant detail around what is driving this non-cash amortization. So as you exclude that, you see that our margins for systems sales remain comfortably over 50% when we think of it -- look at it on a cash basis.

As I mentioned earlier, services margins were negatively impacted by our increased investment in delivering on our client commitments. In addition, margins were negatively impacted by $2.5 million of non-recurring expenses related to the MyWay product consolidation that we have discussed previously.

Turning to operating expenses, SG&A increased approximately $7 million over the prior year and was essentially flat with the fourth quarter. Reported SG&A was impacted by the following one-time items this quarter -- approximately $12.6 million of severance and other non-recurring costs; approximately $3.7 million associated with the MyWay platform consolidation; and $2 million of transaction related costs associated with the acquisition of dbMotion and Jardogs. Taking this total bucket of non-recurring costs into account, this would yield an underlying SG&A of approximately $86 million on a steady-state basis, which is a $10 million decline compared with the prior year, again on an apples-to-apples basis where we exclude the prior period one-time costs as well.

As we indicated last quarter, we will incur further expenses related to MyWay product consolidation, site consolidation and other operational initiatives over the next several quarters which we will believe will alternately drive in excess of $50 million in annualized savings from our cost structure on a full-year run rate basis beginning in 2014.

As we indicated in Q4 and as Paul has reiterated today, our strategic imperatives include investing in the future and delivering on our client obligations and commitments. We indicated last quarter we expect double-digit gross R&D expenditure increases in 2013. In the first quarter, our gross R&D costs totaled almost $59 million, which was a 19% growth rate over the first quarter of 2012. We capitalized $7.9 million of this R&D spend, or 13% of the total R&D for the quarter. This yields a net R&D expense of $51 million to the P&L. This cap rate is lower than we had expected and it is likely that our full-year rate will be below the 20% to 25% range which we had announced at the end of Q4.

Non-GAAP operating margin was 5.1% in the quarter, a degradation of about 300 basis points versus the fourth quarter. The lower revenue gross margins as well as higher R&D drove this unfavorable comparison, all the details of which we've just gone through.

Moving down to non-operating, you'll note that, in the quarter, we recorded two gains that totaled approximately $8 million. One was associated with the sale of the investment -- our investment in Humedica, as well as the revaluation of our former minority interest in dbMotion. GAAP accounting rules require that minority interest investments be grossed up in this case to reflect their valuation associated with the merger.

Our non-GAAP effective tax rate for the first quarter was 23% which was similar to Q4 and consistent with what we had guided. The first quarter benefited from the R&D tax credit for 2012 which was made available to us under a newly enacted law. As we look ahead for the balance of the year, we would expect our annual non-GAAP tax rate to be right around 30%.

Our non-GAAP net income totaled $16.2 million which equated to $0.09 per share.

And finally, adjusted EBITDA totaled $49.8 million. You can see the details of that calculation in Table 5 to the news release of this information. Finally on the balance sheet, borrowings under our bank loan agreements totaled $544 million at the end of the quarter, an increase of approximately $103 million. And this is all attributable to the acquisitions that we closed during the quarter.

So thanks for your time and attention. Now I will turn the call back over to Tiffany to take any of your questions.

(Operator Instructions). Ricky Goldwasser, Morgan Stanley.

Hi, good afternoon. So I have a question on the booking. Paul, on the fourth-quarter call, you stated your goal to grow the booking year-over-year. So now after this first quarter, do you feel more comfortable with the goal? Do you feel you are on track? And also, as we think about the bookings, excluding last year which obviously was an exceptional year, if we think about the normal seasonality of progression of bookings, with first-quarter bookings being seasonally low, is that a fair way to look at it? Should I look at it at the historical rate 1Q booking about 20% to 25% of your bookings and think about an expansion throughout the year?

Thanks for the question. I would say that the bookings in Q1 were not necessarily as high as I would like to have them been based on other opportunities that were out there that either pushed or that we're still working on. However, the bookings that we did pull in were slightly ahead of our Q1 plan.

