Veradigm Inc (MDRX) 2013 Q3 法說會逐字稿

Good afternoon. My name is Katrina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts third-quarter 2013 earnings conference call. (Operator Instructions). Thank you. I would now like to turn the call over to our host, Mr. Seth Frank, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Katrina. Today with us on the call are Paul Black, Allscripts President and Chief Executive Officer, and Rick Poulton, our Chief Financial Officer. During today's call, we will reference supplemental financial tables available on the investor relations homepage of the Allscripts website, 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 with accompanying explanations to assist you in evaluating the financial metrics we will discuss today. Before we begin, I will read the Safe Harbor statement.

This presentation will contain forward-looking statements within the meaning of the federal securities laws. These statements regarding future events and developments, the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates, or projections related 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 on our most recent report on Form 10-K, our earnings announcements, and other reports we file with the Securities and Exchange Commission. These are available at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statement whether is result of new information, future events, or otherwise. And now, I'd like to turn the call over to Paul Black, President and Chief Executive Officer of Allscripts.

Thank you, Seth, and thank you for joining us to discuss Allscripts 2013 third-quarter earnings results. Highlights of the third quarter of 2013 include strong bookings, major client expansions and renewals, and new clients added to the Allscripts Connected Community. We are executing on client obligations and have substantial work underway for MU 2 and ICD-10 upgrades. We have successfully aligned Allscripts corporate priorities to ensure client success in their journey to value-based care delivery. We are making measurable progress, tracking on plan with the key strategic imperatives we refocused the Company around this past January.

Allscripts' number 1 priority is a commitment to client success. For the past 11 months, I have spent the majority of my time face to face with clients around the globe. Year to date, I have conducted over 200 site visits and almost 250 in-person client meetings. This past August at the Allscripts Client Experience annual user group, or ACE, we hosted over 3000 client attendees from the United States and abroad. Our clients have been very clear about what their priorities are and Allscripts role in achieving them. We have also invested approximately $180 million in gross research and development spending year to date, a 20% increase over the same period in 2012. And we have invested more than $250 million in future requirements, enhancing both community and consumer connectivity platforms.

For example, we're increasing the functionality and interoperability of the community health record, focusing on impacting decision making at the point-of-care. We have continued to invest in patient engagement opportunities, as well as developing a new analytics platform for managing patient communities.

The Allscripts installed base scale, combined with an open platform, provides us with a significant competitive differentiation and a leading position to enable the movement from fee-for-service care to accountable care. This focus and investment is paying off. Bookings grew double digits in Q3 compared to prior periods with 40% of bookings coming from subscription contracts, a new record. We believe the migration to a higher mix of long term recurring revenue is the right strategy as we transition to more predictable, consistent growth.

While total revenue declined sequentially as a result of this transition, this result is isolated largely to nonrecurring revenue. In contrast, recurring revenue increased to 77% of total revenue compared to 72% last year. This result was driven by higher mix of subscription and maintenance revenues.

We still have work to do, and we are focused on the fundamental execution to ensure a solid foundation for future success for clients and shareholders.

Allscripts had an outstanding bookings quarter. Total bookings were $236 million, or approximately 47% growth year over year and 10% growth compared to the second quarter of 2013. This substantial uptick in growth over last year reflects a focused execution of our global client organization. Allscripts bookings year to date increased a solid 14% over 2012. We again had a healthy mix of sales, inside and outside of our core installed base. We had a net new clients in acute, ambulatory, population health management, and post-acute solutions. Year to date, we have added over 580 new client relationships.

Major client renewals and expansions is an important theme again this quarter, and I would like to recap a few of them for you.

We announced a comprehensive $120 million renewal, an expanded agreement with Presbyterian Intercommunity Hospital, or PIH, a major healthcare delivery network in southern California, serving a population of over 1.5 million lives. This new agreement runs through 2020, extends its existing partnership, and it also expands it into a recently-acquired hospital, PIH Downey.

In addition to the current ambulatory and acute solutions, PIH expanded the partnership to include the Allscripts full suite of population health offerings. PIH also contracted for Allscripts hosting and outsourcing services at PIH Downey.

I am also pleased to announce that Allscripts signed a new comprehensive partnership in the quarter with New York Presbyterian Hospital, extending the overall partnership to June 2019. In expanding the Allscripts solutions into a newly acquired facility, lower Manhattan hospital, formerly known as NY Downtown Hospital, we are exceptionally proud of this relationship with New York Presbyterian, and we look forward to continuing successful partnership in the future.

The consolidation opportunity can also favor us in the ambulatory marketplace. In the third quarter, we displaced a major private HCIT competitor at HealthCare Partners, or HCP, a subsidiary of DaVita HealthCare Partners. HCP manages and operates medical groups across multiple states and manages integrated care management for approximately 733,000 managed care lives.

In addition to expanding enterprise electronic health records across its California's medical group sites, HCP has embraced Allscripts for its population health management needs to Connected Communities and to empower consumers by selecting both dbMotion and FollowMyHealth. We will work closely with HCP to enable their vision of being a national role model for a consumer-based integrated, important coordinated care organization.

