Veradigm Inc (MDRX) 2014 Q1 法說會逐字稿

Good afternoon. My name is Vonda and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts first-quarter 2014 earnings conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Seth Frank, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Vonda. Welcome to the Allscripts first-quarter call.

Today with us are Paul Black, Allscripts President and Chief Executive Officer, and Rick Poulton, our Chief Financial Officer.

Some of the statements that we will make today may be considered forward looking, including statements regarding future investments and our future performance. These statements involve a number of risks and uncertainties that could cause our actual results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them -- to revise these forward-looking statements in light of new information or future events. Please refer to our SEC filings for more detailed descriptions of the risk factors that may affect our results.

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

Thank you for joining us to discuss Allscripts first-quarter 2014 earnings results.

I am pleased to report that in the first quarter of 2014, Allscripts quarterly bookings grew 26%, recurring revenue increased to 78% of total non-GAAP revenue, and gross margins expanded on a year-over-year and on a sequential basis.

Bookings totaled $223 million. This is a record first-quarter bookings performance. We believe that this is a solid start to the year and is in line with the multiyear plan for revenue and profit growth that we disclosed to you in January.

Allscripts success stems from long-term focus on our clients' success. We believe this focus ensures that more clients will choose us as a long-term strategic partner, allowing us to grow the business with them as their needs evolve. In addition to strong bookings coming from the existing client base, we added approximately 130 net new clients in the first quarter.

My comments today will focus on sales success and operational execution. First, I will discuss the performance within Allscripts core clinical and financial solutions business and the continued growth we see in population health management. Next, I will discuss some recent industry developments and how those may impact the industry. Finally, covering initiatives we are taking to continue to streamline the organization to create tighter alignment with our clients.

We experienced strength across business segments, including core EHR and physician practice management, population health management, and managed IT services. Within acute, we announced the first new Sunrise client in 2014, Shenandoah Regional Medical Center, which will replace their legacy system with the integrated Sunrise platform, spanning multiple venues of care.

We believe there will be additional opportunities for new integrated Sunrise platform sales over the next several years as we compete aggressively in the replacement EHR market.

Note that the Shenandoah agreement closed early in the second quarter and is not reflected in the first-quarter bookings.

We're also focused on adding additional value to the Sunrise Integrated Patient Record platform, which will enable more cross-sell opportunities and drive new sales.

We're beginning to see the benefits of a disciplined R&D investment strategy for Sunrise. In recent quarters, we have delivered substantial enhancements and content in the area of the ambulatory, surgery, health record management, emergency department, and Sunrise Financial Manager.

Client success and third-party client surveys are validating this progress. In Q1, Black Book Rankings, in a survey of 170 provider organizations, named Sunrise the top overall inpatient EHR for academic medical centers and large hospitals with greater than 300 beds. This was the first time in corporate history that we received this distinction.

In the large ambulatory segment, we believe TouchWorks outperformed expectations in the large outpatient environment. Two notable TouchWorks wins this quarter were Southern Illinois University and Lakeland Regional Medical Center in Florida.

We also had a strong quarter of professional practice sales into the community and mid-sized physician EHR market. We achieved significant double-digit sales growth sequentially and year over year.

All new wins were competitive situations that displayed major [income mix] solutions. EPSi, Allscripts activity-based accounting solution, was rated category leader for decision support in 2013's Best in KLAS Report. This was the eighth consecutive year of this recognition. We're also seeing KLAS course for Payerpath training upwards, with those scores reaching an all-time high in March.

In addition to the continuous client focus, we're starting to increase market share by increasing and establishing new client relationships both domestically and internationally. Internationally, we're off to a strong start, finishing ahead of planned Q1. We had successful activations in the United Kingdom and Australia and are seeing an increase in the global sales pipeline. We were recognized by Frost & Sullivan with the 2014 Australia-New Zealand excellence in growth strategy award. They have done their analysis of the EHR market in that part of the world.

We are looking at opportunities to leverage success in Canada, Singapore, Australia, and the Middle East and look forward to bring Allscripts leading solutions to other parts of the world.

While we continue to be successful as a core supplier of integrated on-campus EHR solutions, Allscripts Population Health Management strategy is aimed squarely at coordinating care outside the campus by facilitating the integration and interoperability of disparate communities' data sources through an open connected community of health.

Allscripts leadership position in population health is highlighted by a recent survey conducted by Black Book Rankings, which named dbMotion as the top HIE solution for 2013 in the ambulatory and provider-centric segment. Population health solutions totaled 36% of total bookings in the first quarter of 2014, compared with 42% in the fourth quarter of 2013 and 23% in the first quarter of 2013. This performance was driven by multiple new dbMotion and population health analytic sales to major health systems. We also added hundreds of new FollowMyHealth consumer proto-clients and we made a number of important new sales in the postacute space.

We also see client momentum in care management and postacute care, including the addition of a major new hospice client with over 2,000 locations across [as many] states. The Bronx-Lebanon Hospital expanded their relationship through 2022 and recently selected Allscripts Care Director to help them manage their nearly 9,000 patients in the New York State Medicaid health home program.