I think, in terms of modeling, what we would say is traditionally there are definitely seasonal patterns. Q4 is always the strongest quarter of the year. Q2 tends to be the second strongest, and Q1 and Q3 come in behind those. So that's how we have built our plan based on those patterns in the past, and we would encourage you to build your model the same way.

And then I know you talked about customer retention. In the quarter, it was positive. So can you give us a little bit more color about your client? Are they making long-term retention commitments or are clients more taking it, taking more of a wait-and-see approach and taking it one step at a time?

It's hard to make a general statement about it but of the 100-plus clients that I've been to, most of them are very happy with what service we've been able to provide for them over the years. They have a lot invested in the relationship, and have a lot that is already, if you will, wired and implemented, up and running and their systems are dependent on it, their healthcare systems are depending on it today. So there's a mixed bag. There's some people that are really happy; there's some people that gave me a long list of things to go work on. A lot of people -- most people gave me a short list of things to work on, and that's what we are doing. Most of their obligations that they are concerned about for 2013 have to do with Meaningful Use 2 attestation and getting to ICD-10. Two things that we talked about in the call that we are extraordinarily focused on in the engineering organizations is producing the software that's going to allow for that to occur.

But I think we have a lot of very strategic relationships with a lot of very large health systems and a lot of very large physician office practices, multispecialty group practices up and down both coasts and in the middle of the country and globally. And the folks want us to do well. They are happy with the selection that they made. The deployments that we've had thus far with them have by and large met with their expectations. They want us to continue to do so and 2013 is going to be an important year for us to continue to do that. And so far, so good.

Thank you.

Glen Santangelo, Credit Suisse.

Thanks and good afternoon. Paul, I just wanted to get an update from you. You talked about some of your clients upgrading to 6.0. Could you maybe give us a sense for what percentage of your total clients have upgraded to 6.0 and potentially 11.4 at this point in time?

The 6.0 code has been out for a while, but not a long time. The number of clients that have actually upgraded and are in production on that I would say is less than 25%. Many clients are waiting to go straight to 6.1, so most of our clients worldwide are on version 5.5 on Sunrise. On the Enterprise side, we're going from probably 11.2 in 90% of the cases and they are going from 11.2 to 11.4, and they will eventually go to 11.4.1.

Maybe if I could just ask one sort of follow-up question on the cost side. Rick, it seems the Company is on track to achieve its $50 million in annualized savings. And I just want to get a sense for should we be thinking about that run rate off of the 2012 expense rate, and assume that we should be down $50 million from there, or ultimately because if we look at 2013 expenses, you obviously have a lot of one-time items in there, so how should we think about that savings run rate from what base?

Yes, we were trying to set everybody up for that, but to think about it relative to the 2012 base. We have a lot of one-time hits, as you just mentioned, in 2013. We also should realize some of the savings as they materialize throughout the year. So you get a little bit of a hodgepodge in 2013. So I think it's good to think about it relative to '12.

Then maybe if I can ask one last one and then I'll jump off. Paul, it's a follow-up to the previous question I asked on 6.0. Has there been any sort of negative feedback at all? Have all the upgrades gone smoothly? Any sort of quirks or anything kind of worth pointing out?

This is healthcare. It's really hard, complex, so not everybody is perfectly happy, so I wouldn't say that.

I will tell you that three or four of the largest clients that have gone live have had very few issues. And that's coming off an experience that they had two or three years ago with the prior version 2.5.5 which did not come off in the way that this one is coming off nor will it -- was it planned to come off. So I'm very pleased with the execution both from the engineering standpoint, but also from our deployment teams out in the marketplace as well as our support organization post-go live. So I would never advocate, because I haven't talk to every single client that got it, that everybody is perfectly happy. But I'll tell you, when things are not going well, I'm spending a lot of my time on that topic, and I'm not spending any time right now on 6.0. My time is focused on making sure that we have all of our deliverables lined up for 6.1, 11.4.1, and 13.0 to make sure we meet our obligations. So I'm knocking on wood here. Things are going quite well and the 6.0 version specifically has been tested in some very large clients.

