Veradigm Inc (MDRX) 2014 Q3 法說會逐字稿

Good afternoon. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts third quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

Our speakers for today are Paul Black, President and Chief Executive Officer, and Rick Poulton, Chief Financial Officer. At this time, I would like to hand the call over to Seth Frank, Vice President of Investor Relations and External Communications. Please go ahead, sir.

Thank you, Kayla. I'm going to go ahead and do the forward-looking statements. Some of today's statements that we will make may be considered forward-looking, including statements regarding future investments and our future performance. These statements involve a number of risk 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 impact our results. And now, with that, I would like to introduce Paul Black, President and Chief Executive Officer of Allscripts.

Good afternoon, and thank you for joining the Allscripts third-quarter earnings call. Allscripts' third-quarter results demonstrate progress towards the strategic imperatives we've outlined in the past. The primary drivers of our success continue to occur within the Company's global client base, Allscripts' greatest and most durable asset.

This progress reflects better execution, reflected by timely delivery on client commitments, new offerings and solutions enhancements. Among the most notable of these are the investments we have made to the Sunrise solution suite, allowing us to offer an integrated single architecture, including acute, ambulatory, emergency department, surgery and revenue cycle management.

As a result, Allscripts is benefiting from an enhanced competitive position. This is driving increasing numbers of new clients that choose us as a go forward technology partner.

Allscripts continues to build its strategic positioning, an advantage of an open, connected community health. The Company's long-term core philosophy of interoperability is the now the headline topic for healthcare executives and policymakers across the globe. We have invested in this strategy for years.

At the core is our ability to integrate information and make it actionable across care sites, disparate actors, and even across disparate EMR systems. We are leaders in aggregating EMR data and making it accessible. We enable multi-site integration without the need to rip out existing investments.

We also continue to offer clients lower total cost of IT ownership, better interoperability and connectivity, providing innovating population health management, and consumer engagement platforms, aligning with our clients' objectives to improve health care quality and safety, while reducing the overall cost.

We will likely never be satisfied, but we are dedicated to finishing 2014 strong and entering 2015 with momentum.

Allscripts' third-quarter produced year-over-year growth in revenue and adjusted EBITDA. Bookings were $223 million for the third quarter, and total $680 million year-to-date, an 8% year-over-year growth for the first nine months of 2014. While bookings are down approximately $11 million sequentially, it's important to keep in mind that the third quarter is generally the least active sales quarter in the HCIT industry. On a year-over-year basis, we had a significant contract in the year-ago quarter with a key client, which allowed us to overcome the difficult third-quarter pattern in 2013; Rick will discuss this in further detail.

So while we would've liked to have delivered a stronger performance, the reality is, the third quarter is a tough one. We are working hard to ensure 2014 shapes up as another year of bookings growth for the Company.

As an example, we are actively engaging with Allscripts' long-term partner, DaVita Healthcare Partners, to potentially expand out relationship to include a strategic development and management services agreement. We will continue to update you as appropriate.

Q3 bookings mix was very healthy, and continues to skew towards long-term recurring revenue streams, such as SaaS and managed IT services. Approximately 39% of third-quarter bookings were from SaaS agreements, compared to 40% in the third quarter of last year.

Total non-GAAP revenue for the third quarter was $348 million, a 4% year-over-year increase. Recurring revenue increased 6% compared to the third quarter of last year, and represented 78% of total revenue this quarter.

We also continued to drive operational leverage, as adjusted EBITDA increased 16%, primarily due to lower operating expenses.

Looking at the details, we added a significant numbers of new clients this quarter. In fact, new client contribution to bookings as measured in dollars was the highest in this quarter since I joined the Company.

In total, we added more than 240 net new clients in the third quarter, up from 180 in the second quarter. 2014 year to date, we added more than 550 new clients.

New clients like Saline Memorial Hospital in Arkansas selected Sunrise as its core clinical system after a highly competitive selection process. Clinician enthusiasm for the flexibility and depth of functionality with Sunrise as a key decision factor.

In ambulatory, Allscripts signed a major TouchWorks agreement with a large population health management service organization, Alignment Healthcare. Alignment Healthcare is a leading population health company dedicated to transforming the complex and confusing process of medical treatment, ensuring the healthcare continuum becomes more efficient, productive and effective.

The company partners with providers, health plans and hospitals to enable an easy to navigate healthcare experience, improving patient satisfaction.

Overall, third-quarter TouchWorks bookings grew sequentially and year-over-year.

In the standalone ambulatory market, Allscripts' SaaS offering is growing rapidly. We've expanded investment in our operations, particularly for small to mid-sized practices. We currently offer a hosted platform to all net new customers, and are migrating existing on-premise clients at their pace to this go-forward solution.

Allscripts' Professional EHR grew with client wins continuing to trend, on average, in the six-figure range across multiple physician specialties, including cardiology, asthma, immunology and pediatrics. This is an important differentiator for Allscripts: an open, innovative and robust platform to serve the needs of specialists and primary care providers. As you consider bookings mix, please note we had no net new Sunrise nor TouchWorks wins in the third quarter of 2013.

Clearly, the work we have done is paying off in terms of adding new clients. We have increased our competitiveness in this industry.

Looking at add-on sales, we increased new Sunrise and ambulatory footprints, and signed significant new managed services agreements.

Robert Wood Johnson University, a long-time Allscripts client, and the teaching hospital at Rutgers University, extended Sunrise beyond its main hospital campus to its recently acquired 355-bed hospital in Somerset, New Jersey. The extension replaces a primary competitor, making Robert Wood Johnson hospitals an all-Sunrise environment, a major accomplishment.

Robert Wood Johnson also selected TouchWorks for its Robert Wood Johnson Physician Enterprise, and signed a hosting agreement with us, illustrating our continued leverage in hosting services into the large practice ambulatory marketplace.

Also on the TouchWorks front, we signed an ambulatory hosting agreement with Catholic Healthcare Initiatives, covering 2,200 of their employed physicians nationwide. This is the largest ambulatory hosting agreement in Allscripts history.

Notable client renewals and expansions during the third quarter include Los Angeles-based City of Hope, which renewed its Sunrise relationship. They also acquired the dbMotion population health management platform. MaineGeneral Health signed a seven-year extension for Sunrise and TouchWorks, reflecting this client's success with the partnership, and investments made in these Allscripts solutions.