In summary, provider consolidation along with the impact of accountable care are driving Allscripts growth and creating opportunities for us. While some Allscripts clients may be acquired we're also seeing the benefits from existing clients growing and expanding through their own consolidation efforts. PIH, New York Presbyterian, and HealthCare Partners are examples.

Now, I would like to shift and talk about some specific solutions that we are delivering to the market.

Population health management is a strategic imperative for most healthcare executives today. With the migration from volume to value-based care delivery, interoperable population health management solutions connected to the consumer marketplace are the key to market leadership in the new healthcare ecosystem. Value-based care requires a digitized care across all care settings and across time. This creates a paradigm shift to a patient-centric, coordinated care model with a longitudinal patient record available at all points in the care continuum. Value-based care requires patient engagement solutions that integrate with existing longitudinal patient record investments. To be relevant to provider organizations growing through an acquisition strategy, the solutions must be EHR agnostic.

Allscripts population health management architecture meets these requirements with a proven solution in wide use today. This platform starts with dbMotion and FollowMyHealth combined with other key assets in the Allscripts portfolio. This contrasts with competitive offerings that are in the early stage or proof of concept work. Allscripts Population Health Management solutions went through such a development phase six years ago at the University of Pittsburgh Medical Center. Today, dbMotion integrates with 47 disparate systems at UPMC alone including all of Allscripts acute and ambulatory electronic health records competitors.

Around the globe, we today can harmonize data from over 227 different electronic medical records. DbMotion serves as a population health management platform at over 500 hospitals globally, supporting approximately 3000 clinics. We believe this is unprecedented in the industry today. We believe healthcare organizations have two choices -- rip and replace to automate the medical campus or digitize and protect prior investments to automate the community while innovating for the future. We offer both choices, a key differentiator.

And the proof is in the results. Population Health Management solutions comprise approximately 40% of Allscripts total bookings in Q3. Population Health Management bookings more than doubled year over year. In Q3, a large system in the Northeast chose dbMotion to expand the use of Sunrise into population health analytics, integrating Enterprise EHR and ambulatory setting throughout its own campus and integrating non-community-based affiliated physicians across the rest of their community.

We also signed a new Southeastern medical center client. They plan to use dbMotion to integrate two different in-patient EHR systems, connecting them to share patient data with affiliated physicians in their locale using numerous different EHR platforms.

The FollowMyHealth patient engagement platform also had a phenomenal quarter. We saw excellent traction in the Sunrise base across multiple academic medical centers with a strong pipeline heading into the end of the year and into 2014. We currently have approximately 50,000 providers currently active on the FollowMyHealth cloud-based platform, a 100% increase year to date, and we believe this represents a significantly larger presence than competitive offerings. Allscripts has long embraced cloud-based architecture and will migrate additional solutions into a multi-tenant, cloud-based environment as we believe the market requires. Today, we have multiple cloud-based EHR agnostic solutions including FollowMyHealth, Allscripts Care Management, Care Director, as well as Population Health Analytics. This year we migrated Professional EHR to a fully remote hosted platform. In addition, Payerpath and Allscripts e-prescribe solutions both reside in a cloud environment.

Collectively, these cloud-based solutions represent more than 25% of the bookings and approximately 15% of revenue in the third quarter. This matters because these offerings enable Allscripts to deliver exceptional functionality at a relatively low costs. In addition, Allscripts cloud-based solution serves as an innovator platform for a wild breadth of healthcare end users, including providers, payers, and patients.

In care coordination, Allscripts Care Management continues to gain traction as a scalable, proven technology to digitize transitions of care. Health systems and hospitals are focused on closely managing length of stay via discharge planning in order to prevent unnecessary acute readmissions. We estimate that we have approximately 38% market share of the comprehensive care management systems with over 1000 hospitals and 12,000 post-acute providers connecting daily on the Allscripts Referral Network.

In Q3, we estimate Allscripts Care Management client transitioned approximately 25% of all hospital discharges requiring post-acute care, a material position for our Company to hold in the important space of transitioning care out of the campus and into the community.

We also achieved a record of approximately 23,000 electronic referrals occurring daily on the Allscripts Care Management platform and referral management network.

Finally in the post-acute space, we enjoyed a strong quarter. Of note, we signed the largest new homecare agreement in the Company's history with Medical Services of America, a leading home care agency. This client expanded their existing relationship with us beyond hospice by choosing Allscripts Homecare in a competitive win. We continue to expand in home care and hospice to support the growing demand for care delivery in low acuity settings. This is an integral part of the emerging ACO community fabric. We estimate Allscripts currently has in excess of 25% of the home care market today.

Allscripts has been in a transformational mode this year, returning to core execution basics; investing in strategic platforms; and most importantly, delivering on critical client obligations. This is an incredibly challenging time for all of healthcare. It requires a strategic transition from fee-for-service to value-based care and a tactical transition preparing for ICD-10 and upgrading systems to meet Meaningful Use.

We began an industrial-strength rollout of MU 2 solutions immediately on their ONC certification in general availability this past summer. Allscripts clients will begin demonstrating for Meaningful Use 2 in the first calendar quarter of 2014. Since we last talked, multiple clients have completed these upgrades. Today, we offer complete EHR certification for every application required to test for Meaningful Use 2, along with modular certifications for client flexibility. Allscripts total eligible provider attestations for MU 1 ranks number 2 and are nearly twice that of the largest competitor. Taken together, we know of no other company who has progressed this swiftly to help clients to achieve this level of success in the Meaningful Use 1 and Meaningful Use 2 programs.