Okay. Perfect, thanks.

George Hill, Citigroup.

Hey, good afternoon guys and thanks for taking the question. I'll start off with a bookkeeping one for Rick. Can you talk about what was the contribution in the quarter from acquisitions? I know that Jardogs and dbMotion only closed in early March, but what was their revenue contribution to the quarter?

Negligible. Really almost nothing. Part of it is the timing and part of it, again, is because of our prior relationship with db. Whatever deals they had already in the pipeline, we tended to book those on a gross basis anyway.

All right. Fair enough. And then I guess, Paul, can you comment a little bit on as you guys are going to market and being invited to pitch now? I guess how are you differentiating yourselves, and kind of what kind of questions are you getting about Allscripts from an operational execution level vis-a-vis I would say your two principal competitors? And even I know that we are a month into Q2, but can you give us some color on how the conversations with clients have evolved since you took over in the lead role versus where we are right now about four months later? Appreciate any color there.

Sure. I would say that it always depends again upon what venue I'm in. If I'm on the West Coast and I'm talking to large a physician group practice, they're talking about things that are a little bit different than talking to a large integrated delivery network let's say in Cleveland. But there are seven or eight things that they are all talking about. One is they're interested in the revenue cycle component. They're also interested in our hosting capabilities. Some of them are interested in our total outsourcing capabilities. They are all interested in what we are doing and how we're going to help them connect the community from a population health management value-based care, whatever the current words are that they use, shared savings, shared cost, bundle payments or capitation. Those are all different vernacular that are being used by these organizations, many of whom may have anywhere from 100,000 to 400,000 lives under contract but there are multiple contracts that have multiple different economic formulas as to how they are working with them.

Then there are some new venture components they were talking about on the postacute in the retail clinic and the minute clinic kind of thing. Those are all extraordinarily interesting conversations. And in our pharmacy business, the transaction business is actually -- that's got kind of -- it's a hidden gem, if you will, of a nice recurring base for us where we sit there from an e-prescribing standpoint and -- publishing a lot of transactions each and every day. The conversation, though, broadly with the CEOs is all about population health management. And that's where we are having a lot of traction, and that's where we are having quite a bit of success, especially when you look at where we are today versus where some of the other parties might be.

Okay. And then maybe just a put you on the spot for a second, real quick follow-up. If we look out a year from now, if you had to put a percentage figure on it, what would you estimate client retention will look like?

I would say relatively high, George. I would just leave it at that. It's -- there's a lot of people that are pleased with the focus on execution. Our clients expect that, the people at work here expect that, and our shareholders kind of deserve it. So, that's a huge focus from my standpoint, being able to look people in the eye, make the commitment, come back to the ranch and make sure that we are delivering for them and that is going to be a very important component to people making a determination as to whether or not they're going to continue with us. But most of the conversations I'm in are about how we are expanding the relationship. They always want to make sure to hold us to -- our feet to the fire, which they should. But they're talking about additional applications, they're talking about additional services, and they're all talking about the population component. So I expect that to be a very high number from our standpoint.

Great, I appreciate the color. Thanks.

Mike Cherny, ISI Group.

Good afternoon guys. I know we had talked about this back the presentation at HIMSS on the focus on recurring revenue in terms of both the way the market is going and also the predictability of revenue. As you think about that component, those SAS bookings in the quarter were roughly 25%. What kind of contracts were those in terms of the types of clients that are pursuing SAS and subscription-based versus more traditional? And then do you have a peak level that you want to get to, or is it too early at this point to identify what that may be?

So, we'll take the questions maybe in reverse order. We don't have a targeted goal -- number per se of how much the bookings should be. What we want to do is go to market with offerings that clients want to buy. And if, for some reason, clients want to stay in the license model, then we'll stay in the license model with them. But we see an increasing preponderance -- increasing sort of preference for the subscription basis. And frankly, we have probably lagged in having an offering that meets that need. So we are busy trying to do that.