We added two new Sunrise facilities, with the Community Hospital in the greater Los Angeles area.

We also added to the roster of clients selecting Allscripts for IT outsourcing, including a long-term West Coast client and a major pediatric hospital in the southeast.

Finally, we expanded Sunrise to Baylor Scott & White Health System's Waxahachie Hospital, slated to open its doors the first week of December.

On the global front, we are encouraged by our continued success abroad. We have now signed four new Sunrise clients, representing 60 inpatient and outpatient facilities since June 2013.

In the United Kingdom, Wrightington, Wigan and Leigh NHS Foundation Trust chose Sunrise this quarter across its three inpatient locations. This represents Allscripts' third trust in the United Kingdom. We have gained momentum in the UK, with solid execution, delivering on time and on budget, which has been challenging for other suppliers in the past.

Also, the acquisition of Oasis in Q3 positions us well to leverage our strong clinical platform, and capture a larger proportion of the UK market, by pairing it with PAS administration tools as a single source supplier.

We have invested in multiple geographies, leveraging the global acceptance of Allscripts Solutions, to capture additional market share. As a result, the pipeline of new business internationally is up approximately threefold since 2013.

Within population health, Q3 was a good quarter for dbMotion, which continues to outpace competitors as the market demands scalable, sophisticated clinical solutions to manage the challenge of consumer engagement, interoperability, and clinical decision making. Our pipeline of new business and competitive win rates indicate that dbMotion's growth trajectory will continue to increase over the next several years.

In consumer engagement, in addition to the Sunrise and TouchWorks extensions mentioned earlier, MaineGeneral Health chose Follow My Health in Q3 as a go forward engagement platform, after evaluating several other portal options.

In fact, the patient portal market has seen a noticeable level of first-generation product failures. We are seeing a replacement market already emerge and we expect this to continue as the market consolidates to the most flexible, open and functional platforms. Allscripts has a true consumer engagement and direct to consumer care platform that transcends today's web portals.

Follow My Health's EHR agnostic approach, provides a single sign-on for consumers to access the complete medical record across their multiple providers. Allscripts provides a solution set that nationally identifies the patients, locates and aggregates clinical, health and wellness, and genomic data into a single, secure, patient-owned repository. This allows the patient to consent access to some or all of this data to healthcare providers, research firms and extended care teams. First-generation portals do not have this level of functionality.

We're also leveraging opportunities from the proliferation of mobile personal health devices, connecting these data to Follow My Health's Achieve solution that went GA in Q3. Achieve is integrated with Sunrise, TouchWorks and Professional EHR.

The adoption figures for Follow My Health are impressive. Approximately 2,800 organizations today are live, with hundreds more currently in flight to implementation. Installed clients represent over 200,000 physicians, and nearly 2.6 million active connected consumers. This is an exponential growth rate from this time last year.

We are enhancing population health service offerings through our new partnership we announced recently with Citra Health Solutions. This agreement includes value-based care services in support of (technical difficulty) seeking to position themselves for value-based care. With health systems, we are seeing early traction bundling Citra services with our existing technology solutions for ACOs.

From an innovation perspective, Fusion, Allscripts' community aware EHR functionality, is undergoing testing at a Sunrise client in the southeast. Fusion is a smart, innovative way to bring patient centric clinical information across the care continuum into the EHR work flow.

It semantically harmonizes only the information needed at the point of care, only when needed, inside the work flow, with zero additional clicks. Our goal is to release Fusion as a disruptive enhancement with interoperable functionality and integrated clinical work flows.

The capstone success for Q3 was Baylor Scott & White Health's selection of dbMotion. It will serve as the connectivity and population health management platform for Baylor. We're connecting, harmonizing and analyzing, and transacting data from a staggering number of systems, covering 30,000 square miles, equivalent to the total land area of South Carolina. This includes Baylor's two core acute EHR vendors, one of which is Sunrise, two primary ambulatory EHRs, approximately 70 affiliated community electronic health records, plus many other source systems, including ancillary labs, pharmacy and radiology.

A final area to mention is Allscripts' Payer and Life Sciences business, which is growing rapidly. Allscripts' vast installed provider and robust data provides an opportunity to positively impact multiple healthcare stakeholders by driving efficiencies to lower costs and improve care.

We currently collaborate with payers, life science companies, pharmacy benefit managers, and other partners to develop new programs, processes and content, focused on improving outcomes. Examples range from clinical trial collaborations, disease management programs, and value added programs, such as the prescription discount program we've recently launched through our partnership with Script Save.

Before handing the call over to Rick, I wanted to discuss meaningful use, ICD 10 and third-party rankings. As of today, approximately 90% of Allscripts' physician clients, and 100% of Allscripts' electronic health record hospital clients, have installed the Meaningful Use 2 and ICD 10 edition of our software. Further, we continue to enable its successful demonstration and attestation of the client base for meaningful use, serving as a partner to facilitate their plans, according to their schedule.

We are leveraging Allscripts' extensive clinical and technical expertise to work individually with a large number of hospital and physician clients who will demonstrate and attest in 2014, using Q3 data.

We expect to see client demonstration and attestations rise in the coming months.

We are committed that Allscripts' clients will be positioned and ready in advance for Stage II in 2015.

Finally, I wanted to update you on the progress of third-party rankings in client satisfaction.

We continue to make progress on this front, and continue on this key metric to measure success within the installed base. We are pleased that Sunrise Clinical Manager continues to trend up in the third quarter.

We have also significantly raised awareness and recognition for Sunrise Ambulatory Care as a fully rated ambulatory solution, as scored by providers and recorded by the KLAS research organization. With those comments, I will turn the call over to Rick to discuss third-quarter financials.

Good afternoon, everybody. As I review the third-quarter results, please reference both the GAAP financial statements, as well as the non-GAAP tables in our earnings release. And also the supplemental data sheets posted to our investor relations section of our website that we did early this afternoon.

I'd like to reinforce Paul's comments about Allscripts' progress. For the second quarter in a row, revenue and EBITDA grew on a non-GAAP year-over-year basis. This is very consistent with the three-year plan that we shared with you earlier this year.