While at times there are challenges with new software versions and upgrades, we are working diligently to ensure the best possible experience by the deploying onsite resources when necessary and providing executive-level of attention and resolution where issues might arise. We are closely aligned with Allscripts clients to ensure their success.

As one of the largest and most important to date is Baylor Scott & White Health upgrade to Sunrise 6.1 on October 12 was a key example of a major Sunrise 6.1 upgrade success. This client activation was virtually flawless and client feedback has been positive. We saw nearly 4000 users were online the first weekday following the activation. We believe Baylor has now set the stage for Meaningful Use Stage 2 reporting.

I believe client confidence in Allscripts is increasing. Approximately 90% of Sunrise clients have or will commit to the 6.1 upgrade before the end of the year. These implementations will continue on a large scale during 2014.

In ambulatory, a large West Coast client experienced a successful Enterprise EHR upgrade to version 11.4.1 characterizing it to us as their best executed upgrade finishing faster than their previous activations and ahead of their budgeted hours.

Looking ahead, what excites me most about Allscripts is the potential of growing the impact we have in healthcare every day via what we think of as the Allscripts network effect. We have a presence in over 50,000 physician practices; over 1500 hospitals; and [12,000 post-acute facilities] (corrected by company after the call). And as most of you know, we work with providers of all sizes, not exclusively small physician groups. Allscripts unique ability to connect these entities to effectively manage care transitions in managed care on and off campus of any given institution remains a tremendous opportunity for which we are well positioned. We will exploit this as a powerful competitive advantage when we are competing for new clients. For example, we can demonstrate today that average hospital catchment area has over 3000 Allscripts clients in that area. So whether it is through Population Health Management solutions, the Allscripts referral network, or core enterprise health record, we have a multitude of opportunities to create a connected community of health without having to add new providers -- we already have them. They need to be repurposed or rerouted to the new paradigm of care.

We have been using Open as a competitive differentiator since 2007. We can accomplish this with proven leadership and demonstrate commitment to an open platform. We allow for and encourage innovation on top of this mobile architecture. In early October, Wand, Allscripts mobile iPad solution for the physician office, hit the 1 million patients mark. It is interesting to talk about being Open that we actually built Wand on the Allscripts open API, the same toolkit we provide to outside developers. This approach accelerates confidence from clients, partners, and software engineers that when Allscripts says Open, we mean it, ensuring scalability and exceptional functionality on this platform.

We are taking these competitive advantages globally. We recently hired Rich Berner, a healthcare IT industry veteran, to lead the Allscripts global business. With recent success of Sunrise activations in the United Kingdom and South Australia, we see further opportunities outside the US for core EHR and Population Health Management solutions.

In Canada, where we had a significant client base, Sunrise ambulatory care modules recently achieved electronic medical record J-class certification from the Canada health Infoway. Infoway is an independent organization accelerating the development, adoption, and interoperability of electronic health records across Canada. The organization sets national and international standards for privacy, security and interoperability of HCIT.

And with those comments, I will hand the call over to Rick, who will review the financial results in detail for the quarter.

Okay, thanks, Paul, and good afternoon, everyone. As I comment on our results, please utilize the GAAP and non-GAAP financial statements in our earnings news release as well as the supplemental data sheet posted to our investor relations website this afternoon.

I'm going to first make some broad comments on the quarter as well as our year-to-date progress and then I will provide a little more details on the numbers.

We continue to make very good progress on our four key financial goals for 2013. These are stabilize the client base; two, build confidence in Allscripts in the marketplace; third, create positive momentum in executing our sales and delivery plans; and then fourth, invest for long-term success.

The third quarter was defined by bookings acceleration, a continued mix shift within bookings and revenues to longer-term contracts, and continued aggressive investment in order to best position Allscripts to return to profitable growth. The investments we have made in our solutions and the client base are in early stages of creating return as evidenced by this quarter's bookings results. These investments include our R&D investments; investments in driving a lower, long-term cost structures and delivering on our higher client commitments; as well as the investments in the capital we made earlier this year as we completed the acquisitions of both dbMotion and Jardogs, two very critical assets for ensuring our success in client connectivity as well as patient engagement.

Taken together, we will have invested well over $0.5 billion in 2013 to ensure Allscripts client success and put us on a trajectory for long-term growth.

So now, I'll turn to third-quarter results. Paul did a very good job of talking about bookings detail, but I want to point out a couple of highlights from my perspective.

We grew bookings 46% compared to the third quarter of last year as well as increased bookings growth 10% on a sequential basis to the $236 million, a very strong performance by any measure. Certainly, the expanded agreement with PIH helped fuel the growth rates that I just mentioned, but we would have had a strong year-over-year growth even without that agreement.

For the year, bookings have increased 14% on a year-to-date basis compared to 2012, putting us in a very good position to meet the goal we set earlier this year, and communicated to you, that we intended to grow bookings year over year in 2013.