So there's not a target number other than I tell you again, this is now the fourth quarter in a row where we have been mid-20s% or above. And that all contributes toward a financial foundation which should create more predictable performance for us.

In terms of what's going there, I would say the looks of it are different. But one product that is particular strong for us right now is our Care Manager product. And that's a product that we sell both to our electronic health record base as well as some of our competitor base as well. So, that's a strong product for us.

The Follow My Health portal solution is another example of the a subscription basis such as that as well.

Great. Along the lines of Follow My Health and dbMotion, obviously two partners' companies you knew well on the acquisition front to beef up the ownership, obviously the folks at population health management. Are there any other areas from a technology perspective that you think, through M&A or maybe through specific targeted R&D projects, you think are necessary as you further along the population health management tool, particularly as you move obviously into a new world of accountable care organizations and all those other fun buzzwords?

I think we've got a pretty good handle on what the market demand is for those. But since it is somewhat of a new market, there are the components in there of analytics that everybody is working on that obviously had a bunch of different groups that were working on that inside of the Company, which we have consolidated into one organization. And we have a single plan for what we're going to do on the population analytics side as well as the reporting analytics from a quality standpoint that we referred to in the call. So that's one area that I think always can use additional bolstering. The big data piece that you hear people talk about, but analytics and the algorithms that you run in the background to help identify and then make sure that the appropriate cohorts of your population are getting the right kind of care at the right venue. So matching all that up, that air traffic control system, if you will, is something we will continue to work on and perfect over time. And more data running through the system helps you to perfect that as you are also tracking the outcomes, both clinically and financially. So that's probably one of the bigger areas that is a focus area for us.

And then broadly, the other thing we talked abou at HIMSS, the other capability that we have that we are continuing to invest in our hosting capabilities, our revenue cycle, to be able to offer total revenue cycle outsourcing which we signed an agreement this quarter. We had had other parts of our Company's history done that, so it's not a new area for us. But the revenue cycle outsourcing is important, and we will be making continued investments internally in that, as well as our total outsourcing business, which we signed additional total outsourcing this last quarter with one client and other clients are expressing an interest in that as well.

Steven Halper, Lazard Capital Markets.

Two housekeeping questions. If you look at the income statement, the $3.5 million adjustment in 2012, does that go back to the change in the accounting on that accrual?

Not really an accrual per se. It's a change we announced I believe it was in the third quarter. It was upon further reflection. Our auditors felt that some of what was embedded in our agreements needed to be called on maintenance as opposed to part of a software sale. So, it was kind of like inputting a maintenance stream as opposed to having it all in software. So we -- this is representing the reclass from what was previously reported. If you pulled out last year's press release, you would've saw that $3.5 million up in system sales rather than in maintenance.

Right, so the $37.2 million would've been $3.5 million higher?

Correct.

Okay. Then the other question is what's behind the lower cap rate on the R&D expense? Can you tell us sort of what -- what has taken priority now in terms of development and why you have less capitalized versus expense?

Let's level set on the question. If you remember from Q4 we actually had a 7% cap rate. And so we talked about it a fair amount then. We expected it to come back. You do see quarter-to-quarter volatility. So we went from mid-20s% down to 7%. Now we are at 13%. We had expected it to be a little higher, frankly, this quarter. It's a function of very byzantine accounting rules and requirements on documentation and things like that aligned with where we are on the -- where we are in the state of certain projects. There hasn't been any fundamental changes in direction of our efforts. It's really more driven by accounting requirements and how they are classified. So it's with the fact that we had 13% in Q1. I think it's going to be hard to see a full year in the range we had talked about in Q4. We at Q4 again recall I had said we thought for the year we would be back in that somewhere between 20% and 25% range. I think, with one quarter of '13, I just expect to be at the low end of that range or maybe even lower for the full year. And we'll try to keep you updated. But it's just the facts and circumstances being overlaid on the accounting rules.

Thank you.

Sandy Draper, Raymond James.

