Veradigm Inc (MDRX) 2014 Q2 法說會逐字稿

Good afternoon. My name is Rhonda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts second quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, today's call is scheduled to run for one hour. Thank you. I would now to turn the call over to Mr. Seth Frank, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Rhonda. Today with us on the call 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 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. With that done, I'd like to introduce Paul Black, President and Chief Executive Officer of Allscripts.

Good afternoon, and thank you for joining the Allscripts second quarter earnings conference call. This is an exciting time for Allscripts. We continue to work hard to strengthen the client relationships and expand their ranks by winning new client business. We are investing significant resources to advance Allscripts' long-term competitive position.

Since the beginning of 2013, we increased R&D spending, improved the client experience, strengthened solution functionality, and focused on establishing leadership in growth markets like population help. We strengthened Allscripts' organizational leadership to ensure that we are maximizing significant multiyear opportunity ahead of us, all while increasing operational efficiencies. This benefits Allscripts' clients and shareholders alike.

With this context, in Q2 we are beginning to see some of the very early benefits of these efforts in the Company's financial performance. We grew bookings, revenue, and profitability year-over-year for the first time in two years. We demonstrated meaningful operating leverage as the total operating expenses declined 9% and 6% on a GAAP and non-GAAP basis, respectively, year-over-year. Comparable periods reflect [press] levels of profitability but we are seeing the benefits of revenue growth and lower expense. We reported 26% year-over-year adjusted EBITDA growth while non-GAAP net income grew 78% for the same period, clearly a move in the right direction.

Looking forward, we see a strong global market for the full suite of Allscripts solutions in core HER, revenue cycle, population health, managed services, and value-added services. We intend to pursue wallet share gains across the base. We intend to compete aggressively to win market share domestically and globally, where we have already strengthen the Company's position. We believe the market is evolving to our unique, open positioning. A combination of outdated legacy systems and limited choices creates a significant opportunity for Allscripts, especially as clients look for solutions that are both interoperable and fully integrated, something Allscripts' open platform is uniquely positioned to provide.

In Q2, bookings totaled $234 million and 9% growth over last year and up $10 million compared to Q1. For the first six months, bookings grew 17% over 2013. We saw an uptick in sales to new clients relative to Q1 and a year ago. We added over 180 net new clients in the second quarter, up from 130 in the first quarter. Within Sunrise, we had a solid quarter from a sales and client delivery standpoint.

As we discussed on the Q1 call, we won a net new Sunrise client at Shenandoah Regional Medical Center in Iowa, a critical access hospital, replacing an existing system with the Sunrise integrated platform. In addition, today we are announcing a second Sunrise win booked in the second quarter. Sunrise Ambulatory Care has been selected by an international government defense agency and will be integrated with the various healthcare institutions in its home country, to afford care delivery to servicemen and women. The specific client is confidential. The agreement also includes solutions for patient engagement and connectivity. This is a large-scale deployment to dozens of clinics and outpatient centers.

Patient care in military settings requires rigorous standards for security and sophisticated technology that is both innovative, open, and adaptable. We are pleased with Allscripts' selection for this major project, and we view it as validation of the interoperable and flexible nature of the Sunrise platform. This win was a capstone achievement for bookings in Q2 and an important milestone for Sunrise Ambulatory Care as a scalable and robust outpatient offering; one integrated platform for acute, outpatient, revenue cycle, surgery, and emergency care.

In addition to these new wins, we announced several major Sunrise renewals in the quarter, including such marquee clients as Memorial Sloan Kettering, Children's of Alabama, and Wheeling Hospital. The value of these renewals are not included in the reported bookings number, but is incorporated into the contract revenue backlog. If we included the renewals, the dollar value of our bookings metric would increase substantially.

Next, we are harnessing the interoperability and clinical workflow integration power of the dbMotion platform and fusing it with the flexibility of the Sunrise platform to enable a community aware electronic health record; this winning combination, an integrated complete, affordable, open, modern EHR with turnkey enablement for accountable care, the ability to do what we call CHAT, connect, harmonize, analyze, and transact.

The Company's new fusion technology, which we will begin testing with clinicians shortly, will integrate key clinical data from the community record into the Sunrise workflow at the point of care.

We will add fusion technology to TouchWorks and our Pro outpatient platforms. In the outpatient market, one of the largest sales this quarter we had was a TouchWorks expansion with a national client, strong winds for Professional EHR which recorded bookings growth year over year.

New Professional EHR sales are averaging in the six figures, which is a significant accomplishment for this segment. Internationally, this has been a very busy period for us. The investments we are making to bolster Allscripts' international competitive position are paying off. The new Sunrise agreement I mentioned, we believe, is the beginning of a meaningful growth opportunity.

In July, we acquired Oasis Medical Solutions in the United Kingdom. We believe owning a well-established patient administration system, or PAS solution enhances our ability to compete as a single source supplier to the national health services trusts for their joined EPR and PAS needs. The pipeline of new business has increased significantly across international markets. Bookings are up dramatically year-on-year outside the United States.