Top line year-over-year revenue grew 4% on a non-GAAP basis, and total recurring revenue, which is where the Company continues to shift the majority of our new sales, increased 6%. Please note that we completed the acquisition of Oasis Medical Solutions this quarter. From a financial perspective, Oasis contributed a little over $1 million to revenue, as well as increased SG&A costs by a similar amount in the quarter. So overall, had a very negligible impact on the results for us for the quarter.

Now for the some of the details. Let's start with bookings. As Paul discussed, bookings quality continued to be very good this quarter. And as a result of that quality, on a year-to-date basis, approximately 51% of our bookings have come from software sales or subscription agreements. So once again, these are our highest profit areas for us, and this type of relative contribution is up significantly from the nine months last year.

Total bookings were $223 million for the quarter. When we look at the year-over-year comparison, please note that the third quarter of 2013 included an agreement to provide additional software and services to PIH Health, while also extending their current hosting and managed service agreements. The bookings value of PIH was significant in the third quarter of 2013, and it represented an excess of 15% of all bookings reported in the period.

So if we exclude the effect of this material agreement, bookings increased approximately 16% on a year-over-year basis. I think this context is important, as there are no agreements signed this quarter that were anywhere near the size of the PIH deal.

SaaS or subscription-based bookings represented 39% of our total bookings. That's flat compared to last year, and down a little bit from Q2, but still remains at a very healthy level. And it was, in part, a little lower this quarter because we had significant traction in our hosting agreements, which are not considered SaaS agreements.

So before moving to the P&L, remember that for Allscripts, when we define bookings, it represents incremental revenue streams. Client renewals on services or Core System agreements, as well as maintenance revenue commitments, are not included in the bookings metric. In addition, when considering the translation of bookings to revenue, please remember that there can be a significant lag in the conversion to revenue, due to the increasing mix of multi-year subscription agreements, as well as managed service contracts.

As you can see in the supplemental data sheet, we added almost $100 million to backlog, which brought us to a total of $3.4 billion at the end of the quarter, which is a 3% increase compared to this time last year. In particular, note that system sales backlog, as well as transaction processing backlog, are up significantly on a year-over-year basis, and maintenance remains very stable.

So turning to revenue, total GAAP revenue was -- total non-GAAP revenue, excuse me, was $348 million, an increase of $14 million compared to last year. As a reminder, non-GAAP includes a $2 million adjustment to our GAAP revenue results, which is primarily related to the acquisition accounting that we had to apply to dbMotion. We expect to stop making this adjustment after Q4 of this year.

Our non-GAAP system sales revenue totaled $22 million, a decline of $5 million compared with last year, and $4 million with the second quarter. Driving this change, we had the lowest level of hardware sales this quarter since the merger of Allscripts and Eclipsys in mid-2010. This low margin hardware revenue decline accounted for all of the system sales decrease compared to the year-ago period, and most of the decline from Q2 of this year.

So as you are aware, this trend is really driven by the shift to SaaS-based solutions for us, as well as an emphasis on increasing our hosting services. So again, this summary is a low margin hardware really explains most of the decline in system sales activity.

Moving down, as we projected on our second-quarter call, professional services revenue returned to the trend line we had talked about, after a very strong second quarter, where we had the impact of achieving a key delivery milestone at one of our larger clients. Non-GAAP professional services revenue totaled $55 million, and that represents an 8% increase over last year.

Our maintenance line also returned to a more normalized revenue run rate, at approximately $118 million. That's up $4 million compared with the second quarter.

And that second quarter, as you may recall, was impacted by an out-of-period credit that we had to recognize during the quarter. With the continued emphasis on subscription sales, we would continue to expect this maintenance revenue to average in the mid-teens on a quarterly basis. That's mid-teens -- a hundred and mid-teens.

Transaction processing and other revenue was $154 million on a non-GAAP basis. That's up 11% from prior year, and up 2% on a sequential basis from Q2.

So our top line growth continues to be impacted by approximately $3 million in quarterly subscription revenue, due to our termination with our previous partner for our portal product. We talked about that last quarter, and we continue to believe that was a very good business decision. We have more than offset the gross profit impact of that lost agreement, but it does have a top line effect for us still.

Moving to margins, gross margins -- our total non-GAAP gross margins declined to 42.3%. And that compares to 43.6% in Q3 of last year. It also declined about 150 basis points on a sequential basis.

On a line item basis, we recorded higher system sales gross margin. That's before the effective amortization. And this is due to the favorable mix of lower hardware that I mentioned earlier. Professional services gross margin had also returned to what we would think of as a normal trend line right now, off of the spike that we saw in the second quarter.

Our non-GAAP gross margins in professional services was approximately 11.5%, and that's relatively consistent with what we had seen prior to Q2. In the near term, margins are being impacted by our support of client objectives, including achieving meaningful use milestones. We view this as an investment in our clients and the right thing to do that will ultimately result in higher returns for the Company.

Moving to transaction processing and other, the step down in total gross margin that we saw in the quarter is due to an out of period nonrecurring charge of approximately $5 million related to costs associated with our outsourcing business. In the process of moving to our new back-office ERP system late last year, the release of that were deferred costs against the related revenue was not recorded, and this has resulted in the one-time hit that we had to take this quarter.

But accordingly, we do expect outsourcing margins to return to historical norms in Q4. Again, this is -- the effect of this was $5 million, and on an overall basis, largely explains the entire 150 basis point decline we saw in gross margins.

Adjusting third-quarter total gross profit for this $5 million, again, brings us in line with where we were in Q2 and Q3. Finally, the investments we are making in remote hosting remain a temporary drag on profitability.

We want to reiterate that Allscripts' commitment to improve operating and financial performance in remote hosting remains. We are carrying a higher level of non-revenue producing people and infrastructure, as we have prepared a ramp up of many clients over the next year. We are also expanding our hosting operations into a new facility, and we do remain confident, over the long run, that we will begin to see these margins improve.

Turning to operating expenses, on a non-GAAP basis, SG&A increased approximately $3 million sequentially to Q2, to a total of $79 million. This sequential increase consists of acquired SG&A from Oasis that I mentioned earlier, as well as the seasonal impact for the costs associated with our ACE client experience event that we do each year.