When we described our strategy to you last February, we described the goal of ensuring a more consistent, predictable, and profitable financial model at Allscripts for the long term. We set the stage that in 2013 would be a financial transition periods specifically within our P&L as that shift accelerates throughout the year. I think as you looked at the third quarter, you really see that this transition is well underway in our financial metrics and that this is largely driven by new subscriptions and managed services agreements.

SaaS bookings as a percentage of the total bookings for the period were 40% this quarter, the highest number we have ever had in a single quarter and up significantly from both the year-over-year and sequential comparisons. Within this group, an amount representing 25% of total bookings came from cloud-based delivered solutions, as Paul mentioned earlier. So while certain competitors of ours would like to think we are dinosaur EHR company, many of our solutions that Paul enumerated earlier are alive and well in the cloud.

Continuing what we saw in the second quarter, we engaged in multiple major client renewals and expansions, including PIH, New York Presbyterian, as well as some others. These client decisions are clear indicator of our stability and confidence in Allscripts. It is not a one-quarter phenomena but the latest quarter period of demonstrating this transformation.

And we're seeing these renewals expansions across our solutions suite including core EHR solutions, managed services, and major commitments to our accountable care portfolio.

It is in this area where we're having significant success. Approximately 40% of our bookings came from population health management solutions, and this compared to one third of our bookings last quarter and approximately 25% in the year ago period. We are executing on a strategic expansion of our offerings to build on this future growth, beyond EHR, and you will see that very much in this quarter.

As a reminder, client renewals for existing services and subscriptions do not count toward our bookings metric. So what you see this quarter is a combination of extended commitments, as well as strong add-on sales covering more facilities, more doctors, and more post-acute facilities. As a result of more long-term agreements, we saw our total backlog increase sequentially by 4%, or approximately $115 million to a total of $3.3 billion. This is a new high for Allscripts.

One metric that is also worth highlighting is that in 2013 we have added over $0.5 billion to our transaction processing backlog, reflecting subscription renewals, expansions, and new agreements. That metrics stayed relatively flat during 2012, so while some of this uptick ties to the renewal cycle, it is also clear that we are making significant progress.

Our maintenance backlog declined just slightly. This is a result of fewer client renewals of multi-year maintenance contracts this quarter due simply to the timing of contract maturities. Maintenance revenue grew sequentially, and I will discuss several more in a few moments.

So while the bookings results are encouraging, for the most part, we are not yet picking up these benefits on the income statement due in part to the timing of revenue recognition. The results of these collective efforts means that our income statement continues to be negatively impacted this year as we posted GAAP loss on significant noncash charges as well as expenses directed at increasing our organizational efficiency.

So now let me turn to the P&L and talk about revenue. Total non-GAAP revenue was $334 million, a decline of 7% year over year and 4% sequentially. The declines in revenue relative to both periods are due largely to a decline in systems sales revenue as well as our professional services. These are both the nonrecurring components of our top-line revenue production.

Systems sales revenue declined due to less software revenue recognized in the quarter, largely a function of the bookings mix shift that I've already talked about.

Services revenue had a more notable declined of about $10 million in the quarter. There are several factors that impacted this decline, including the go-live of several large implementations of our Sunrise platform late in Q2 and early Q3. Those go-lives were abroad in both the UK and South Australia. And these projects were not immediately backfilled with other new go-live projects. Also, we've had a meaningful amount of client service projects in which we are not yet recognizing revenue at the present time as clients await some upgrading upcoming releases of our products. So these efforts get hung up on our balance sheet as deferred revenue.

We expect that some of this revenue deferral will begin to be recognized in the remainder of 2013 as well as early 2014, and we also expect that MU 2 upgrades will provide some tailwind next year. However, we expect quarterly services revenue to settle in the low- to high- $50 million per quarter range for the next several quarters.

In contrast, maintenance revenue increased in the quarter compared to Q2, an encouraging trend relative to client stability and growth. There can be some variability in the quarterly progression of this metric, but generally we expect a flat trend over multiple quarters, in line with our year-to-date quarterly average of maintenance revenue. This is due to the shift from perpetual license agreements to subscription-based agreements and thus the recharacterization of these maintenance dollars into transactional processing and other revenue.

Our transaction processing and other revenue decreased 3% year over year but it increased 1% versus the second quarter. The total transaction processing revenue decline compared to last year was due to the roll off of an outsourcing client that we talked about in detail during our Q2 call.

The remaining revenue components of transaction processing, which include our remote hosting and our other transaction businesses were generally stable relative to prior periods and that is consistent our quite expectations.

You will see in the supplemental data sheet that SaaS-based revenue, which is what we historically call subscription agreements and is included in the transaction processing line, continues to trend up compared to prior periods. In fact, the subscription revenue this quarter of 14% -- is up 14%, I should say, year over year, and that is an important factor to consider as you evaluate our top line going forward.

Overall attrition rates within our core client base are consistent with our prior quarters.

Switching to margins, on a GAAP basis, system sales gross margins deteriorated due to less Allscripts software revenue, and it resulted in a higher mix of third-party software, which carries lower gross margins. In addition, we did have a higher mix of hardware during the period as well, which also contributed to this margin decline.

Looking at the impact of noncash expense on gross margins, amortization expense is an increasing headwind when comparing results from prior periods due to the higher capitalized software amortization as well as the increased acquisition-related amortization from the deals we did earlier this year.