Population health management had another strong quarter. Client and market awareness of our solutions is very high. We hosted Allscripts' Population Health University, our annual client event for 150 clients in June. From a results standpoint, dbMotion had a great quarter with sales at Memorial Sloan Kettering, Children's of Alabama, and Flagler Hospital among others. We had good sales of dbMotion outside the install base.

The second quarter was strong within the patient engagement business. Sharp HealthCare executed as a significant new agreement to implement Follow My Health across its entire enterprise. Southern Illinois University is adding Follow My Health in addition to the TouchWorks selection we announced in the first quarter. We saw one non-Allscripts acute EMR client add FollowMyHealth as its enterprise patient engagement platform.

Finally, we hit an important milestone from the development perspective this quarter, the general availability of FollowMyHealth achieved. This solution which we first unveiled at [HIMSS] this year facilitates the collection of data from consumer wireless health monitoring devices directly into the EHR, via the patient portal. Care coordination solutions including ambulatory, acute care management, post-acute, and financial decision support had a solid quarter with sales both inside and outside the Allscripts base. In the post-acute market we continue to grow our relationship with one of the largest national post-acute providers, implementing Allscripts referral management in a large number of its long-term acute care hospitals, or LTACs.

Managed IT services continues to be an important growth driver. We signed several multiyear agreements for the hosting clients within acute and ambulatory during Q2 and a three-year outsource agreement with a Sunrise client. We had a strong professional services quarter with a significant new Sunrise activation at Resolute Health in Texas, which was signed just over one year ago. As Rick will discuss, we are making progress improving professional services margins.

We are pleased to report that 100% of upgrades to Sunrise 14.1 are Meaningful Use and ICD-10 certified EHR versions are complete. Approximately 85% of upgrades to TouchWorks and Professional EHR Meaningful Use and ICD-10 certified versions have been completed. We are looking at opportunities to align professional services organizations with our clients, including a comprehensive menu of consulting and value added services. We had signed a handful of clients to provide these services, which are all new revenue offerings for us.

Before I hand the call to Rick, I wanted to update you on our progress in third-party rankings in client satisfaction. We continue to have senior level focus throughout the organization to drive strong relationships with the top industry analysts and to ensure this critical constituency understands Allscripts' long-term vision and to highlight client success utilizing our solutions. [Class] research along with Black Book remain a primary driver for how we are dealing and addressing client satisfaction. While research methodologies vary, and are at times 6 to 12 months in arrears relative to currently client experience, we are pleased that scores and rankings are moving in a positive direction.

Allscripts is increasingly being recognized by leading technology organizations for innovative and trusted partner status. We received the US Health Provider Partner of the Year award from Microsoft Corporation, recognizing Allscripts' innovation, collaboration, and leadership contributions in the area of patient and population health. We were also recognized with a 2014 Intel Innovation Award for the development of Allscripts' Wand mobile solution, one the first comprehensive mobile electronic health records developed on Windows 8.1 platform.

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

Thanks, Paul. Good afternoon, everybody. As we review the numbers, please reference both the GAAP financial statements as well as the non-GAAP tables in our earnings release, and also the supplemental data sheet posted to our Investor Relations website earlier this afternoon.

Echoing Paul's sentiment, Q2 results illustrate we remain on track with our long-term plan to drive top line growth and also realize operating leverage as we continue to execute our plan over the next three years. This is a milestone quarter for the Company, when you look at where the Company has been and the impact of the work we have done to drive improving results. It's been over two years since Allscripts reported year-over-year growth in bookings, revenue, and EBITDA. While we are the first ones to say that we have more work to be done, certainly, the hard work of our team is clearly starting to pay off.

I will start with a few comments now on bookings. From a bookings perspective, Paul covered most of the highlights, but I would emphasize a couple of points. First, total bookings of $234 million represented 9% growth year over year and more importantly, on a year-to-date basis, we grew bookings 17%. This is a level that compares favorably with our public peers and also favorably with our internal plan.

Secondly, the quality of bookings was strong this quarter. Approximately 55% of our bookings came from software sales or subscription agreements. These are our highest profit margin areas for us, and this relative contribution is considerably higher than the average that we had throughout the whole of last year. In addition, as Paul talked about, we won two new Sunrise agreements including a major international contract with the Ministry of Defense of a foreign government.

By comparison, we did not have any new Sunrise agreements in Q1 or in last year's second quarter. We're optimistic that we'll continue to see additional Sunrise opportunities come to fruition as the pipeline that we have converts to new business in the future.

Paul mentioned this, but I want to say it again. You need to recall that client renewals, transaction fees, and maintenance revenue commitments are not included in the reported bookings, but they do influence our backlog contractual period. Also, recall that for forward-looking modeling, there can be a significant lag in the conversion of certain bookings in a given quarter to revenue, due to the increasing mix of multiyear subscription agreements, as well as managed service contracts.