Non-GAAP SG&A declined approximately $5 million from the year-ago period. On a GAAP basis, in SG&A, we recorded $10 million of nonrecurring expenses, as highlighted in Table 4 of the press release.

This brings us to a total of $22 million in total non-recurring expenses for the year, which is slightly higher than the anticipated level that we have shared throughout the year. That part that is slightly higher is really due to some incremental legal reserves that we've recorded. But we do believe, by the end of the year, we should be largely wound down from all of these nonrecurring-type expenses.

From a P&L perspective, our reported R&D was $46 million, as we capitalized $10 million of our total gross spend. Our total amortization of capitalized software was just under $12 million, and these details can be found on the supplemental data sheet.

Allscripts' adjusted EBITDA for the period, which can be found on table 5 of our press release, came in at $46 million, representing a 13% EBITDA margin. Please remember that the third-quarter EBITDA was negatively impacted by the $5 million out of period non-recurring charge for outsourcing that I just explained.

With regard to other housekeeping items, we recorded approximately $3 million on non-cash interest expense. This is similar to prior quarters, and this again is associated with the convertible notes that we offered last year. For purposes of our non-GAAP net income, we excluded this non-cash interest expense.

And finally, for the P&L, our non-GAAP net income totaled $12 million, or $0.06 per diluted share. This is an increase from $0.05 last year, and our weighted average share base continues to be approximately 180 million shares.

Looking at the cash flow statement, our cash flow from operations totaled $14 million. That's consistent with the non-GAAP that we generated during the period. And capital expenditures have declined significantly. So this leaves us with significant standby liquidity at the end of the quarter.

So to summarize, our performance remains on plan for the Company through three quarters. And given the consistent commentary that we've made about how 2013 bookings levels would be sufficient for our long-term growth and long-term financial targets that we shared earlier this year, we remain comfortable with a three-year revenue and EBITDA targets that we have provided.

So with that, thanks for your time and attention. And now, I will turn back the call to Paul to summarize the quarter before we open it up for your questions.

Thanks, Rick. To summarize, we were pleased with the quality of the booking results, and through nine months, remain ahead of our plan for the year.

We added new Sunrise clients, signing seven incremental hospitals, four net new client sites, three add-on facilities including a major competitive displacement, making good progression with our discussions with Baylor Scott & White on extending our Sunrise relationship. We added a major new TouchWorks clients.

We signed 10 new major hosting agreements, including the largest in the corporation's history, for the ambulatory services with CHI. We signed three new outsourcing agreements. We grew our ambulatory booking sequentially and year-over-year.

We secured a new dbMotion agreement with Baylor Scott & White Health in extending their newest hospital with Sunrise platform. We added a major new homecare client. Our backlog is growing as a result of all these client successes.

And we are making operational progress, including greater notoriety and ranking for Sunrise as an integrated platform of class. We are leading the industry in advanced consumer engagement technologies and moving beyond a unit dimensional version one patient portal, where evidence of that is, we also this quarter replaced Epic MyChart, in one of our clients, progressing towards a community where EHR, a key deliverable built on our philosophy of open systems, data harmonization and the ability to push relevant information to the point of care within existing work flows with zero clicks.

And we are positioning our clients for successful with MU2 and beyond. And finally, we are on plan to grow bookings in 2014, which supports a three-year financial plan we introduced in January. With that, thank you, and we now will take your questions.

The first question is from Sandy Draper, SunTrust.

Thanks very much, and good afternoon. The question I guess probably for Rick, and thanks for the -- all the commentary and the additional detail. And I guess it's just a follow-up on the commentary on system sales. You talked about hardware being the biggest driver there. But I'm just trying to understand, you're starting to see, obviously, some nice growth.

You're up 55% year-over-year in system sales. You're building that backlog up. When would you expect to start see some of that being pulled out? And just trying to understand what revenue recognition, or what the length of the timing of the implementations are? Try to get some better visibility on when that back log actually drives into system sales. Thanks

Thanks, Sandy, for the question. I would expect the software component of our system sales to begin to grow frankly in the fourth quarter. We, as you noted, Sandy, we are establishing some good backlog there. Some of that backlog takes a little longer than others to get through the pipeline. So I'm not ready to give you a quarter to quarter forecast. But I do expect it to begin to lift, with our Q4, certainly off of these Q3 numbers

Okay great. And just one quick follow-up. As you commented, you've got liquidity, and no pressures there. With the stock having come down from where it was earlier this year, any thoughts about the potential for looking at a -- some type of a buyback? Or is that something that the board you think would consider?

I'll start by saying we have in place authority from the board already. And I will also say we are committed to delivering shareholder value, Sandy. As you will note, we have generated -- a lot of the cash we have generated this year, we've reinvested in the business, Oasis being one acquisition. We've invested in some other business partners, as well. So we continue to see pretty good uses of cash to create long-term value for the business right now. But we also -- it's not lost on us that the stock has gotten beaten up a little bit. And it's something we're talking about

Great. Thanks. I'll jump back in the queue.

Your next question is from the line of Michael Cherny, Evercore ISI.

Afternoon, guys. So I want to be able to bridge the gap a little bit. I appreciate at the end, you guys talking about the fact that you still feel confident in the three-year targets. As you think about where you are for the first three quarters of the year, relative to hitting those three-year CAGRs, what's the delta, in terms of, what needs to get better? What is already where you want it to be, in terms of making sure you get to those three-year average numbers?

From the start, Mike, I will remind you that we said the rev rack would be accelerating three-year period, and remind you of that I would also reiterate what I said in my call -- or excuse me, in my prepared comments, which is, from an internal plan perspective, and I appreciate we haven't published that. But from an internal plan perspective, we remain on our plan through nine months. So I want to be really clear about that.

But what needs to happen, to answer your question directly, is we're -- the transaction sales we're doing need to convert to revenue. And there's probably a little more slowness there than I was looking for, but the sales are real, they are in the backlog, and they will -- the proverbial pig will get through the pipeline here, eventually, and turn into revenue. So it's that conversion factor that we're going to look to shrink, I guess is the short answer to your question.