For example, total noncash amortization expense within systems sales, the cost of sales measure, increased by $6.6 million versus last year accentuating the margin compression on a GAAP basis. We anticipate that Q4 will have a slightly more robust mix of software revenue helping to improve the system sales gross margin.

Our non-GAAP services margins were relatively stable and continue to be impacted by our continued investments in ongoing client commitments.

On an overall basis, we maintained our corporate gross margins on a non-GAAP basis at approximately 44%, and that was similar to what we had in Q2.

As we move down to operating expenses, SG&A expenses as reported increased approximately $14 million or 15% over the prior year and were essentially flat compared to Q2. Our reported SG&A was impacted by the following one-time items this quarter. We had approximately $14 million of severance and other nonrecurring costs, and we had approximately $2 million of transaction-related costs associated with the acquisitions we completed earlier this year. The vast majority of this transaction-related cost related to deferred consideration payouts. This is the stock consideration we gave in the deal that went to employees that still work for us. This is recognized as compensation expense. And we will be having this cost with us through the third quarter of 2014.

Netting this $16 million of nonrecurring expenses within SG&A, our third-quarter adjusted SG&A of approximately $89 million is a decline of $2 million on a sequential basis. The increase in SG&A compared to last year reflects additional expenses associated with dbMotion and the Jardogs acquisition, which will anniversary in the first quarter of 2014.

Turning to R&D, in the third quarter our gross R&D expenditures totaled almost $60 million or 20% growth year over year. We capitalized $11 million of R&D this quarter, or approximately 18% of the total spend. This is a capitalization rate consistent with Q2 but certainly down from last year. On a reported basis, R&D increased 31% year over year due to the absolute spending increase as that lower capitalization rate. We remain on target with our stated goal to invest double-digit growth in R&D investment throughout 2013. And gross R&D and spending, as Paul said, is up 20% year to date. These details can be found on the supplemental data sheet on the website.

Allscripts non-GAAP operating margins were relatively consistent with Q2 again off of a lower revenue base but bolstered by consistent gross margin quarter to quarter.

As we have discussed, operational efficiency is a key priority this year as we set our cost structure for the future. We remain on track to drive $50 million in annualized savings from our cost structure on a full-year run rate basis in 2014 when we compare that on an apples-to-apples basis with 2012. Most of the savings will come out in the SG&A line item.

Finally, moving down to nonoperating, we recorded approximately $3 million of noncash amortization expense in the quarter; approximately $2.5 million of this runs through our interest expense line and the remainder through our other income expense line. These expenses relate to preparing charges that stem from convertible bond accounting rules, and we will continue to add this back as the expense for non-GAAP purposes.

Moving to taxes, our non-GAAP effective tax rate for the quarter was 20%. This is a decline from the 34% we recorded in the second quarter. This variance and non-GAAP rate is simply due to the effect of permanent differences on a lower expected taxable income base. And so, we would expect the rate to be low for the balance of this year. We will give you guidance for next year as we get toward our fourth-quarter call.

After excluding all noncash and other adjustments we discussed, non-GAAP net income totaled $9 million, or $0.05 per share, flat with the second quarter. Also, weighted average shares outstanding were flat at approximately 178 million shares.

Adjusted EBITDA totaled approximately $40 million, and you can see the details of this calculation in table 5 of the news release. We ended the quarter with total liquidity of approximately $425 million, and this is comprised of cash, marketable securities, and undrawn amounts under our bank credit facilities.

So with that, thanks for your time and attention. I will turn the call back over to Paul before we take your questions, so that Paul can update you on a couple of timely announcements.

Thanks, Rick. Before we take your questions I have two items I would like to cover.

First, Cliff Meltzer, head of our solutions development, will be leaving Allscripts by the end of the year. During the past two years, Cliff has better driven alignment between research and development and the needs of our clients. I want to thank Cliff for his contributions, and we wish him well on the future.

Effective today, I have appointed Jim Hewitt, Allscripts Senior Vice President of Solutions Development as the new leader of our solutions development team. Jim is a healthcare IT industry veteran who brings highly valuable experience as a former Allscripts client as well as exceptional credentials as a commercial healthcare IT development executive. Jim was CEO of Jardogs, now FollowMyHealth. Jim knows Allscripts well both as a client, as the CIO of Springfield Clinic in southern Illinois, as well as through his tenure as the engineering lead for Enterprise EHR at Allscripts from 1999 through 2005. Jim is the right person to take Allscripts to the next level as we increase the effectiveness of our global development team and precisely align development resources with our clients and the requirements for the future.

Secondly, we are privileged to announce a five-year extension and expansion of our relationship with Montefiore Health System in New York, which signed in Q4. Allscripts will update Montefiore New Rochelle and Montefiore Mount Vernon hospitals to Sunrise 6.1 as well as Sunrise Clinical Analytics, radiology, and laboratory systems. This agreement also opens an opportunity for implementation of FollowMyHealth within Montefiore. We have been committed to these hospitals for many years and we look forward to working with this prestigious health system in the future.

And with that, we will open the call for questions.

(Operator Instructions) Charles Rhyee.