Turning to revenue, our total non-GAAP revenue was $354 million. This represented an increase of $7 million compared with last year and an increase of $9 million compared with the first quarter. This non-GAAP revenue includes adjustments of $3 million from the GAAP results, and these reflect the same purchase accounting related adjustments that we've highlighted for several quarters. As we've said before, we expect these adjustments to be done at the end of this year.

Looking at specific line items within revenue, our non-GAAP system sales revenue was at $26 million, which was up $2 million from Q1 but declined from last year due to the continued shift towards subscription software arrangements in 2014. Our professional services had a very strong quarter at $63 million on a non-GAAP basis, and this is significantly higher than the mid-$50 million range we've been averaging over the last three quarters.

We had a pop in revenue this quarter similar to what we saw in Q4 of last year, whereby revenue growth in the quarter reflected the impact of achieving key delivery milestones at one of our larger clients. This resulted in the recognition of implementation activities that had previously been hung up on the balance sheet in deferred revenue. Going forward, excluding the impact of achieving similar client specific milestones, we would still expect professional services revenue to average in the mid-$50 million range on a quarterly basis.

Turning to maintenance, our total revenue was $114 million, a small decrease from our first quarter. There are two issues impacting the reported maintenance number in the quarter. The first is some modest attrition in our small doc ambulatory base, including our MyWay users. That's consistent with our projections. The second is some out-of-period effects relating to processing credits for this group. This out-of-period impact comes from transition issues on our ERP cut-over late last year.

Net-net, our maintenance revenue was depressed approximately $2 million in the period as a result of these out-of-period effects. We field a lot of questions on maintenance, so I would also like to take this time to remind everybody that given our focus on emphasizing recurring revenue through subscription agreements, our maintenance line will not grow like a Company that emphasizes perpetual license sales would.

Transaction processing and other revenue was $151.2 million on a non-GAAP basis, which is up 10% from the prior year and flat on a sequential basis. The flat performance relative to Q1 is due to a temporary loss of revenue of approximately $3 million on a quarterly basis, due to the unexpected decision of Allscripts' former patient portal partner to terminate their agreement with us early in the quarter. This termination of the agreement resulted in an immediate cessation of revenue share that we were otherwise realizing from that agreement. We view this item as transitory in nature.

As you know, we have had tremendous success with FollowMyHealth, having signed up more than 2,000 clients since acquiring this technology in early 2013. As of today, we have had success signing a significant number of the legacy partner portal users to our FollowMyHealth solution. As those users get up and running on FollowMyHealth through Q3 and into early Q4, we would expect the revenue and margin from these portal clients will once again throw flow through our P&L.

Putting all that together and again our net-net basis, the impact of higher incremental professional services during the quarter was offset by some out-of-period revenue reduction in maintenance, as well as this temporary displacement of portal related revenue. Thus, we feel pretty good about our overall revenue performance and the quality of that for the quarter.

Shifting to margins, overall our gross margin on a non-GAAP basis declined to 43.8%, compared to 44.9% in Q1 and was essentially flat year-over-year. On a line item basis, we saw the impact from some of the revenue mix items we just discussed, and so you'll see the same way they impacted of revenue, they will also impact margins. If you look at it on an overall basis, our slight gross margin step-down this quarter relative to Q1 is really due to our commitment to improve performance in our remote hosting operations. We're consolidating and investing in our hosting operations which is temporarily depressing margins. This investment will be temporary, and we remain confident that will be able to improve hosting margins as we look out over our three-year forecast period.

Moving down to operating expenses, our GAAP SG&A costs declined $15 million over the second quarter of last year and are down $3 million compared with the first quarter of 2014. Our total second quarter nonrecurring expenses and transaction related costs were $6 million, and that was an $8 million decline from the second quarter of 2013. As we indicated last quarter, we expect our total nonrecurring expenses for 2014 to approximate $20 million, and so through the halfway point of the year, we've reported approximately $9 million and are on track with that outlook.

We concluded the MyWay transition in Q2, and we also will wind down our transaction related deferred comp charges that were associated with the dbMotion acquisition last year. As you know, we recently acquired Oasis Medical Solutions in the UK. While we do expect some nonrecurring expenses related to that acquisition and its integration, we don't currently believe that these will be material. If there's any update to our overall outlook for nonrecurring expenses, we'll provide that next quarter.

Our SG&A on a non-GAAP basis was $76 million. This is a $6 million sequential step down, and a $10 million decline compared to our results in the year-ago period. These results are consistent with our plan and our prior comments starting to drive lower SG&A. You may recall last quarter we talked about some seasonal impacts of SG&A in the Q1, and that's in part why the sequential decline is as large as it is.

We are very pleased with the progress in our cost reductions, which have been driven by multiple initiatives that we started earlier last year to drive overall operational efficiency. We believe the current quarter SG&A represents a reasonable run rate for us, but please keep in mind there are some periods of volatility in areas like marketing costs as well as legal expenses. You should appreciate there will be some volatility, but we do like the overall run rate right now.