Thanks. A couple of housekeeping items initially for Rick. Following up on Steve's question, so the adjustment on the systems sales to maintenance revenue, will we see similar changes in the second and third quarter, or was it just this first quarter? I'm just trying to think, do I need to -- I'm thinking year-over-year for the next couple quarters. Do I need to make some type of adjustment mentally for the next couple of quarters?

For sure next quarter you'll see the same thing. And then we will have -- frankly I can't remember if that came out. I think that was Q3 where we first reported that. And so by the time you get to Q3, then there's no more need to restate.

Okay. In terms of I know you probably can't give me an exact number, similar magnitude in sort of that $3 million or $4 million, or could be something much bigger or is that --?

For Q2?

Yes.

The answer is yes, should be similar magnitude but we are happy to get you that off-line. I don't have that number in front of me. But It should be in the same ZIP code.

Okay, super. Second question, appreciate the more detailed disclosure around the cost. Looking at the amortization, I just want to make sure I'm getting it right. You've got the amortization, the software development costs and acquisitions up in cost of goods. Then you also have another amortization of intangibles down below the gross profit line. There is a $7.5 million that matches up. I want to make sure I'm not double counting. Those are two distinct numbers. The $7.5 million that's up in cost of goods, and then there's an additional $7.5 million that's down in the more operating expenses. Is that correct?

Yes, that's true. Trust me, if I could've rounded it differently, I would have, because I know it is a little confusing. But it's an unfortunate reality that it just happens to be the same number, but it's two different -- represents two different things.

Okay. So were all of those amortization costs up in cost of goods directly related to systems sales or were they spread through different -- through the different pieces of cost of goods to the different revenue components?

Previously, they were in systems sales. And that, frankly, is why we started to see some really goofy margin numbers start to show up around systems sales. I know I can just tell you we fielded lots and lots of questions about that. And so it's with that in mind is why we've decided to show you. I think we provided a lot of detail, but just to break it out so you can distinguish the cash from non-cash pieces.

Okay, yes, that's really helpful. And I may do the same thing and follow-up off-line to try to get some similar numbers for the other quarters.

Broader question, probably for Paul. When you think about bringing on dbMotion, does that change at all your philosophy of around ADX and does dbMotion replace anything or replace an older strategy, or is it really supplemental and what was in development around ADX and the integrated product is still really unchanged.

There's a few areas of overlap that we are working with each individual client where there has been some ADX integration systems. But there is a set of additional capabilities that you get with dbMotion that you didn't have with ADX. So we are walking through client by client and helping them roadmap, understand what we are going to do with that. But I would expect over time for there to be a unified answer in that regard as far as how we would sit on top of not only other heterogeneous EHRs but on top of a couple that we actually have that were legacy systems.

Charles Rhyee, Cowen and Company.

Hey guys. Thanks for taking the questions. Paul, I wanted to go back to an earlier question regarding our retention and maybe ask it a different way. Obviously, you had a number of clients leave prior to your coming on board, clients who were unhappy with probably a fair laundry list of things. Decisions that will be made over the next, I don't know, certain amount of period could still reflect processes started a while ago. When you look across the client base, can you give a sense on how much you think there is left to maybe wash through sort of the system on those? Are there any things that are sort of in the final stages? Do feel you have some opportunities to maybe halt those?

To the extent that there is -- where people have expressed a dissatisfaction or where people have expressed a lack of let's say interest in pursuing a relationship, we are going out and talking to them and we are demonstrating our new solutions and we are also talking to them about what they currently have that they're going to have to upgrade irrespective of what they may want to do two and three years from now. We are trying to have the discussion about the difference between the similar architecture in some cases between -- in that as juxtaposed versus a single community based patient record. A number of those conversations are resonating pretty well. All of those, though, are contingent upon our execution in 2013 against Meaningful Use 2 requirements and ICD-10. So to me there is a substantial amount of performance is going to be graded this year by our clients and we will be measured against that performance in 2013 at making any final determinations. And in that case, I'm talking about the low percentage of people who are actually having that conversation go through their head.