We've invested research and development to deliver important new functionality across the Population Health suite. The FollowMyHealth Achieve solution is one example. Achieve enables providers to engage patients directly in ongoing management of their care, monitoring compliance with care plans remotely and initiating interventions quickly, as needed, to influence behavior and impact outcomes in a very real way. Achieve allows clinicians to connect with patients more consistently, to interact and stay connected in between visits to truly change behaviors that contribute to their improved health conditions.

Addressing certain industry and regulatory trends, we remain focused on enabling clients to maximize the value of their investment in Allscripts technology. This includes focusing on critical deliverables related to meaningful use. Many clients continue to make progress demonstrating and the custom for MU-2.

Last week, we announced that a Sunrise client, Carson Tahoe Health, became one of the first hospitals in the country with tests for MU-2. This was a major collective achievement. Citrus Valley Health Partners became one of the first in the country to achieve a 2014 MU Stage 2 requirement for electronic transitions of care, by transmitting the minimum of 10% discharge documentation between disparate acute and ambulatory EHRs. This was accomplished by the utilization of dbMotion.

In addition to meaningful use deliverables, we also believe it is important for Allscripts clients to demonstrate sophisticated EHR adoption via the HIMSS analytics adoption model. We have a number of clients domestically, as well as internationally, near or at the top of that hierarchy. In Q1, Northeast Georgia Health System leveraged TouchWorks to achieve HIMSS analytics Stage 7, the highest attainable level adoption model for an ambulatory EHR. Northeast Georgia was the first provider to utilize a standalone ambulatory solution to achieve this distinction.

We received questions about what the pause in ICD-10 adoption will remain -- or mean for our clients. Allscripts is ready for ICD-10. The message we're sending to our clients is to move now and be ready for the October 2015 deadline.

Recently, our Payerpath revenue cycle management solution passed a major CMS ICD-10 testing process. This validates Allscripts revenue cycle management solutions are ready for the ICD-10 mandate.

Finally, keeping clients as a number one priority requires a focused client organization. The actions we took in 2013 to align the organization into business units has delivered execution, greater innovation, improved performance, and better client satisfaction. We believe these actions helped drive the bookings growth discussed earlier.

We recently instituted the role of the Allscripts outcomes executive, or ALE. The outcomes executives are responsible for the delivery of value for the long-term success of client relationships. Their focus is on better alignment between Allscripts and our clients' goals, which we expect will improve client satisfaction. By focusing on these areas, we expect to achieve improved growth in operating margins, lower discretionary spending, and improved operating leverage from our accelerated R&D investments in 2013, which should benefit both Allscripts and our financial stakeholders.

Looking ahead, 2014 will be a year where we expect to deliver on multiple priorities that are aligned with client success. We will focus on executing in the managed IT services space, remote hosting, and IT outsourcing. We are driving operational effectiveness, scale, and productivity within hosting. We are seeing good demand, a solid year-on-year growth in hosting, while outsourcing bookings doubled compared with the first quarter of 2013.

We also expect to maintain our leadership position in the Population Health Management, which we believe will be a strategic growth driver for us over the next several years.

In 2014, we will continue with an unrelenting focus on the client. When we succeed with clients, everything else falls into place, and I like our progress here. When we look at the Black Book Report I mentioned and the categories it uses to rate suppliers, the one area I am most proud of is that Allscripts was rated number one in trust. That is currency for the long term and not something we take for granted.

With those comments, I will turn the call over to Rick to discuss first-quarter financials.

Okay, thanks, Paul, and good afternoon, everyone.

As I discuss our first-quarter results, please refer to the GAAP financial statements and the non-GAAP tables in our earnings release, as well as the supplemental data sheet that was posted to our investor relations website this afternoon.

As is now customary, I will make some general comments summarizing the quarter, and then I will go into a little more specific details after that. To summarize, I want to echo Paul's comments regarding our first-quarter results. We are off to a very solid start to the year and remain focused on executing against the three-year financial goals that we had presented in January.

First-quarter bookings grew significantly year over year, and we are continuing to build backlog and enhance Allscripts topline consistency and visibility. Recurring revenue continues to build as a percentage of total revenue, which is consistent with the goals we set out previously. Within this increasingly large bucket of recurring revenue, our maintenance revenue remained stable, just as we had forecasted in our fourth-quarter call, and we are seeing growth in subscription, outsourcing, and hosting revenue.

As Paul mentioned, gross margin improved year over year and sequentially, and we are keeping both our SG&A expenses, as well as our investment in research and development spending, in check. In addition, as you'll see in reviewing the GAAP results, nonrecurring expenses and transaction-related costs declined significantly compared with last year; thus, this saves us significant cash.

2014 will be a year that focuses on improving our P&L and growing cash earnings, specifically our adjusted EBITDA. This quarter, we generated $48 million of adjusted EBITDA, the same as in Q4, but -- and this is in what is typically a seasonally softer quarter. Last year's first quarter had $50 million of adjusted EBITDA, but as highlighted in our release, this included $8 million that came from the sale of an asset. So we feel very good about the quality of our cash earnings this quarter.

While we have plenty work ahead of us, we are pleased with our start to the year. Our performance is consistent with our internal plan and we believe the general trend will be one of improved results as the year rolls out.

So, now I will shift to some more details. I won't belabor the bookings results, which we know is Paul's favorite subject and which he covered extensively already, but I do want to reinforce the point that growth of 26% on a year-over-year basis is a great achievement. In dollar terms, this is consistent with the approximate level of bookings that we indicated in January will drive our multiyear growth plan.