Looking at our R&D investment, our gross R&D totaled $62 million, and that's a $1 million increase from Q1 and just slightly down from last year. These results are consistent with our prior comments on our R&D investment for the year, and it remains very consistent with where we were in 2013. The impact of that on the P&L, our reported R&D was $53 million as we capitalized $9 million, or approximately 14% of the overall total. Our total amortization of capitalized software was $11 million. These details can be found on the supplemental data sheet that I referred to earlier.

Finally, we recorded a $1.7 million asset impairment charge in the quarter, associated with the write-off of two small software development investments that we no longer are pursuing. We've excluded these noncash impairment charges for purposes of calculating our non-GAAP results. As I move down just a couple comments in the nonoperating section. Just as we have in the last few quarters, we recorded approximately $3 million of noncash interest expense. This is associated with the convertible notes that we offered last year, and this is excluded for purposes of calculated our non-GAAP net income.

Our non-GAAP effective tax rate was 35%, which is consistent with where we were in Q1. Overall our adjusted EBITDA, which can be found on table 5 of our press release, came in at $53 million, and that represented a 15% EBITDA margin. We continued to tick up on the adjusted EBITDA margin. After excluding the noncash and other adjustments, our non-GAAP net income totaled $16 million or $0.09 per diluted share. This is an increase from $0.05 last year and $0.07 in the first quarter. Our weighted average share base continues to be approximately 180 million shares.

To summarize, the quarter was one of growth and of improvement in many financial metrics, most notably, top line growth and the leverage we got down the P&L, to the EBITDA line. There was some overperformance in services and prior-period items that impact recurring revenue, and some of those, as we talked about, will flip back during the second half of the year.

With that, thanks for your time and attention. Before opening it up for questions, I want to turn it back to Paul who will share some really good news that we just received.

I did want to share one other piece of news. We were just informed that Baylor Scott & White Health is expanding its relationship with us and has committed to implementing Allscripts Sunrise at its newest facility, Baylor Scott & White Medical Center, Waxahachie, which is just south of Dallas. This new facility will open in December of this year. We're thrilled to expand our relationship with Bayer Scott & White Health and grow with them into their new hospital.

Okay. Thanks, Paul. With that, we'll open it up for any questions.

(Operator Instructions)

Charles Rhyee, Cowen.

Just a couple quick questions. First on this international government defense agency, can you talk about the structure of the deal, in terms of at least the length of the contract? Were all the bookings related to this in the current quarter, or was there a piece and we'll see more of a later? Then I have one follow-up. Thanks.

You can tell by the fact that we can't release the name yet, most of the aspects of the contract are pretty confidential, Charles. We can't say too much other than it is a multiyear agreement. We're very excited about it. The value of the contract that we have in hand today is reflected in our bookings, but it's certainly not unusual to get expansion to those kinds of agreements in prospective periods. If and when that happens, you'll see some incremental impact on it.

Okay. Then maybe as a follow-up, when I look at the backlog, it looks like maybe, Rick, I missed when you talked about it but the professional services backlog decline sequentially. Could you add a little color there in case I missed it?

Yes. I didn't really go into it, Charles, but yes, two things going on. I think your question is, if you look at the line items of backlog, the professional services line is down in Q2 relative to before. Two things going on there, one, we do have some reclass going on between the professional services line and the transaction processing and other line. You have some reclassing going on.

Also, we asked our team to really scrub the project list there. Frequently, the nature of professional services, we make estimates on jobs, and they go into the backlog. As you learn more about the job, you true those up a little bit. Both of those went on during the quarter, and that's why you see the shift on the line items.

Okay. Great. Thanks a lot.

George Hill with Deutsche Bank.

I'm going to warn you guys in advance. I might not limit myself to just one. Paul, it seems like that you guys are making a lot of traction and the language in the press release leads to what we call increasing confidence about new footprints. Two questions, number one, can you tell us if you were to look across the book of business right now, through renewals, what portion of the book do you feel like is locked up? Or do you feel like you have good visibility isn't churning away and isn't going anywhere?

The new footprints that we're getting are coming from care management, from population health. Sunrise, which is, if you will, quite important to us. The TouchWorks new business is actually still doing quite well. There's quite a bit of a new expansion in there. Pro, in the professional office area, is also still doing quite well.

I don't want to make it sound like everything is doing perfectly, George, but there's not one area of the business that's dominating our overall performance. We're also getting, from of visibility standpoint, from a pipeline, there's quite a few new deals that are out today that are active that we probably weren't looking at this time last year, new deals specifically in the new hospital space. From a global standpoint, the pipeline there is as robust as we've seen it. That's a multicountry statement, more so than just one or two geographies.

Okay. (inaudible) share in the market, obviously one of your bigger competitors was in the process of buying one of your competitors that seems to be limping along a little bit more. Can you talk about how you guys feel about either seeing this weaker competitor removed from the market? Or, how you guys feel about where we are in the consolidation cycle, if we think about the core EMR/ HIS market?