There's been a number of places that I've gone that, because of Q1 and the first, if you will, 90 days, not just because I'm here but because of deliveries that we've made this year for them, or software that we've put in place to remediate some issues that they may have had, they are pretty pleased. And they are, if you will, giving me great cards and giving the company great cards based on that, plus our ability to be responsive. And the organization understands the need to execute and the organization understands the need to retain clients. And there are many, many people that are working on that.

We did receive a call the other day from one of our clients that has asked to extend their relationship with us who had previously signed with a different supplier. And so there's things like that that are also going on in the marketplace. There's other people that are coming into the market and may have come into one of our installed bases with promises or expectations that they set but that they are not able to meet, and at least in one organization. And I at least have one example of that, where they've asked to extend their relationship with us. So it can go both ways. I of course am doing everything we can to make sure that it doesn't happen, but there will be some. That's how I would leave it right now.

Do you think there's a lot left on maybe people who are permanently unhappy that probably would leave regardless, or do you think there's no situation like that that you don't think you have an opportunity at least to go in and talk with them?

We are talking to everybody, and I of course have -- I am an eternal optimist as well as I also know what capabilities we have. And I've also been in many places that are extremely happy with us, so I know we can create an environment of success for our clients both from an ambulatory standpoint and an inpatient standpoint, as well as from a single architecture or a community. So depending upon what their desires are and how they want to align with us, I am confident that we can do that. So of course my answer is always going to be we think that we can go in and true-up any relationship through additional performance, not through discussion and not through talk, but through performance and delivery.

Sean Wieland, Piper Jaffray.

Thanks for taking the question. So you started off the call talking, saying that your client base is the greatest asset. And I was wondering if you could give us any insight as to what percentage of that client base is running a product that's currently marketed by your sales force.

That's running the current version?

Meaning that it is using a product that you are selling today.

All of them.

So you don't have anyone on MyWay anymore or on some of the older platforms?

I'm sorry. yes, I've got a few of those, but the MyWays that are left they are migrating to Pro. I misunderstood your question.

Okay. How about some of the older practice management systems that are out there? I just wanted to get a sense of how much of the base is using legacy software versus the newer stuff?

Do you have any idea?

Yes, we don't -- we don't have a number for you on that. Obviously, certain people have certain preferences for what they have and what they don't have. We think MU2 requirements in particular will force a lot more of the base towards current generation products, or making decisions on that. But we don't have a data point for you on that.

I've been to some of the legacy practice management clients; I've been to a lot of them actually. And it's a remarkably stable product. They're markedly happy with it. They actually are one of our lowest users of our support system, if you will. They log the lowest number of calls. So, that's an environment that we are carefully monitoring and making sure that we have continued conversations with them. Many of those clients, because of our relationship with them, have a different electronic medical record, hence we have a lot of touch points with them in various different product sets.

Okay, thanks. And the deal that you mentioned with the PBM piqued my interest a little bit. Can you give us any more details on that?

With those guys, we went in with them and we are, if you will, building a different type of transaction. And that transaction is going to allow us to use our medication history file versus having to go through an alternate source -- in this particular case that they've been going through in the past. And that combined with the online adjudication capabilities of the processor allows us to create a different transaction some healthcare organizations and some insurance companies that are looking at an alternate route in order to adjudicate that pharmacy client. It's pretty interesting.

Mr. Black, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thanks for your questions today. As you can see, we are beginning to make many critical decisions to return Allscripts to a trajectory of long-term growth. We're securing our installed base and continue in an unwavering focus on client focus and commitment. We are investing in the future and have moved aggressively to secure strategic architectural platforms that will accelerate our competitiveness, including our ability to deliver on our open connected community of health vision.

While this quarter was not optimal from a profitability perspective, we generated positive cash flow and bookings were solid, illustrating the depth and breadth of our offerings. We are making substantial progress in our initiatives to improve our operational effectiveness. And finally, we look forward to welcoming our clients at our annual client user group, the Allscripts Client Experience, or ACE, August 21-23 in Chicago. We also plan to host the investor community for a day as we have done in the past. Look for more details on that soon. Thank you very much for your patience and your time.

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