If I could ask a question around the Allscripts Care Management platform, if you can go more into that and describe to us a little bit more detail -- what are the parts that go into that? What types of providers are on it? And what kind of referrals -- what kind of information is going through that right now when a referral gets sent back and forth? That would be great. Thanks.

Sure. The key to this is having a caregiver that is at a discharge location, typically an in-patient setting is trying to figure out and coordinate the care of that person who is going to an outpatient setting where there is a step-down unit, a SNF, which is called a skilled nursing facility, a home care agency. And what traditionally has happened without this kind the capability is that you would send somebody out with paperwork. And what we do is we send out an electronic exchange, a send, acknowledgment, and receipt of that information from us to the receiving organization.

So the referral network is extraordinarily important component to the overall case management solution that we sell. One is just the management of all the documentation that has to accompany the patient as they depart the hospital. And the second one is the receipt of that information on the other end so that they can continue the protocols and the care path that that patient might be on in order to effectively manage the trajectory, and effectively manage their health in the post-acute setting.

George Hill.

The first question I am going to ask is something I feel like I probably should know the answer to. With everything we are seeing in the macro healthcare environment with respect to benefit design changes, we feel like we're seeing a lot of demand for what I would call ability to pay tools, eligibility verification tools, EOB, the point of care tools. I wanted to ask if you guys are seeing the same thing. And how do you feel you are positioned to penetrate that market on the rev cycle side?

That's a good question, George. We're seeing that as well, and we think that the managed care component to the practice management systems that we have and on the revenue cycle and on the patient accounting side are very important pieces that we have in place in some instances; in some instances the things are in the development, organization to be built this year.

So those are additional either buy, build, or partner for those. Historically, we have been partnering for them. I've been pretty interested in spearheading the engineering organization to build more of it. In some cases, on the practice management side, we have these capabilities today.

Paul, with a quick follow-up there is that I would say on the path down the road to population health, does this change in macro benefit design seem like -- I would ask you how much of an intermediate step does it seem like? And are you perceiving things the same way I am seeing things at my end?

I think that change in the benefit design might be an interim play. If you play this out far enough and depending on what part of the world you are operating in, like whether you are in California or in some places in New York where you have a very high percentage of capitation and in some cases, full cap, you will see the co-pay component to be a very important piece. But you are going to see a decline in the emphasis on the claims processing system, as an example. That will also then put more pressure on folks to understand at the shop floor with their costs are, which we feel we are very well-positioned with our EPSi solution, our cost accounting solution, which is pretty interesting to see the way this is all playing out.

Okay. I will stick to the 1.5 question limit and hop back in the queue. Thank you.

Robert Jones.

Just wanted to ask about conversion. The bookings have been growing nicely, impressive this quarter, especially when you consider the historic seasonality with 3Q, but you are clearly on the revenue side not quite tracking where the Street had been expecting. Can you maybe just talk about the right way to think about the backlog configuration and conversion expectations going forward? Specifically, if I think about population health and dbMotion becoming a bigger component of the new wins, anything you could share on how we should be thinking about revenue conversion would be really helpful.

It is clearly. That's the challenge. That is in part why I'm trying to give everybody a little more thinking on our services revenue. I think when I have looked at where the Street was relative to us and try to decompose it, I think the nonrecurring pieces of our revenue are where we are seeing the biggest variation, not the recurring pieces. And that is natural as we switch from less perpetual license sales to more subscription based.

So that is what is flowing through now. There is no real easy way to think about it. I think you can say on average a subscription deal is probably a five-year type deal. And you turn the meter on after you install it. Different products have a little bit of a different installation cycle. So contrast the FollowMyHealth portal -- that is a pretty short cycle between order taking and when it goes live -- versus say certainly a Sunrise would be installed at the other end of the spectrum. But even dbMotion is a little longer-term install right now.

So, you have that gap to install and then you think of it as probably a five-year ratable recognition after that.

So when you put that in the whole context of the whole backlog, there's lots of moving pieces and it's pretty tough to generalize, but those are the things you have to think about.

That's helpful. Thanks.

Ricky Goldwasser.

Can you talk a little bit with more detail about the replacement opportunity? As it relates to acquisition, how long does it take when one of your hospital customers makes an acquisition for them to have that conversation with you about replacing?

And somewhat related is what percent of the new dbMotion contracts that you have sales overlap with Allscripts clients versus clients that use other vendors?

On the first one, depends upon the strategy of the organization. But if it is an in-patient facility, when we see them in the cases that we cited in the call today, the four different organizations, they have been buying and then immediately contracting with us to begin a project by which to go put our systems in, once they've made that, if you will, enterprise determination that not only are they going to affiliate with the facility but there's going to be an asset transfer.

And so on the four that I cited today, the three in-patient settings and the one outpatient, those were all -- once they've made those affiliations they are putting us in.

On the dbMotion question, I'm not sure I was tracking what the question was. You're saying in our base versus outside our EHR base -- is that what you are saying, Ricky?

For the new bookings.

So I think it's fair to say dbMotion being new to the family is still probably spending most of the time building a pipeline off of our EHR client base, but it's certainly not exclusive. When we bought the company, about half their business was outside our base, and they continue to prospect outside our base.

And I know your question was just on dbMotion, but I just would say there are other solutions in our Population Health Management which are much more skewed toward outside our EHR base.

Okay. Thank you.