Sure. Our markets are highly fragmented, and I think it's inevitable that there will be more concentration over time, whether it's through consolidation, or companies failing to respond to the changing regulations, or changing needs of the clients. Acquisitions of this size or merger of cultures, multiple systems, and thousands of existing client obligations, so as a result, we believe this transaction will create opportunities for Allscripts. We've already begun to talk to targeted clients.

Okay. The last one I'm going to throw at Rick. Rick, bookings through the first half of the year has been strong, but comps get a little bit tougher in the back half of the year. I'm going to give you the opportunity right now to expectation-set, regarding comparisons. Should we think of the current run rate as the right bookings run rate, or should we be thinking more that the growth profile of the first half could be repeated in the back half?

I'll note, George, we never predicted a bookings number when we put out our guidance really this year. We did talk about that it was predicated on bookings in the $800 million to $900 million a year range. We're tracking. That's where our guidance is based on. We really can't say more about it. I guess I'd say your observation is spot on. It's a tougher comp as the year goes on. What we know today is we feel really good as we start off this new quarter, nice pipeline of stuff. You know how Paul operates, George. We're going to push hard, but we do know, yes, the comps get tougher.

Good deal. Thanks, guys.

Dave Francis with RBC Capital.

First, congratulations on the Baylor Scott & White news. Quick question on that, given the previous relationship is that something that will show up in new bookings in the third quarter? Or is that something that simply slides into backlog?

It'll be both.

It's a new revenue footprint as part of that relationship, Dave. That should be part of the bookings number.

To follow-up on George's question, a little bit differently, with the corporate transaction that was announced a few days ago, I'd love to get your perspective on how that changes the near-term churn dynamic in the market. Do think that it takes a while for customers that are involved in that to figure out what they're doing? Or is that a flashpoint that creates some additional activity that may have taken longer to generate and then suddenly comes on a little bit faster relative to (inaudible)?

This is Paul. It really depends. A lot of those clients, on the acquirer, they're locked up in long-term contracts. The ability for them to have, if you will, a flashpoint is probably not as robust as let's say as [SaaS] client or something like that where you can turn it off tomorrow. You won't see a lot of churn, quote, unquote. That all depends on when their contracts expire.

The second point though is that as new business is out there in the marketplace, it's the change the dynamic to the business side. In some cases, it may be favorable, and in some cases it may be unfavorable. As I said, we're out having a lot of conversations about it. We consider it to be a net opportunity for us.

Okay. Then to follow-up, if I may, to go back to the maintenance revenue line, Rick. Understanding the dynamics, positive and negative, that impacted the revenue this quarter, once we normalize out for the negative volatility that we saw, is it your sense that that's at a steady state at this point going forward? Or is there other attrition or customers slipping from existing contracts into longer-term subscriptions for you that might impact the maintenance line going forward? Thanks.

Dave, there's a lot of things going on. I'm glad you asked the question the way you did because it highlights a couple. The starting point is, the real takeaway we want everybody to have, is we exited the quarter at a maintenance run rate we think a couple million dollars higher than what [we reported]. There's obviously at the lower end of the ambulatory stack there are lots of different alternatives. Switching costs are a little lower. Things can happen a little quicker. It's hard to make any real concrete statements when it comes to that, but I will say we have a very dedicated team that's highly focused in that area, repackaging offerings that are catering to that end of the market similar to some of how our competitors are.

We feel pretty good about the value of the solutions we're bringing, and we're fighting that fight pretty hard. There's not a lot of new stuff going in the top of the maintenance funnel because, as we said, most of what we're selling a subscription related now. You probably have a little bit of asymmetrical pressure, if you will, on that line, but we feel pretty good about it. It's been I think a lot stabler than most people had predicted it would be for the last year-and-a-half. While we might see some small moves, we don't expect any major moves.

Ricky Goldwasser with Morgan Stanley.

The one thing I would like to learn a little bit more about was if you look at the EBITDA margins, they're growing quite nicely. They were at 14% and 1Q, 15%, 2Q. When we do the math on your three-year road map, it implies 600 bps of EBITDA margin expansion from 2013. You guys are already in the second quarter 200 bps above that baseline. How should we be thinking about where you'll end up at the end of 2014 and then the balance of the two years in the timeline?

The end game, I think, is a lot easier for you to model. We gave everybody revenue CAGR guidance as well as EBITDA CAGR guidance. You can pick whatever range or whatever spot in that range you think is appropriate. For discussion, let's call it the midpoint of that range. You can model that out and as you said, you've got 600 bps left or so.

We think we'll see accelerating revenue growth throughout the period, at least that's what we're expecting, revenue growth stronger in the latter part of the forecast period versus the beginning of it. A lot of cost work, we've done early on. You can think about that, that way. The real method we have is we feel like we're on track with the outlook that we have.

All right. One quick follow-up, usually in the press release, you have the population health management bookings as a percent of total. This time I didn't see it. I was wondering if you'd give that out.

It was quite strong. It was in the range that it's been in the past. We want to make sure everybody doesn't think we pivoted away from our core system focus as well. We consciously want to talk about the collective Company. We have a lot of emphasis on our EHR space as well as the pop health space. That's the reason we changed the tone a little bit. It's still a significant contributor to overall bookings.