No, thanks. And you mentioned some of the competitive wins you've had in the quarter. As you think about some of the stuff that you've gone out and won, particularly versus -- on a head-to-head basis, where there is another incumbent that you have either displaced or worked alongside. Have you seen any differences? Is there anything related to some of the third-party rankings? Or I guess relative to maybe 12, 18 months ago, what has been the differentiating factor that's driving some of the performance you have, from a head-to-head competitive perspective?

I think that the clients themselves that are references for us, their confidence in our ability to deliver has increased substantially over the course of the last 24 months. I also think when prospective clients go visit our existing clients, they see a very large amount of extraordinarily deep and broad set of applications that are in, up running with clinicians that are using them and that are happy.

And to me, that's probably the biggest thing that's out there is that, when you take people to go see a Allscripts clients, whether that's Pro, dbMotion, TouchWorks or Sunrise, you're going to see the breadth and depth of what we have to offer. So when we are in the game, and when we do compete, we compete quite well. And people are pleased with what they see, and we get the nod.

Thanks

Your next question is from the line of Jamie Stockton with Wells Fargo.

Yes, good evening, and thanks for taking my questions. (inaudible) Can you hear me?

Yes.

Good. It sounds like you guys saw a decent acceleration in the ambulatory business, maybe even outside of TouchWorks, based on the number of new clients that you brought on during the quarter. I was just curious if you could give us any color on whether or not it seems like there's a replacement market that's heating up, and that is benefiting you? Or is this more, we have a lot of relationships today with organizations, and we're signing some deals as a result of groups they are affiliated with, and that's what driving the business.

I'd say it's a combination of both. One is we compete on the standalone brand-new footprint marketplace pretty well. There's new organizations that are getting into the market that are acquiring hospital facilities -- or excuse me, hospital-related ambulatory facilities. And those folks are looking for a different type of approach for the value-based care transactions that are coming down the path. So not only are they looking for the EMR, but they're also looking for a population health management solution.

And we currently offer both of those, which is, I think, a differentiator in the marketplace, as far as our capabilities today. There's a replacement market, from time to time, that occurs out there, just because of a damaged or broken relationship. Or there is, in some cases, we had some clients that came back to us who have actually gone to Brand X, tried it, and they came back. So we've had a couple instances where that has actually happened, as well.

So I think that all of those are -- they lead to our being able to be successful. And again, you have to be in the game, if you will. And we have got a pretty large army of folks that are out there each and every day that are turning over rocks, trying to collect new leads. But they're also working with existing clients as those existing clients expand and acquire facilities, and acquire ambulatory organizations, and extending our capabilities into those recently acquired organizations

But it does feel like a lot of these are replacement deals, where you're displacing some other product, as opposed to consuming that last breath of greenfield opportunity.

Yes, there are very few standalone organizations that are, today, operating without an electronic medical record.

That's great. Thank you.

You bet. Thanks for the question

Your next question comes from the line of Charles Rhyee with Cowen and Company.

Yes, hey guys. Thanks for taking the question here. If we think about, then, your comments about looking for bookings growth for the full year, anything in the fourth quarter that we should be aware of? Maybe from the year-ago period, that was large, that you would think that you want to call out?

And then secondarily, obviously, the numbers came in below where we were expecting. But as you think -- can you more about the pipeline, then, particularly in Sunrise? You talked very positive about the momentum. Can you give us some sense on what the pipeline itself is looking like? Domestically you seem to call it, international being up very large, but what about domestically?

Number of questions in there. The pipeline itself is pretty robust. I would -- just in general. So the US pipeline is good for a new business standpoint, as well as the existing clients. On Sunrise, as well as TouchWorks, as well as our population health solutions that are out there. So that feels pretty good. Q4 is usually a very active marketplace. In Q2, Q4, the points in time in US healthcare marketplace where people typically have their end of year. And it's either a June 30 or a December 31.

And that's when a lot of the decisions get made for healthcare information technology expenditures. So we expect Q4, it has seasonally been a big quarter, and we expect that trend to continue. Outside the United States, we talked about that pipeline in our extended, and I would say additional, investments we made in people, as well as locations outside the United States are paying off. Not only in client successes, winning business, but also in deploying our software successfully.

But also just with more, if you will, feet on the street. So that has all been positive. The Sunrise pipeline in the United States, and the new business is probably the thing I would highlight, we're getting a lot more RFPs, or our folks are out, again, the new business sales force is getting a lot of activity, and has been successful this year. Whereas in the last, I would say, prior 18 months, we weren't as active as we currently are, and we're closing business.

Great. Thank you.

Yes, and Charles, just for the first part of your question. The answer is no, there was nothing of the magnitude. We certainly had a very strong fourth quarter last year. But there was no single transaction that skewed that outcome, the way we had in the third quarter of last year.

Great, thank you.

Your next question is from the line of George Hill, Deutsche Bank.

Hey, good evening guys, and thanks for taking the question. Rick, I was just wondering, could we revisit -- or talk about or update us on where we are on the synergy target? And I guess, can you talk about how much has been achieved versus how much has been re-invested? And how much has been delivered?

You're talking about our SG&A efforts, George?

Yes.

Yes. We have -- we feel very good about our progress. We made, remember, the benchmark -- just to level set, make sure we don't talk past each other. Our benchmark was our spend rate in 2012, and where we would get to by the end of 2014. And we feel pretty good about our progress on that, even if you just look back to 2013, or you look on a year-over-year basis, on a non-GAAP basis, we're averaging being down more than $5 million a quarter right now.

So we feel pretty good about it. Now the challenge, whenever you put a point in time, as time goes on, you lose the apples and apples comparison a little bit. And certainly for us, when you think about acquiring dbMotion, acquiring Follow My Health, or Jardogs at the time. And now acquiring Oasis, we clearly import a little bit of SG&A into our world.

So we've had a couple of things, and that requires, I think, a real -- a little bit of a reconciliation, to really look at things on an apples and apples basis. And we provided that type of transparency at the end of last year. And we're certainly happy to provide that type of transparency at the end of this year, as well, just so everybody can see the same score-keeping. But the punch line is, yes, we are pacing to achieve those goals, absolutely.

Okay, that's helpful. And I guess, just nobody has brought this one up yet. But can we talk about what client churn looked like in the quarter? Can you give us any metrics around retention rate?