Michael Cherny.

One quick clarification for Rick, you mentioned something about tax guidance -- I assume you meant just for taxes not for actual guidance for 2014 as we get closer to the Q4 call.

Yes, that was definitely the context, Mike that I said it in was tax rate because I know we had given tax rate guidance earlier this year, and it is moving around a little bit due to the changing pretax income levels. And so I thought we'd clean that up for quite expectations going forward on the next call.

Yes, we're not saying right now what else we will guide towards. Certainly I think continue to share our thinking as we get to year end on what we see ahead but what that exactly looks like right now we are not going to say.

That was my understanding; appreciate that.

And then, Paul, maybe another question around dbMotion, given that it has now been part of the organization for few months. Obviously, this, along with a lot of the other tools you have, are playing out well in the bookings. How is your sales force reacted to being empowered with some of these other tools, some of these other packages? It is showing up in the bookings but in terms of the education process you've done with them, having them go back out to market, particularly when they are going to clients some of those in population health that maybe are not traditional Allscripts clients, what has energized them and what is the feedback they are getting, particularly for the clients that you're still pursuing in the pipeline but maybe haven't really signed yet?

The sales reps really like having something in their quiver that allows them to pull out when they are out in the marketplace. We've got a lot of great relationships in the market with existing clients. And with new business, this is something that seems to be front and center in most of the executive minds that we have the privilege of talking to. So the sales reps needed to get some education, but as a reminder, we have been working with dbMotion now for over four years. So, it wasn't a brand-new concept to us, and it wasn't a brand-new concept to the sales force.

We are, though, making sure that all salespeople have the educational background to be able to have a fluent conversation about this topic versus having to bring in a specialized sales force just to have a conversation around this.

So we are training people, and we're making sure that they are understanding the totality of the expanded placemat of solutions that we now have.

The other thing that is interesting is we actually got some very quality executives that came with those acquisitions as well as a quality engineering organization and a quality support and delivery organization. So there's been a lot of, if you will, gems in the assets we bought in addition to the core technology which is been a very pleasant surprise to all of us.

Last but not least, the combination of Jardogs now FollowMyHealth, and dbMotion has been a pretty powerful asset combination when we go to the marketplace because people -- they do want to connect and interoperate, but they also want start investment for and have a meaningful dialog around what the patient engagement strategy is for their health system.

Great, thanks. Thanks for all the color.

Greg Bolan.

Paul, could you maybe talk about the replacement of Cliff and just trying to think of the appropriate way to ask this, but clearly Allscripts is on a new path here while you are at the helm. And just wanted to see -- is the replacement putting leadership in place that you feel can allow you or enable you to take that additional share, expand that footprint within the acute ambulatory arena and more in line with your longer-term vision for the Company?

Cliff did a great job for this Company for a long period of time. I feel that on a going-forward basis that the alignment that we need to have between the amount of money that we spend on our research and development, between the ever-growing wants and needs of our installed base, and the vision of the Company to make sure that we are relevant player in the connected community of health, are all really important components of how we're managing every element of the business on a going-forward basis.

The thing that we have been focusing on internally, as you have heard us say probably 1000 times, is a focus on execution and a focus on making and keeping obligations to clients. So, we are extraordinarily laser focused on every element of the Company, every report, every executive, every meeting, where we start and begin with, what are we working on, and how are we spending the money, how is the money that is being spent right down the middle of the fairway of what the current needs of the clients are, as well as how do we spend additional money on the wow factors and on some of the things that other perhaps competitors may not be contemplating.

So I feel very good about the team we have in place today. Their ability to build a high-performance organization amongst all of them; their knowledge of the solutions that they are saying grace over and are accountable for are all extremely important.

And last but not least, we are running it by, if you will, the numbers with regard to much money we spend, the project plans, the deliverables, the dates, and the functionality are all in there and being managed at a corporate PMO. That is a regularly reviewed weekly activity with either a green or a red light on where we are.

That's great. Thanks, Paul. And just last question, on HealthCare Partners, known to be a well respected, good reputation within the ACO world, is it fair to say that dbMotion may have played a fairly significant role in your ability to displace a large private healthcare IT vendor there?

The answer is yes. But they also have been a really strong Enterprise EHR client for a long period of time. They have a very large internal IT shop that is extraordinarily adept at being able to convert their constituents, their caregivers' requirements into contextual workflow, using our systems, working with us.

They also have a very bold vision for what they want to do and how they compete in the markets they compete in. And they have an acknowledgment that the ability for them to connect inside of their physician offices in multi-specialty groups as well as connect outside the rest of the community in order for them to be a relevant player are all extremely important.

But they have been a believer in the open platform for long period of time, and I do believe that they are extremely eager users of dbMotion and they want it installed as quickly as they possibly can.

Got it. Thanks for all the color.

(Operator Instructions) Eric Coldwell.

1 1/2, but might be 2 1/2 by the time I'm done. Great call tonight.

First off, you went through a laundry list of solutions that you have that are cloud-based in nature. That was really good disclosure. During that discussion, you throughout something on enterprise, and I missed it. Just curious if you could tie that into your cloud strategy and what you've done with enterprise because I don't want to miss that one.