All right. Thanks.

Dave Windley with Jefferies.

A follow-on to the last one, the numbers in the supplemental that are there, are around SaaS and the SaaS bookings continued to step up. The revenue actually stepped back a little bit, as did recurring. Can you talk about what caused that to happen, please?

The revenue, really, is the impact of what I described earlier about the portal relationship. We lost about a few million dollars. We said about $3 million quarterly relationship basically went away overnight. We earned that back quickly, I want to emphasize. There is the transitory nature to it. That went away, and that's largely why you're seeing maybe the disconnect with revenue bookings, remains strong and very consistent with the overall messaging we've been giving you. My comments earlier about the quality of bookings in the quarter, when you combine those ASP bookings with the software sales bookings that we had, we had a very strong percentage of the bookings from our highest margin stuff.

Thank you. On the cost side, you obviously made a lot of progress on SG&A. There's been a fair amount of talk about your relationship, your supplier relationship, in the hosting area. It sounds like that was not, in this quarter, an area where you've made progress on savings, but instead maybe made some investment there. Perhaps you could give us a sense of magnitude and how long you think that investment needs to be made to shore that up?

Again, it'll sound repetitive with what I said. The hosting environment is more than just a singular relationship, and it's important for us to create a much more robust, hardened, and reliable hosting environment for the long term for our client base. We've got a few different initiatives underway to do that. That's net-net, resulting in an investment right now. Margins are deteriorating right now as we speak, around remote hosting. We're doing that because it's a very calculated approach on our part. It's operations and client [sat] first. We'll clean up the financial second.

Thank you.

David Larsen with Leerink Partners.

A little more color around the Baylor Scott & White expansion, is it a new Sunrise install in one of their hospitals? Did they expand their use of dbMotion? Is it an extension of their existing contract for a couple of years? Any more color you could provide would be very helpful. Thanks.

For now, it's a brand-new facility that they're building. That they've build. We're moving Sunrise into that brand-new facility. There's not a dbMotion component to that.

Okay. Then can you also talk a little bit about the Oasis acquisition? It's my understanding that the patient administration system, is there complementary clinical solution that you would seek to sell alongside with Oasis? Maybe you could talk a little bit about the UK market and opportunity there. Thanks.

Dave, that was the biggest driver behind the deal and why we did the deal. We have the clinical. It's our Sunrise platform. Tailored a little bit for the market, but at core, it's the Sunrise platform. We've very successfully rolled that out with a few different clients in the UK right now. We're riding a nice wave of momentum of live sites and good client references. The PAS system is meant to complement that and have a more full [some] offering for the remaining business that we see coming to market over the next couple of years, business opportunities, I should say.

Great. Thanks a lot.

Greg Bolan with Sterne Agee.

Rick, on the system sales line, revenue line, given the higher mix of software sales this quarter, I guess I would have expected a little bit more pull-through on the top line. In terms of the recognition of those software bookings, is it something that's a bit more elongated because you guys are handling more of the training implementation? It's recognized more of a pro rata percentage of completion basis? Could you maybe explain the slight dichotomy there?

Sure. Let's use a couple of data points you've thrown out. We had a new couple of new Sunrise footprints in the quarter. Sunrise footprints do not get installed overnight. You have a little bit of a lag between the booking and the recognition on that.

Then it's fair to say that as we think about the coming quarters that other things being able, that might trend a bit higher on the system sales line?

Yes. System sales is software, and it's hardware as well. Our hardware sales, I would say on average, are down from where they used to be. We're okay with that. There's a couple of different things going on, on that line item. That's a little bit of the mix. Yes, you get a little bit of a lagged effect.

The software's driven by many different things. I'd use the Sunrise example as one example. We also have any of our Pro business, some of our pop health solutions to go out and license form. It's hard to generalize it, Greg, but I think you should say to the extent we're selling more Sunrise solutions, you should expect an increasing steady-state impact from that on the system sales line.

That's great. Quickly, Paul, as you think about the cost structure today, the overhead relative to the longer-term guidance, and maybe change in mix in terms of what's going to be driving that guidance, both on the top and on the margin line, how do you feel about the current relationship between the overhead or expense structure and that of your revenue profile?

Given the fact that we're in the software business, you always want to run as much volume through this thing as it possibly can. When you do that, everything looks good on a percentage basis. That's what we're fixing to do.

Totally fair. Thanks, guys.

Eric Coldwell with Robert W. Baird.

I thought I'd actually dialed out. I apologize. Most of my questions have been hit on tonight. I did want to come back to, I think was Charles' first question, on the professional services backlog. I know you mentioned that you transition a little bit into transaction processing, and I suspect also the revenue [upside] in the quarter would lead into that backlog a little bit. It's a pretty massive delta quarter-over-quarter. I realize that you've done a scrubbing process.