The quarter was notable for an improvement in ambulatory bookings with our Pro solution, as well as growth in Population Health Management and managed IT services. Overall, it was a good balance of new business in our bookings this quarter.

Subscription, or SaaS, bookings were 42% of total bookings in the quarter, and it grew 110% on a dollar basis compared to where we were in the first quarter of 2013. During the quarter, 36% of bookings were from the sale of Population Health Management solutions, so demand continues to be very strong for this industry-leading suite of solutions.

Our backlog at the end of the quarter was $3.44 billion, which is up slightly from the end of fourth quarter.

So when evaluating Allscripts, I want to remind you that bookings and backlog figures -- remember that client renewals, transaction fees, and maintenance revenue commitments are not included in our bookings, but they are reflected in backlog for their contractual period.

Moving to the P&L, it's important to remember for forecasting and modeling purposes that there is a significant lag in the conversion of certain quarter bookings to revenue, due to the overall larger mix of multiyear subscription and managed services contracts. We illustrated this in our investor presentation from January, so please refer back to that if you need a refresher on how this works, but we are well on our way to building a meaningfully higher revenue visibility model relative to our historical results.

Our total non-GAAP revenue was $345 million. This was down $3 million compared with last year, but consistent with our internal plan. This $345 million includes revenue adjustments of $4.5 million from the GAAP results, which while -- which were modestly higher than prior periods, but they represent the same adjusting items. As a reminder, the GAAP revenue results are reduced for the impact of purchase accounting and other contract accounting adjustments, and we add those back to our non-cash -- we add back these non-cash impacts into our non-GAAP revenue.

The impact of these adjustments are expected to taper down throughout the remainder of this year and we would not anticipate further adjustment after 2014.

The overall year-over-year decline of $3 million comes from two specific items. First, we had a large outsourcing client worth approximately $5 million per quarter that moved these services back in house. We have referred to this several times in past earnings calls, so we're just about to the anniversary that effect as we move into the second quarter. In addition, our hardware revenue declined by approximately $3 million versus the first quarter of last year.

So if you exclude these items, we saw core revenue growth year over year -- we saw core growth even with a $10 million reduction in professional services. Again, we think this is a very significant accomplishment.

Similarly, looking at revenue performance on a sequential basis, on our fourth-quarter call I described some revenue lift we had in both professional services and maintenance that we did not expect to recur in the first quarter. That turned out as expected and accounts for the sequential decline that you see.

So I would reiterate what we have said for the last two quarters, which is that we expect quarterly professional services revenue, on average, to settle in in the low to mid $50 million range per quarter, consistent with what we have seen here in Q1. Our overall trends in maintenance are stable year over year at approximately $118 million, and this is a good indicator of the current stability of our client base, many of whom maintain annual or multiyear software maintenance agreements with us.

The topline growth drivers in Q1 were largely related to subscription-based software agreements, as well as hosting and outsourcing revenue agreements. The shift from perpetual license agreements that have separate maintenance contracts to bundled software and maintenance subscription-based agreements for new purchases continues to be a significant component of our bookings and increasing the amount of recurring revenue as a percentage of total revenue.

Our transaction processing and other revenue grew 7% year over year to $151 million on a non-GAAP basis. Notably, we also saw a sequential uptick of -- this was a sequential uptick of 5%. We posted a positive year-over-year comp in this area despite the loss of the $5 million in revenue from an outsourcing customer that I referred to above. So again, we feel very good about how our subscription sales are now beginning to work their way into the P&L.

Our SaaS-based revenue, or subscription revenue, which we have historically called our subscription agreements, is included in the transaction processing line, and we had a very strong period here -- we had a very strong quarter compared with prior periods. Subscription revenue grew 19% compared with last year and 6% sequentially.

So that's some details on revenue. Now I will shift to gross margins. If we look at our gross margin, system sales gross margins improved again this quarter, largely based on mix, specifically a larger proportion of Allscripts software revenue, combined with lower hardware sales. If we exclude non-cash amortization expense, as we show you on the P&L that accompanies the release, gross margins for system sales was approximately 66%. This is up meaningfully both year over year and sequentially.

Our professional services margin declined versus prior periods, due to fewer billable hours in the quarter, and that was reflected in the lower revenue. We will continue to actively manage costs and efficiency within our professional services business to drive improvements in the annual margin, but there may be some quarter-to-quarter variations. The continued impact of upgrades for meaningful use will have some positive impact during the balance of the year.

Finally, gross margins were up somewhat year over year in maintenance, as well as transaction processing and other revenue lines, due largely to an increasing mix of high-margin subscription revenue and improving outsourcing margins.

Overall, Allscripts gross margin on a non-GAAP basis improved to 44.9% during the period. This compares to 44.4% in Q4 and 42.5% in last year's first quarter. So overall gross margin trend is positive and we continue to work hard to continue that momentum.

Continuing to move down the P&L, if we look at operating expenses, our GAAP SG&A costs declined $14 million over the first quarter of 2013 and $19 million compared to the fourth quarter of last year. Our total nonrecurring expenses and transaction-related costs totaled -- in the first quarter were $3.7 million. That's down about $17 million from the first quarter of last year and this explains a lot of that year-over-year GAAP decline in SG&A.