And then I guess my 0.5 question is 15% of revenue today cloud based in nature. I was hoping you could put that in context with where that might have been a year ago and how you see that trending over the next year or two.

On the enterprise question, we remotely host it in some cases today, but most of the time -- today, most of our enterprise clients especially our larger clients are client hosted around premise which represents an opportunity for us to go back in to outsource and to migrate those folks to our datacenter, which a lot of them are beginning to raise their hand and saying, given my CMS cuts and some of the other things that I have been working on why don't you give me a quote for us, for you, Allscripts, to host our solutions.

And then the 0.5 question, 15% of revenue cloud today, where was that a year ago and where might it go over the next couple of years?

Don't have off the top of my head where that was a year ago, so we may have to cover that, looking backwards. But what I can say is with 25% of bookings and 15% of revenue, bookings is the leading indicator of revenue, so that number should go up.

That is great. Thanks a lot.

Jamie Stockton.

Paul, the traction that you guys have had recently when a comes to some of these SaaS solutions, especially the multi-tenant solutions, has it changed the long term thought about what you're doing in the ambulatory space as far as leaning toward more remotely hosted? I hear your comments to the previous questions that you are seeing a lot of incremental interest in the remote hosting solution, but have you thought about whether there is a place for a true multi-tenant solution in the future on the ambulatory side?

Yes, to me whether it is multi-tenant or whether it is hosted, we absolutely are going to go in that direction. From the standpoint of that is what clients want and we will always be very malleable when a client says this is the way I would like and I prefer to pay for, acquire, and have my system managed. A lot of benefit to them of having somebody else run, operate, build, support, upgrade systems, if you will, in the cloud or behind the wall, behind the curtain. And we intend to move to an environment globally where we're doing much more in offloading our clients -- much more of the work is coming to us versus staying on site with them.

Okay. And then maybe Rick, just gross margin profile for the typical SaaS solutions, if you could update us on that.

Again, we use this term, SaaS, to describe all of our subscription models, whether it is delivered through a classic multi-tenant cloud-based delivery or just remote hosted. When we use the term SaaS, we are including both.

It is significantly north of where our enterprise gross margins are right now.

Okay, thank you.

David Larsen.

Congratulations on a great quarter. Can you talk about the in-sell opportunity for your Sunrise 6.1 platform and also the enterprise 11.6.1 platform?

The in-sell opportunity so for your existing base of hospital clients, how many facilities will need to install those products?

In the United States, all of them will, and we are, I think I said in my comments, a very high percentage of our enterprise, Sunrise and Pro base have signed for the upgrades. They need those upgrades to get their Meaningful Use 2 dollars.

Okay, great. Thanks.

And just so you know, that gives us an opportunity to talk to them about whatever else they have. And they've got their organizations lined up to go do an upgrade, and you'd like to get additional value out of spending the time to do that upgrade. They will get a lot of value when they get their Meaningful Use 2 check. But that's a really great time to also talk to them about FollowMyHealth Patient Portal, about a lot of the other solutions that we have in many cases they were unaware of.

Okay. And then you also mentioned the term global a couple of times. Which countries are you expanding most aggressively in? Is that a significant focus?

We have a big focus in install base both in Australia, Canada, Singapore and the United Kingdom.

Okay, thanks.

Richard Close.

Just a follow-up on David's question here with respect to the upgrades. I think you mentioned 90% committed to 6.1 in 2014. How comfortable do you feel that the team you have in place can continue the flawless execution that you have had already on the most recent upgrades?

Well, I am never comfortable which is why we continue to have the inspections that we have every week. It's not that the people that are here aren't great, it's just that with the reason that, in my opinion, that we have done as well as we had is we've had a lot of inspections and we have had a lot of collaboration internally as well as with our clients to make sure people understand the complexities that surround an upgrade of this magnitude.

It is the mechanization of that is what I am trying to get to such that there is very little variance as we go from the 16th to the 30th to the 50th to the 100th upgrade and that we are also, as I mentioned a minute ago, adding some interesting cool applications that go along with that that add a lot of value to the health system so it's not just a like-for-like upgrade to get the Meaningful Use.

We have bought a bunch of additional features whether it is Enterprise Pro or Sunrise that people have been asking for, so that is part of the reason why they are doing the upgrades in addition to the MU 2. But it's, broadly, probably I feel very confident that this team will continue to execute at the ramp that they have been doing. And after you've done a large number of upgrades, they actually get a bit easier because you've seen a lot of the issues before, and you have been able to [surveill] the upgrade and the entire client environment in a much more effective way to understand what you're walking into.

Thank you very much.

Thank you very much for your questions today. To wrap it up, we're pleased with the sales in the quarter which usually is a very tough quarter for HCIT. And with the growth in recurring revenue, we are migrating to an increased financial consistency and predictability over time. We're delivering on our major software upgrade obligations; accelerating the client base toward readiness for ICD-10, Meaningful Use 2, and beyond. We have a strong leadership position in the post-EHR market and are positioned well ahead of the competition in scale, solutions available now, and our corporate philosophy and design to be open.

Finally, we also see in multiple opportunities to grow wallet and market share in a core business as the Company's client base grows through this consolidation phase. We expect to leverage the Company's vast Connected Community network as a strategic asset.

We look forward to speaking with you again soon. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.