I guess what I would point you at -- George, that's not just a number we've ever thrown out there, and we don't want to make one up on you. But I would point at maintenance returned. I think everybody looked at the maintenance in second quarter, got a little spooked by that. We explained what was impacting it in the quarter. And I think the recovery of that line back to what I would certainly label a normal label should give you some solace that maintenance remains very stable.

No other public defections of any significance that have occurred. So every day is clearly a battle. We're fighting for the continued loyalty and retention of our clients. All clients in this space are under a lot of financial pressure. That's not a mystery to anybody. And I think all of us in the provider space feel that, in some way, shape or form. But where we sit today, we are a net winner of clients, not a net loser of clients.

Okay. I guess -- first of all, that's exactly what we like to hear. And then the last thing that I'll drill you on. And I guess I don't know -- just whatever color you can give me here. You talked about confidence, and bookings being up for the year. You don't need to hit a very high bar in the fourth quarter. In fact, you could have bookings be down significantly in the fourth quarter and still deliver bookings that are up for the year. I guess, is there any other color that you could give us regarding the Company's expectations for the strength you expect in Q4?

I will answer before Paul does. Of course --

I was hoping for Paul. (laughter)

Believe me, he wants to speak. You know he wouldn't settle for math that got us $1 over last year in total. But yes, look, we recognize the math you just did there, George. And you're right. We're aiming for a strong quarter. There's a lot of opportunities Paul will comment on. But we're not -- we'll stop short of predicting, any more directly, what we expect to achieve in Q4.

Okay. (multiple speakers)

I would just say, George, that the team is focused. We've had them all in. They -- we're on a very regular cadence with everybody. I'm still out in the field. I've made over 502 client visits since I've gotten here. And everybody -- everywhere I go to, there's a lot of business that are out there. And I, of course, expect to win it all. And the team knows that. And I've got a lot of people on the team that also feel the exact same way that we do.

So there is not a lack of opportunity out there in the marketplace, on a global basis. And we, from time to time, will have things that don't happen in one particular time frame that we would like. But over the course of 12, 18 month period, they do. And we've been pretty pleased with our execution across the opportunities that we've seen thus far. But again, I'm particularly pleased with the new business performance that we've had over the course of the last 18 months.

It's been -- there's been a major refocus on that. And the people that we have that are going after that business are delivering. And they continue to have a very robust pipeline and forecast for success there.

Okay, that's helpful.

Your next question comes from the line of Robert Jones, Goldman Sachs.

Thanks for the questions. I guess first, just on bookings. Paul, listening to the number of wins you called out in the quarter, both with Sunrise and some of the population health solutions, and I understand you guys called out the year-over-year large win in this quarter last year. But I guess I'm a little surprised to see bookings down, not just year over year but sequentially. Can you maybe just give a little bit of detail, or share some of the dynamics that might be at play on the pricing front of what you are seeing out in the marketplace, as you win some of these accounts?

Yes, Bob, it's not -- I understand the question you're asking. I guess I'd say we are very happy and very proud to win some of the accounts that we're talking about. Take, during the quarter Saline, or our UK clients. But it's not that I'd say there's a bookings -- excuse me, a pricing -- certainly, pricing is a little bit under pressure in the industry. But it's not that there is cutthroat pricing. It is just the size of the deals are starting smaller, and then you grow on to them from there.

And so what's going into bookings now is just what's the committed amount of the deal today. I think in all cases, we would expect these -- in all these new footprints that we've landed, we would expect these deals to grow over time. And when they do, they'll contribute incremental to bookings. But they start a little smaller.

That's fair. And then I guess just a quick follow-up would be, if I look at the step down in -- or the drop off in system sales, and thinking about the mix shift that we've talking about to some of the SaaS and recurring revenue streams. I guess I would have expected to see a little more of an offset this quarter in transaction processing. Anything specific to the quarter that maybe didn't create that shift between those two buckets? And I guess how should we be thinking about that mix, as we look into next quarter and next year?

Yes, the transaction processing and other line, there is several things that go on underneath that caption. And it just, as an aside, looking ahead for next year, we're going to think about whether the revenue lines are the most representative of the business. Or whether we should create a different presentation format. But we have that we have now. That has business like, such as our subscription or SaaS business, buried in there. It also has outsourcing. It also has hosting.

So there's a fair amount of stuff that goes in there. And that's why that line item has become such a dominant piece of the overall revenue puzzle. But the subscription business is actually increasing nicely. If you could get under the hood of that, it is increasing nicely. Some of the outsourcing can be a little project oriented from time to time. So some quarters, it ebbs and flows. This particular quarter, it was on the flow, not the ebb. So some of the variable aspect of outsourcing was a little lower in the quarter. Just a function of work orders that we get from some clients.

And so it's -- all of that is masking, I guess, the pure subscription basis, which is continuing a study drum beat of growth for us.

Great, thanks for all the detail.

Sure.

Your next question is from the line of Dave Francis, RBC Capital Markets.

Hi, good afternoon guys. Paul, interoperability has been a big deal in the marketplace here recently. A lot of noise around that. I was wondering if you could comment, in terms of what activity is going on in the marketplace that may play to your benefits? Whether it be a dbMotion opportunity that you are seeing more of, as a result of the issue of interoperability? Or things that you are doing with CommonWell or other activities in the marketplace that may play to your strengths, relative to that specific issue, whether it be the DOD contract or other pieces of new business that are out there.

I'll try to answer that three ways. With CommonWell, we're very pleased with the progress we're making there. And we applaud that organization. And we're a founding member with those folks, of trying to advance interoperability for the industry. We're firm believers in that. We've been on the open platform, and on the open, if you will, bandwagon since 2007. So it's not a new subject for us. But it's great to see the industry come together to try to proclaim, as well as demonstrate, a higher degree of interoperability.

Because at the end of the day, it does improve patient care. And at -- there's -- at the end of the day, there is always somebody at the end of that line who has traversed through multiple different care venues. And it's important for a caregiver to have a complete picture. So that problem statement is being addressed in multiple different ways. From a DOD standpoint, they've made some very specific requirements in the RFP response, that you have an innovative and inter-operable platform, with world-class content, work flows and open systems architecture.