When we look at SG&A on a non-GAAP basis, we were down $3 million in the quarter on a year-over-year basis. We did see this number increase sequentially by a couple of million dollars, due largely to seasonal spending. That seasonal spending really comes from the big HIMSS show, our own annual sales meeting that we have once a year, as well as higher audit fees, which are skewed most heavily in the first quarter.

Overall, our spending was consistent with plan, and we believe we are well positioned to continue to aggressively manage adjusted SG&A costs throughout the balance of 2014.

As we look ahead and as we indicated in Q4, we expect total nonrecurring expenses for the year to approximate $20 million, and we spent a total of just under $4 million in the first quarter. We estimate that about $15 million of this $20 million total will be in the form of cash costs and the rest represents amortization of deferred compensation expense associated with the dbMotion acquisition.

So, that's our outlook for the year, and the first quarter was largely in line with that projection we gave you at Q4 for nonrecurring expenses.

When we look at first-quarter R&D expenses, gross research and development totaled $61 million, which is up about $2 million from the fourth quarter and is up 5% versus the first quarter of last year. As we had indicated previously, we expect R&D expenses to remain relatively consistent with 2013 levels, after what has been several years of double-digit growth in this area.

On the P&L, our reported R&D was $52 million, as we had capitalized $9 million during the quarter, or approximately 15% of the total spend, which is a slight decline from the 19% that we had capitalized in Q4. These details can be found also on the supplemental data sheet on our website.

Moving down into nonoperating areas, consistent with prior quarters, we recorded approximately $2.5 million of non-cash interest expense, and this relates to the convertible notes that we -- offering that we executed last June.

Finally, regarding taxes, Allscripts non-GAAP effective tax rate in the first quarter was 35%, which is consistent with the range we discussed with you in Q4. As we mentioned in our release, the impact of R&D tax credits in last year's first quarter, as well as valuation allowances that we booked in this year's first quarter, dramatically impacted effective tax rates between the periods, and this obviously then skews any comparisons between periods in terms of net income or earnings-per-share calculations, and that would be both on a GAAP and a non-GAAP basis that that impact shows up.

After we exclude all non-cash and other adjustments, our non-GAAP net income totaled $12 million, or $0.07 per share. The weighted average shares outstanding increased sequentially by 500,000 to approximately 179 million shares.

Finally, we ended the quarter with cash and cash equivalents of $43 million and had undrawn amounts under our senior credit facilities of $360 million. Our total face value of our debt consists of $345 million of our convertible bonds and approximately $280 million of amounts outstanding under our senior credit facilities. You should note that we repaid approximately $15 million of indebtedness during the first quarter.

So, to summarize, we're off to a very good start and we're executing on our plan for non-GAAP revenue and adjusted EBITDA growth over the next three years that we shared with you in January. Our recurring revenue is growing and gross margins are expanding. And we are aggressively managing our discretionary spending and will continue to look for opportunities to be leaner and more efficient and responsive to our clients, while at the same time we will make some additional investments in our infrastructure, which we believe will have a strong long-term ROI.

So with that, thanks for your time and attention and we will now take your questions.

(Operator Instructions). Gavin Weiss, JPMorgan.

So, another quarter of impressive bookings growth. It looks like Population Health was down as a percent of total bookings, but still up on a dollar basis year over year. Can you just talk about what are the biggest areas outside of Population Health that drove bookings growth in the quarter? I know I saw some deals that had Financial Manager and remote hosting. Are you seeing more interest in those areas?

Yes, I would say that, Gavin, we had good growth in new, in (technical difficulty), in hosting, outsourcing, and interestingly, in the ambulatory space we've had a lot of business in Pro and in enterprise in either replacement or where clients had started down another path and then come back to us as they're going to look to do a total enterprise rollout.

Okay, and Rick, just a quick one. You talked about the mix shift in system sales and how it impacted margins in the quarter. How should we think about that going forward? Is this lower hardware sort of a one-time thing or is that more of a consistent trend we should expect?

It may have a little variability, Gavin, but I would say in general we are -- we are not looking to sell hardware. That's something we do to support a sale, as opposed to a prime reason, and we have now oriented all of our sales commission plans to make sure those incentives are aligned the right way. So I think there will be a little less focus on hardware than there might have been in the past.

Okay, great. Thank you very much.

Jeff Garro, William Blair & Company.

Thanks for taking the questions. You guys had a slew of important product releases over the last year, and obviously the focus seems to be on successful sales and implementations of those products. But I want to see what is queued up next when the current wave dies down.

We hope the current wave never dies down, but there seems to be a pretty robust opportunity out there for either replacement electronic medical record systems, the new business that is coming from hospitals and, if you will, some of the smaller organizations, community hospitals, and some of the critical access areas have been an interesting new growth area for us that have not historically been a strong point for us. And we are getting a lot of activity there and some great success.

Our global business is continuing to pay a lot of dividends for the folks that we put in the marketplaces there that historically has probably not contributed on a consistent basis as much as we would like. And the Population Health Management is really continuing to have a lot of wind in the sail, and I don't see that dissipating anytime soon.