My question is if I look at the last five quarters' revenue performance, you've been averaging about 15% of contract backlog burn in professional services. On this new metric, the $241 million, to be in the mid-$50 million, you're going to be up 23%, 24%, 25% burn rate, so a pretty big step up if you're going to hit that $55 million target. I want to get more comfortable that that target is actually realistic, and we're not going to have a step back in that number over the next few quarters.

Also as a follow-up, you mentioned that you've been making some progress on margin in that segment. With the revenue coming back down to the mid-$50 million, and the backlog down so much, how do you keep that margin progression? How do you continue that over the next few quarters? Thanks.

Here's what I can say. We feel very good about the substance and the reality of the backlog that we're reporting to you. Just real simple and rounded math, you've got a full year's worth of professional services and backlog. The concept of you're selling something and that it ought to be installed within a year's time, I don't think it's a large stretch of the imagination. I would submit to you should get some comfort off of that. That's what I can tell you on that. We feel good about it. If we didn't feel like mid-$50 million was doable, we certainly wouldn't be talking about it.

In terms of the margin profile there, obviously cost is part of a margin equation as well. We have gotten much more efficient with the workforce that is tasked with this and is working on this. Obviously, the margin pop in the quarter is also influenced by the one-time nature that I talked about earlier, the one-time transaction where we hit a milestone and picked up some deferred revenue. That certainly gave us a pop. Even if you exclude that, we've made some nice progress on the margin side and services, and that's again a function of managing cost much smarter than we had in the past.

Do have a target for operating margins there that you could share? (multiple speakers). Either one?

We again see it as a high-value opportunity. You can look at some of our comps and how they earn in that space. We think it is intrinsically an area we should earn anywhere from 20% to 30% gross margins.

Okay. Thanks very much.

Sandy Draper with SunTrust.

Actually like Eric, I was trying to get myself out of the queue, and was not smart enough to figure out how to do that. (multiple speakers) Unlike Eric, I'm not smart enough to think on my feet and come up with another question. I'm going to try to keep the call to an hour and drop out of the queue.

Jamie Stockton with Wells Fargo.

Rick, maybe just one more follow-up to Eric's, can you give us the dollar amount that was lifted out of the professional services backlog, one-time, that either got moved to transaction or went away altogether?

Either went away or got moved out?

Yes. As a result of the scrubbing.

I guess I'd do it indirectly, Jamie. You know what we were last quarter. You add to that the bookings contribution from this quarter. I appreciate we don't give you that detail. You [hover] a guess, subtract out revenue recognized, and then the rest is either reclassed or went away.

Okay. Then maybe my other question is on international. It seems to be elevated in your commentary this quarter. I think that it's about 5% of your revenue base today. My real question is, where do think that can go? I think Gartner's numbers suggest that healthcare IT spend outside the US is about 150% of what it is in the US. Obviously, it spans over a vastly larger geography international, but when you think about where you would like to manage the business, how big do think international could get?

We think there's a fair amount of runway. That's why we made the investments last month to help really augment our offering in the UK. We think there's some near-term demand opportunities there. What it represents as a whole is also a function, obviously, of what we do with the rest of the business as well. Let's just say the estimate that you put out, we would expect it to at least double.

Okay. That's great. Thank you.

Gavin Weiss with JPMorgan.

Paul, you mentioned in response to, I think it was, George's question that there are a number of new deals out there in the marketplace. Is there anything that you can point to that's a consistent driver of those customers coming to market? Is it M&A driven, or dissatisfaction with the current vendor?

Some of it is M&A driven, but those typically don't go to market from the standpoint of if it's an existing client they go ahead and put Sunrise in. In the case of a couple of other clients last quarter, they put TouchWorks in. Those don't go to market. That's handy. We appreciate that. We obviously try to earn that right each and every day.

On the new business front, there's some active [IDN] opportunities. There's a lot of opportunities outside the US which we've talked about frequently. The population health space is relatively wide open, both inside and outside the base. Then on the hospital side, the 200 bed and below, there's a fair amount of activity there, either because of some issues with existing suppliers or a desire to get perhaps a different type of the EMR. They're looking to the next 10 years and something that would be a little bit more contemporary, especially when you think about what we try to advocate, which is a community aware EMR and strategy for these folks in the future.

The community hospital folks, depending upon the size of the organization, are very actively involved in and aware of and are putting strategies toward a population health management infrastructure that they have, in order to support their patients, both inside and outside the four walls of the hospital. It's not limited to big cities.

Okay. Then in terms of the patient portal vendor termination, would you say that was actually a driver of bookings in the quarter? I know you talked about the number of clients that you currently have on Follow My Health, but how much runway would you say is left there in that opportunity?

Gavin, first the question was, was it a driver bookings? Some. Follow My Health bookings have been strong for four or five quarters in a row now. We didn't have an overall outcome from that was disproportionately high or unusual, relative to what we've seen. Certainly, that customers set with the termination of agreement, that customers set became a jump ball, if you will. We went after it pretty aggressively, and have had some nice success signing a bunch of them up, and there are still more of them out there to keep working. That activity will continue through Q3.