So we feel very good about where we are and what we've offered to those forks as a solution for what they are trying to do for our service men and service women. Again, same concept, that those folks will be seen in multiple different venues, with multiple different systems. And the ability to get the appropriate information about that service man or service woman who potentially has suffered an injury or a wound, needs that information immediately. So that the caregiver can perform the best possible service in a very short period of time.

And then from a-- just a broadly, the industry, there has been a lot of different ways to go after solving for the broad topic of population health. And population health has multiple different descriptions. But the way we try to describe it is, if you're clinically and financially responsible for, and accountable for, a population of humans that reside around your service area, you are going to want to know everything you can about who those people are, what conditions they have. And where they are going inside of that, if you will, service area.

So the ability to get the information out of all of the different points of service that they have, whether that's a minute clinic, or it's an emergency care center, or it's a level one trauma center, or it's a primary care, or it's an orthopedic specialist, those all typically, and every environment that we go into, are information that are stored on a different electronic medical record. For someone to be accountable for all that, and to assume that, they can put in one system and one architecture, to take care of all that by ripping out the EMRs, I think that's a very unrealistic expectation.

And I think the industry is coming to that realization, as well. So as we go in, and we have conversations at a very strategic level, with executives that are trying to put in place the strategies to go at risk, the strategies to become value-based care organizations, they are looking for the infrastructure to be able to accommodate not only the clinical elements of that, but also the financial elements. The costing components, as well as the claims processing capabilities. So there's a holistic view of that person, both from a, where all have they been? What conditions do they have?

What costs, by the condition, do they have -- have they incurred? And how do we redirect that person to the right venue at the right price? And that, to me, is the major PhD-level piece of strategy that folks are working on that we feel we're uniquely positioned to provide for. And the Baylor, Scott and White folks believe in that, as well. The complexity down there is -- I have already talked about it -- but that's the complexity, quite frankly, in every single large metropolitan area in the United States, and across the world.

No one has a single architecture. No one has a single EMR. There's hundreds of different electronic medical records that must be -- the data from whom must be harmonized, in order to get that total picture of that person.

Next question, please.

Your next question from the line of David Larson, Leerink Partners.

Yes, thanks for the question. This is Chris Abbott in for David. I just wanted to drill in a little deeper to the competitive landscape. You've indicated that there isn't very much greenfield opportunity left in the market. So as we think about the replacement opportunity, are you seeing more noise or movement from some of the customer bases that have maybe been considered traditionally to be a bit more stable? You had mention an Epic My Chart replacement in the quarter. What drove that? And are you seeing any more activity from the Siemens customer base?

Yes, to clarify what I said was that there's very few places that we go, especially on the ambulatory environment, where there -- they do not have an electronic medical record -- or health record. So that's the greenfield -- the absence of that today. Because of the MU two focus that's been out there for the last four years, a lot of people have made an electronic record selections. So that's how I would probably clarify that, David.

So what I would say on the -- on any installed base that's out there, from time to time, there's going to be movement in the installed base, and new requirements from the installed base, that may not be satisfied by the incumbent supplier. And it's -- I think that's the component that we are working on, is to make sure that we maintain a relevance, and we maintain a strategic importance to that client. That's why we're focusing not only on making electronic medical records that are robust and handle the day-to-day operational needs of the caregivers that utilize it today.

Working on optimizing work flows, working on reducing clicks, working on getting the clinical and the quality information out of those data that they need in order to maintain a better practice. But importantly, the thinking about the next phase of where they have to go to connect the population, to analyze that population, and to connect to the consumer. And those are things that are, as people are looking at their incumbent supplier, in some cases, they're making a move because they're making another new 10-year decision about where they want to go.

And the folks that are looking at the next 10 years are looking at organizations who have thought through, and have invested in, a long-term strategy and approach to having an open systems approach to, and a very robust set of offerings for, the multitude of caregivers that exist in a total population health-centric environment, as compared to a traditional environment from the past years

Okay, that's helpful. And I just wanted to touch on the international opportunity. You mentioned several times the global demand you're seeing. What countries or regions are you seeing in the most near-term opportunity? And then, can you give us any color on your current business mix between US and ex-US? And where you think that could go over the next two to three years?

Yes, I think that the areas that we're seeing a lot of activity are the Middle East and Australia and Canada and the United Kingdom. There is a fair amount of opportunity in mainland Europe, as well. But the places that we're focusing right now on are the prior four that I outlined. With the split, we obviously, at some point in time, would love to have equal balance between where we are in the United States versus the rest of the world, given the population component between how many people live here and how many people live outside -- the rest of the world.

But that is not a doable balance in the foreseeable future. We would expect to have a higher growth rate attached to our global business than what comes out of the United States, just because the denominator is smaller. But we have invested a lot in people. We have invested a lot in the organizational infrastructure. And we invested a lot in the clients that are overseas that, from a localization standpoint, we expect to get good returns on.

Okay, thank you.

Your next question comes from the line of Gavin Weiss, JPMorgan.

Hi, thanks for squeezing me in here at the end. Just wanted to touch base with you, Paul, on a bigger strategic question. Obviously, population health is a big focus for you. In our view, it remains a pretty fragmented market, a lot of players out there throwing out the words population health. Can you just talk how you see the competitive marketplace right now? And how you see it transitioning over the next couple of years? And as a follow-on to Sandy's earlier question, in terms of capital deployment, are there any products in this area, or any technologies that you think you need to acquire to be competitive going forward?

I'll take the first part, and I'll let Rick answer the second part. On the first part, we feel that there's -- because the population component is relatively new, there is a lot of different examples of people who are coming at, if you will, the elephant from different angles. So you have some folks that come in, and they hop immediately to the analytics piece, which is very important. We've got some folks that just do HIE or lightweight connectivity. You have other people that just do patient portal.

To me, the totality of putting together a population health infrastructure is what we are working on, and what we have been spending a lot of money and time and energy on over the course of the last 24 months. The ability for us, also, through our open systems capabilities, to attach other solutions to that, like if you have extraordinarily powerful analytics capability, we're happy to utilize that extraordinarily powerful analytics capability inside of our infrastructure.