Great, and then, congratulations on the Black Book Rankings that you guys discussed. But is there a particular or specific strategy that you guys have in mind to correct the gap between those Black Book results for academic medical centers and where Sunrise's market share has been going?

We continue to focus from a client satisfaction standpoint on all elements of the business. We are also working with other rating agencies to continue to understand how they are viewing us and what our clients are telling them.

So, it's been a lot of focus internally on making sure that we write good software, we have good processes internally, we deliver on our obligations, and we don't break the trust, and that's a big, important piece of maintaining in business a good, strong overall relationship.

Once you do that, people are happy. They tell others. They pay their bills on time and it's a nice closed-loop system. So, that's been a pretty important internal focus that we have not had -- there wasn't breakage in that in the past. It's just an additional focus on that in payment, in culture, and the way we promote people, the way we do internal recognition. That's a very important piece of what we are recognizing. As we align with our clients, good things are going to happen to us.

Great, and then one last quick question. You mentioned that the bookings for outsourcing doubled in the quarter. I just wanted to see if that was due to any one or two outsized clients or if just the volume of outsourced clients has really picked up? Thanks again.

Yes, we didn't have any huge deals there. There was a number of medium-sized deals, and then not -- like in Q3 of 2013, we had one very large deal and we are seeing the pipeline, importantly, for our outsourcing business really speed up, which is exciting.

People are under pressure. There is capital constraints out in the marketplace, and to the extent that they can move some of those capital constraints over to us and have a regular and predictable model in that regard, there is people that are looking at pieces and elements of their business that they have not historically outsourced and we are happy to do that for them.

I would add, Jeff, too, that some of it is expansion of footprint with some current clients as well, so the deals are actually getting larger.

Dave Francis, RBC Capital Markets.

Along the lines of meaningful use 2, and congratulations on the Carson Tahoe folks moving forward there, that notwithstanding, there has been some concern in the markets about how quickly just both hospitals and physicians in general have been moving forward relative to attestation rates and what have you. Can you talk about what you guys are seeing there and what you're doing from a consulting or services perspective to help your clients move forward there to be able to collect the federal money and move forward on attestations?

This is a big focus for us last year -- or this year. Last year, we talked a lot about getting ONC certification, which we did in June for almost every solution, with the exception of a couple, which we completed by the end of, I believe it was, August? And then, we immediately went to getting the solutions shipped and into production.

So, the work that we've been doing over the course of the last 12 months has been people taking their upgrades, whether it be through our professional product or our TouchWorks product or our Sunrise products and getting those solutions in, up, and running. And the focus that we've had internally and from a professional services and from a hosting standpoint has all been very focused on getting folks up and running, get them to a place where they can begin the demonstration period, and then, of course, finishing that demonstration period and getting them tested.

There is a very large number of human beings inside of this Company that work on that every day, from our engineering, our outsourcing, our hosting capabilities, as well as a very large implementation army that is out there working with our clients, both on site, as well as, if you will, in local large organizations that are internal that are helping to remotely get clients through that process.

The capabilities that we have from a collection, the data that are required in order to do the reporting to be able to do the test, once you have done the demonstration period, has also been a huge focus. So, it's a very large and, interestingly, very complex process. The workflows that people use in order to demonstrate are all different in every single client. You would hope that there is three or four that you could go pick, but all of our clients are different and you have heard that saying, if you have seen one, you've actually just seen one.

And so, that's a big, from our standpoint, complex piece of what we do, but we have been doing it for a long time and we are very proud of the fact that we are one of the very first to attest with Tahoe, and we have got a lot of others queued up to attest going forward. It's a very large, complex process.

Understood, that's helpful. Thanks. As a quick follow-up, can you talk about the environment in which your customers are operating right now? It's a turbulent one, given the implementation of the ACA, some changes in benefit plans, and how that impacts the cash flow and payment mixes and what have you. Given all the things that are going on for your customers right now, how does that impact their, A, demand for new products and services that you guys are offering, and secondly, their willingness and ability to contract for and commit to new purchases here in the near term? Thanks.

I think you have hit pretty squarely there. Most of these folks are very capital constrained, and so they are looking for a way to leverage their existing investments, and so to the extent that we can sit on top of some of the investments that they've made and put things in there, like our Open Connected Community of Health, our dbMotion, our FollowMyHealth platforms for both Population Health Management connectivity, as well as the analytics that can sit on top of disparate electronic medical records and are multitenant, multi-tiered, and untethered patient engagement platform, we are seeing a lot of demand for that because the clients are being asked to move from fee for service to a value-based or a bundled payment or an at-risk arrangement. They need to have the capabilities to surveill and understand what the populations are and what the conditions are present in those populations that they are now going at risk for.

So their appetite is not one of ripping and replacing systems. Their appetite is to say, I would like to keep what I have if I can and I would like to go iterate on the layers above and I would like to go work in the Population Health Management pieces that they need to put in place in order to enable them to be a relevant player in their marketplace.

So I think our strategy, which is one of very few strategies that are out there to be a non-rip and replace alternative, is getting a lot of traction in the marketplace.

That's helpful. Thank you.

Sandy Draper, SunTrust.

Maybe just a couple of quick questions. I think, Rick, you had mentioned last quarter, and I am not sure if you repeat this, your goal was to have gross margins up year on year. It sounds like that is still, based on what you saw here, your still overall target, correct?