I think the second part of your question, do I expect new Follow My Health bookings to stay at the level they've been indefinitely? There will undoubtedly be a little bit of a taper them off a little bit. After people go through their application, we think there's another wave potentially of switch. We'll continue to aggressively market it. We think we have the best solution in the market, and we'll continue to be active selling it.

Okay. Great. Thank you very much.

Robert Jones with Goldman Sachs.

Going back to the international opportunity, just trying to get a little bit of a better sense of what that opportunity means to you guys today, anything you can share with us relative to the pipeline or the backlog, as far as the weighting towards the international opportunities that you see in front of you?

I would say broadly, and again when we talk about global we're talking about specifically the United Kingdom, there's a lot of tenders out today. While somebody has let a tender, if you will, that doesn't mean it necessarily comes directly into our pipeline. I expect to win those, but we're not going to win all of them.

There's a fair amount of activity there, a higher degree of activity than we've seen for quite a while. There's a number of different places in Canada, in different provinces that are also out to market. We're seeing continued activity in the Asia Pacific rim and in the Middle East. There's just a pretty decent set of opportunities that now that we are staffed up, it's amazing what you see when you have people on the ground. We have a lot of people on the ground today that we didn't have a year ago. They are hustling.

Got it. Rick, just one housekeeping on transaction processing margins, well below the 40%. It sounds like you said you're investing in hosting in that business, and that's what was weighing on the margin. I'm just curious if you could give us a timeline on how we should think of those margins returning back to the previous run rate? Thanks.

Bob, my comment about hosting was really meant to say there's a lot of line item impacts that I think throw off what you've traditionally seen in margins on line item basis. The hosting was a comment on overall. Within transaction processing, you have a couple of things moving. That would be also where we got hit with this, again, termination of our relationship with our former portal partner. That hits you pretty quickly, too. That's virtually all margin.

I think that piece of it's going to come back quickly. I don't expect our hosting numbers to get worse, and I do expect them to creep back up. You should see that start to improve, I think, relatively soon. How quick do they get back to where you're thinking they were? Let's just wait and watch it a little bit.

Michael Cherny with ISI.

Thanks for all the color so far. Rick, I just wanted to ask the bookings comp question a slightly different way. George mentioned earlier that the comps start to get harder in the back half of year. The way I look at it is on a two-year basis, the comps are actually easier given that last year was a bit of catch-up. As you think about bookings without asking you to obviously give guidance, but thinking about the run rate, I want to reiterate. You made it pretty clear that you guys are still within the plan in terms of the way you think bookings are progressing. Now, we're at more of a new normal for what the bookings levels should be at on a repeatable basis?

A new normal, I'm sorry, in terms of -- (multiple speakers).

This is more normalized base run rate level, give or take. Obviously, you have some bigger deals. Some of the comp issue is more the fact that last year was just a big catch-up from the year before versus a one-year challenging comp.

Right. If you look at last year, you had a dramatic difference between the beginning of the year and the end of the year in terms of performance. Arguably, some of that's seasonality and buying patterns, but some of it was certainly I believe a relative level of confidence around the Company. We started the year in 2013 limping out of the strategic alternative process of late 2012. It took a while to regain market momentum and market confidence. In that regard, we feel pretty good about where we're at now and the levels were at. I'd say we feel like our activity in the market today is a pretty good normal circumstance for us, I guess.

Thanks. That's helpful. I just wanted to level set. One other question on Baylor, and congratulations on winning that new hospital, I know there have been some people who question in the market given the merger with Scott & White the disparate system that were used, what the incremental opportunity is there. Clearly, this is a big incremental positive for you guys in terms of expanding your relationship with Baylor. Do have sense of, at least from an addressable spend opportunity, what your penetration rate may be on the pro forma company?

I don't have a very good view of that right here today. We get to earn that business each and every day in Dallas, and they're a wonderful group of people to work with. They've got a great set of outcomes down there. They take great care of the people. They take great are of the people they do take care of.

This is another rollout, if you will, between the Denton hospital, Carrollton, Baylor Heart and Vascular Hospital, and now Waxahachie. I see this as expansion of their footprint down there, and as they're growing, we expect to grow with them. They're doing quite well financially in Dallas. There's a lot of opportunities for them to expand their clinical services, both through hospitals, but also through the physician services. We've enjoyed a very long term relationship with these folks, and we expect from our standpoint to do everything we can to maintain a very healthy relationship with these folks, which I said, you earn that each and every day.

Got it. Thanks for all the color. Congrats on that deal, and see you guys next week.

We have reached the allotted time for questions. I would now like to turn the call back over to Paul Black for any closing remarks.

Thank you very much for spending the time with us today. Next week is a big one for us. We'll celebrate the clients' success and talk about the Allscripts Nation, the collective partnership we enjoy with our global client base in Chicago at the Annual Users Group. We're expecting a total attendance of over 3,500 attendees. We know many of you will be joining us on kickoff day, Wednesday, and we look forward to seeing you then. Thanks, 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.