To be able to take that analytics and make that actionable, back down into the bedside or the clinic, in a workflow-centric manner that we think a lot of people are not spending as much time on as they need to really effectuate the change that a caregiver wants to make, by using a system that has been imported with, or if you will, has received newfound information at the bedside. So the workflow component, from my perspective, and from our Company's perspective, is an extraordinarily important component to making sure that these quote-unquote population health management systems all work.

If you are a payer, you're really interested in the claims component, and making sure you understand where people are, if you will, to spend money. That's a retrospective view, but yet it's all still very important for you, when you're financially at risk, to understand the spending patterns of a certain condition, or a certain population of people who have those conditions. So from our perspective, the population health management has been relatively broadly defined. We look at it from a system standpoint. Or what are all the different areas that we need to have a relevant answer for, for somebody who is clinically and financially accountable for the care of a defined population?

And that is currently, today, as people are moving from fixed fee -- excuse me, fee for service to a fixed CR capitated environment, that is still living in both worlds, and you have to be able to perform in both worlds. Which we feel we're able to do in a pretty effective manner. The other component that has not been discussed very often, which is the entire, as I mentioned earlier today, the cost of that transaction, if you will. So the ability for people to actually cost out what that condition costs, versus what a department inside a hospital, as an example costs, that's new information, and that's new ground that has not been plowed by anybody.

We feel that we have a very big head start on that, based on our EPSI component. And what we've done over the course of the last 18 months to move that from a departmental view to a condition-based view, which we think, when you're, again, at risk for the entire population, you're going to want to understand what the costs are across venues and across caregiver teams.

So Gavin, I would -- I'll just summarize. Paul talked a lot about where the opportunity lies. And again, you may remember, we, for a while, just tried to summarize population health, and what it means along the four pillars. It's really about managing transitions of care. It's about analytics on clinical and financial information. It is about interoperability of data. And it's really about engaging and empowering the consumer. If you line us up against that, we have some pretty good solutions in all those areas today. We have invested a lot in that solution base already.

Where we probably are weakest right now, in that regard, is in the area of analytics. And so that's a focal area for us. But I don't see that being something running out and doing a major acquisition. I think we have a lot capability to build that out ourselves, for a fraction of the cost. So -- but that's -- will continue to be a build versus buy type of decision for us. But I think, from a focus point area, that, and then continuing to make our care management, referral management, all these tools we have that are around transition of care, more robust are -- be the areas we will continue to emphasize investment.

Okay. Thank you very much.

Sure.

Your next question is from the line of Ricky Goldwasser, Morgan Stanley.

Hi, this is Shaun sitting in for Ricky. Thanks for taking my question. There have been a number of questions on bookings, and I hate to add to it. But it does seem that bookings stalled a little bit this quarter. So one thing I was hoping to get a sense out of was the composition of bookings. If we look back to last year, a big driver of bookings was population health, and it is running above 40% in the back half of 2013. And now I know that you are no longer providing that metric. But could you give us a sense for, has population held as strong a driver of booking momentum as it was last year? Or is it flattening out a little bit?

I guess let me -- I'll start by saying, while we certainly respect your view, we wouldn't agree that we stalled at all this year. We've tried to point out context to looking at bookings, making sure everybody remembers third quarter is always a seasonally softer quarter in business. Last year, we had an unusually high transaction that impacts when they do the comps, et cetera. So we're not trying to make excuses, but we're trying to paint the right context. And in summary, I don't think we would agree with your stalled characterization.

But with that said, we are continuing to see very robust demand from population health. We wanted to make sure our client base did not think that we were abandoning our foothold of being a core systems provider of EHR and rev cycle management solutions. And so that is why we're not breaking out that statistic of population health as a percentage. It's -- we are a healthcare IT provider of the broad suite of solutions, not just population health.

And -- but we do talk about it, and we continue to market our solutions very aggressively. And they continue to be a very meaningful driver of of our overall bookings performance.

All right. And if I could just have a follow-up on the slower backlog conversion? Particularly with assistance, and I guess transaction processing is a mix of things. But if you give a little bit more -- shed some little bit more light on what is going on, and why you are optimistic that it will work the revenue [is soon], that would be really appreciated.

I will give you an example. An area we've been emphasizing is increasing our -- and affect share of wallet with certain clients through increasing managed services in a particular hosting. There is a long lead time, from the time clients, particularly larger clients, make the decision to choose us as their hosting partner, and when you actually bring them live, and then therefore turn on the revenue recognition. So that's an example of hosting.

I bring that example up because that was an area that was actually a very strong contributor to bookings in this current period. So there are certain items that just are a longer lead time to conversion than others. Some of that is a function of the client, and their timelines. Some of that is a function of accounting rules, and when you're allowed to actually record the recognition. And some of it's just a function of backlog that we have, and working through that backlog. So there are multiple contributors to what leads to that timeline.

On the system sales backlog, is it more driven by the in-patient side or the ambulatory side?

I would just say in-patient is a longer implementation cycle than ambulatory, but they're certainly both residing in backlog.

Can we have the final question, please?

Your last question is from the line of Eric Percher, Barclays.

Hi, this is David Ho on for Eric. I want to ask quickly about R&D. Do you expect it continue to tick down? Or will it move up, going forward? And as a follow-up to that, what are you prioritizing, in terms of R&D?

On the spend, I want to be clear. The actual cash costs of R&D did not go down in any real meaningful way. What appears to be a falloff is because actually, we had a little roll off of stock compensation expense that we have to recognize for accounting purposes. So that's what exacerbates what appears to be a reduction. I would expect, with that said, our cash costs to go up a little bit from where they are now.

But in general, our play book that we shared earlier this year continues to be the play book we follow, which is to continue to have R&D investment at roughly the levels we saw, both last year, as well as what you'll see this year, on a gross basis. So that's the levels. We have a lot of priority on getting our solutions to integrate with each other, much more so that we've emphasized in the past. That's a lot of what Paul described earlier as the ability to drive population health solutions down into the workflow of EHR is, we think, a huge value add to our client base.

And can also allow us to create some competitive advantage with that, as well. So that's an emphasis for us. We're largely past the Meaningful Use 2 area, we're starting to spend some money, thinking about Meaningful Use 3. But we're supporting our entire solution set. So there's a broad swath of priorities right now.

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect

Thank you very much for joining us tonight.