Yes, Sandy, we didn't get that granular with the statement. We definitely see over the three-year outlook period that we provide guidance on opportunities to lift margins. And so, directionally, that's the way we want to head. We are pleased with the start we're off to here.

Last year's first quarter was the low water mark for the quarter, and -- excuse me, for the year, and so we had some decent performance as we continued to move throughout Q2 and Q4, and while Q1 is up certainly even relative to those performance levels, and it's a good start, I think you should say -- you should feel good that that's the focus for us, but we are stopped short of saying what our real outlook is for the year.

Okay, I appreciate that commentary. And then maybe, I don't know if you can comment, obviously you're getting some good success around some hosting business. Can you just remind me where you are with the Xerox contract and what the status is and what your thoughts are longer term about do you ever want to be a CapEx builder? Do you always want a partner, and if you do want a partner, what type of partner makes the most sense?

Let's start with where we're at. Our agreement with Xerox host has quite a while to run in it, so it was a long-term agreement that was not -- it was entered into not that long ago. So there's still a ways with it.

Having said that, we are very actively discussing with them some alterations to the agreement to allow us to, first and foremost, make sure we can ensure we can deliver a very reliable and consistent level of service to clients, so that's our number one focus there.

There are some aspects of that agreement that have challenging economics for us, and so over the longer term, we need to fix that, but that is not -- I don't want to suggest that that's the only thing we have to deal with them. So, we are doing a lot of other work, planning for both short-term and more medium-term ways to make sure we can have reliable access at very cost-effective prices. So, that's our goal there.

Great, thanks (multiple speakers) on the good, solid progress in the quarter.

Dave Windley, Jefferies.

Sandy asked part of the question I was going to ask. I guess it's my understanding beyond Xerox that you have some other contracts that this leadership team has inherited that you might be able to affect in a positive way, I guess I will say. And maybe you could broaden your discussion out beyond Xerox to other areas that you might be able to garner some savings from and the pace at which you think you might be able to do that.

Again, so we will talk -- I will reiterate what I said about hosting. We see providing hosting services to our clients as something strategic that we have to stand for, and as a result, we have to have a much greater degree of control over it than we have -- let's say we had a year ago. I think we are improving every month, but we had a long way to come.

So, you are right. It's not just our relationship with Xerox. We had several other relationships that created a more virtual environment than we are comfortable with. We are fixing that, fixing that aggressively. Sandy asked the question before that I didn't really answer, which is, does he see us being in the business ever of pouring concrete and owning data centers? The answer to that is no. We don't need to. There is plenty of facility space out there, but we will be much more active managers of our destiny in this than we have been in the past.

Okay, and then shifting gears to Population Health, I guess I'm curious if you could shed any light on a common theme or profile in the clients that are adopting your Population Health suite or stack of solutions. Is there a common -- is it existing clients on Sunrise or your ambulatory solutions or Meditech? I guess I'm just interested if there is -- if you are seeing early traction with this in a common group of customers.

This is Paul. We are seeing pretty broad interest level from what we call internally inside the base, and inside the base would be with our Pro clients, with our TouchWorks clients, and with our Sunrise historical clients, so there has been broad interest from that, and there has been a pretty good set of dialogue with those clients because they're asking about it and we've been talking to them about it for quite a long time.

Outside the base, we are very pleased with the traction we're getting outside the base that's based on the historical success rate from the Black Book Ratings from dbMotion, specifically, but also the FollowMyHealth, being able to go into a client or a prospect that has multiple different electronic medical records and they need to have a single patient portal. Right now, there's a lot of patient portals that are out there that are one to one only, so if I am a patient inside of a large IDN that has multiple different electronic medical records, I have to have multiple different sign-ons for my portal, which doesn't make any sense. We don't operate that way and our solution doesn't require that.

Outside the base, we are getting a lot of interest and we have a relatively good-sized set of executives that are focused exclusively on selling outside the base and educating the market as to what our capabilities are there, and we're getting a fair amount of traction across large organizations, medium-sized organizations, and small organizations against places that would historically, you would think they would go to their incumbent suppliers for that. But again, based on an open capability that we have that has not been met by the others yet, we're getting some pretty good traction there.

Very good. Thanks for the color.

Ricky Goldwasser, Morgan Stanley.

A few follow-up questions here. First of all on ICD-10, I know that in the prepared remarks, you talked about the fact that you are still focused -- the message to clients is that they should upgrade now and prepare ahead of the delayed timelines. But what are you actually seeing in the marketplace? Are you seeing slow demand from clients, or are you seeing your clients coming to you and asking to do different things in lieu of ICD-10?

We're not really seeing them ask about anything in lieu of ICD-10.

The requirement for that got reset, so there was a brief pause, and we have been ready for ICD-10 for some time, and a large portion of our installed base has already upgraded to the ICD-10 compliant system we offer, because the ICD-10 system came with the MU-2 version, and so they are delivered together and those get upgraded at the same time.

A lot of our clients were well down the road of doing the testing for ICD-10, and many of the clients were a little -- I wouldn't say miffed, but they were a little disappointed when the pressure came off of them to finish and conclude that.

So, while they do have a little bit of time to work on other projects as a result of the pause for ICD-10, since it's been reintroduced, that testing will continue, and my expectation is that they will very quickly go back to ensuring that all the testing and all the work that they have done will get completed and get completed on time and they will be ready for this important mandate in the 2015 timeframe.

We're also seeing some clients that are -- they're going to take this extra time to partner with some of the smaller clients who are moving more slowly towards readiness, and we believe that there are some important opportunities to pick up clients from other vendors who aren't as ready as we are.

Talking about those opportunities, what are your most updated thoughts about the overall replacement market?

I think that the replacement market is out there, depending upon what part of the world you are in, and again, literally geographically, whether that's the Middle East, Saudi, Australia, Canada, there's a replacement market in every single one of those different geographies. There is a new market in every single one of those geographies.

Here in the States, the replacement market can be from either a [tied] relationship, or a relationship with somebody who may be mandating an upgrade and that upgrade requires a substantial investment, and any time there is a substantial investment required for an upgrade, most hospital boards or most large clinic boards are going to make you go out to the market to do a channel check. And when people go out to the market to do channel checks, they will find organizations like ours that are quite capable in our ability to secure that new business opportunity.

So, there is always, I would say, an ebb and a flow in the marketplace, and we are -- because of our organizational structure today as it was compared to 18 months ago, I think we are in much better position to go after that, both from a just pure [ergs] of energy from the people that we have on it, but also our reputation in the marketplace.

Okay, thank you.

(Operator Instructions). Charles Rhyee, Cowen and Company.

Thanks for taking the question. Paul, obviously a couple years ago, the big concern was the lack of an integrated inpatient ambulatory offering. Now fast-forward a couple years, we have a few deals here that includes Sunrise ambulatory. Can you first talk about are you happy with the functionality there in ambulatory? Is there more we need to improve it to make it more competitive or you feel pretty good where it is?

And then, secondly, can you talk about the pipeline? How much is the pipeline dependent -- is ambulatory being asked to be part of it, Sunrise ambulatory, that is? Thanks.

I think that on the new business side, especially on the small, medium, and large organizations, the single architected solution for a new opportunity is being asked for frequently.

And our ability to do the inpatient/outpatient revenue cycle, Population Health Management, the community piece, the portal piece, the consumer engagement spot, as well as the traditional emergency surgery, computerized physician order entry, pharmacy, as well as nursing ordering and the nursing documentation are all components I feel very good about.

It demonstrates well. We could take people to a number of organizations to show them all of that functionality running today, and on multiple different venues, including palliative care, hospice, all in one architecture. I feel pretty good about our capabilities there, certainly as compared to where we were 12 and 18 months ago.

Do you feel good about the recognition in the market that you are in a much better place today than you were, or is that still -- needs to get out more into the market? Thanks.

I think it needs to get out more in the market and we are doing everything we can to advance that.

All right, thanks a lot.

David Larsen, Leerink Partners.

Congratulations on a good quarter. Can you just give an update where you are in terms of cost-reduction efforts relative to plan? Thanks.

Sure, Dave. I'll start by just remind you what we put out at the end of the fourth quarter. In the fourth quarter, we actually put a fair amount of detailed reconciliation showing how we had achieved what we had set out to achieve, which was a $25 million reduction last year when we compare on an apples-and-apples basis relative to where we were in 2012 on our SG&A costs, and that that would annualize this year into approximately $50 million.

So, that plan is still the plan. My comments earlier were about some of the seasonal shifting -- excuse me, seasonal impacts that we had this quarter were just meant to inform everybody as to why we see a slightly higher number in Q1 than we did in Q4. That was according to plan for us, and so, again, when we look at it for the full year, our expectation is we will still be on that path.

Great, and then just in terms of remote hosting, can you just give a sense as to what the incremental in-sell opportunity is for your base? Is maybe half of your base hosted now and you have another half that you could potentially sell to? Any metrics around that?

Here is the metrics I guess I would give you, just directionally. If you -- you have to think about it in three maybe discrete buckets, which would be our Sunrise base, our TouchWorks base, and our Pro base.

In our Sunrise base, we have less than half of that client base hosted today. So, you have the remainder is the target market. In our TouchWorks base, it is considerably less than even 20% of that base is hosted today. And in the Pro, it would be a similar statistic. So, there's significant leverage and upside to continue to penetrate.

Great, thanks a lot.

Garen Sarafian, Citigroup.

Hello and thank you for taking the questions. A couple of follow-ups on the quarter. First is on the Population Health metric being 36% of the total bookings. Still, it's a very good number, but I guess it is a little bit more volatile than I would have thought, given last quarter's figure over 40%. So, was there anything unusual this quarter or last quarter? I'm just trying to get a better understanding of the puts and the takes and the normal range that you guys are expecting.

I don't -- I am not sure -- I guess the short answer to your question is we don't see it as that volatile. We recognize when you put it down in percentage terms, maybe it feels that way.

But a year ago, we were down in the low 20s and you still have a number that is a pretty significant part, and that's -- I don't mind pointing out the obvious -- that's on a much higher bookings base. So when you translate that to dollars associated with Population Health sales, it's still very significant.

Some of it is buying patterns. There is seasonality in all of what we are doing here, and we -- I think we readily acknowledged last year that there was some MU-2 driven demand that we were experiencing at the back half of last year.

So, all of those factors get into it, but I really think the appropriate takeaway for you is to say that our suite of solutions of Population Health continue to resonate very loudly with the client base, and we're still getting lots of traction there.

Got it, that's very helpful. And then, the follow-up is you mentioned in your prepared remarks that international sales was ahead of expectations. So could you just elaborate on that a little bit? What region is it coming from? Or is there a specific product? On that front, I'm just trying to understand what you underestimated. Thanks a lot.

Here is how I would encourage you to think about it. The Company had a couple of big international wins going back to 2011, and then essentially had very little, if any, international activity in 2012 and 2013.

And that was a function of a few things. Some of it was market conditions. It was mostly function of maybe where we were as a Company for part of that time, but also a lack of dedicated teams aligned to that.

So, we have rebuilt the team. I think Paul could comment on that further, but we have a solid team that has amped up our energy in these areas considerably, and we have a meaningful plan for them for the full year, but we back-end loaded it, more of it, so they got off to a good start and that's why the comment.

Great, thanks again.

George Hill, Deutsche Bank.

Good afternoon, guys, and thanks for taking the question. I dialed in a little late, so I will apologize if any of this is repetitive. Paul, did I hear correctly that there were 130 new clients signed during the quarter, and if I did hear that number right, I guess, can you talk about the mix and the composition of where they're coming from?

Yes, there were. Those are coming from multiple different areas, George. A lot of ambulatory clients that are still coming in that we have a big focus on. We got a pretty good-sized organization that goes after new business in the ambulatory marketplace.

We've got care management, which is a big, large piece of the business that comes in every single quarter, and most of those solutions are acquired by clients that are not -- customers that have historically not been one.

So those all add up to 130. So, we expect them to go back in and cross-sell back into that base, and that's a big important part of a healthy, organic growing machine.

Okay. That's helpful. And maybe a quick follow-up, with respect to the Population Health sales in the quarter, are you guys providing any more color on how much is the FollowMyHealth product, how much is the dbMotion product, how much is other? And I guess what I'm trying to get to is, is it the connectivity and data solutions and product health that are seeing the most demand right now or is it the patient engagement solutions that are seeing the most demand? Just trying to gauge where the end market demand for what set of the solutions is most active right now.

You probably won't like this answer, George, but it's all the above. So, all kidding aside, it's -- FollowMyHealth is very robust. DbMotion remains quite strong. Our care management solution remains quite strong, and our EPSi cost accounting system remains quite strong. Even our patient flow solution had a very good quarter, as well. So, we're happy to see that we're not just seeing it in one place.

The good news is there is no bad news. Thanks.

Well said.

Michael Cherny, ISI.

I don't know if I can follow up cheery George just that well, but I will do my best. One question for you guys, Paul, you have actually brought up the term your first 18 months here quite a bit. It is interesting, a good time to look back and see what's happened.

As you think about the organization, and particularly from a senior management perspective, you have shifted some people around. Jim Hewitt taking obviously a much more important position with solutions development. Are there any holes in the senior management team? I am thinking particularly, just looking at the website, you have no one that is technically in charge of sales. Obviously, that's something that you are very familiar with, but any other senior hires that you really think are needed as you continue on this path towards the growth plans that you have for the next few years?

My mantra here is --

You stole my thunder. We're announcing Paul's promotion as the head of sales.

Thanks. Everybody sells at this Company is what I continually remind us, so everybody is on stage. Everybody, to answer the phone, whether it is taking a support call or they are out on an implementation. There is always an opportunity to represent the Company.

From that standpoint, we've got five very good client executive leadership folks in the United States that cover our installed base. Got a very good senior leader that is in charge of new business. Got another very senior executive in charge of running all of our national accounts. And then, globally, we have got an extraordinary seasoned executive that I feel quite confident about his capabilities in being able to handle that.

So I think from a topline and from a client relationship standpoint, there is -- I feel great about where we are there.

From a other additional senior leadership, I don't have any open positions, and the folks that are here are feeling that the normal pressures of everything that our clients are asking us to do, just we're a manifestation or a reflection of the pressures that they have, of everything that they are trying to get done to be in concert with the regulations that are being given to them each and every day, both on the MU-2s, but also on the quality and the compliance components that are out there that are very rigorous. And the reporting that is being required as a result of making healthcare digital, it's not falling short on the government, but that data is now available and they need to see it.

So our clients are under a lot of pressure and a lot of -- as well as it does create opportunities for us. So, we don't have any big gaps, and I feel very good 16 months, actually, into the role about what we have done with the team and the culture that we have reinvigorated here and the focus that we've put back on the thing that is most important, and that is our clients.

Of course. Well done. I was just rounding a little bit, but well done to you and the team on the first go-around.

Ladies and gentlemen, we have reached a one-hour mark. I will turn the call back to Paul Black for concluding remarks.

Great. Thanks for calling in today and for your questions. In summary, I am pleased with our Q1 performance, in particular our record Q1 bookings and meaningful margin improvements; our growth with existing, new, and international clients; and continued success of our Population Health Management solutions.

We are holding a second annual Population Health Management summit for the investment community in Pittsburgh on June 5. It will be an exciting day of client demonstrations, strategy, and plans for the future. Please join us. Thank you very much and good night.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.