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MDRX > SEC Filings for MDRX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

Form 10-Q for ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Allscripts is a leading provider of clinical, financial, connectivity and information solutions and related professional services that empower hospitals, physicians and post-acute organizations, such as nursing homes, to deliver world-class outcomes. We deliver innovative solutions that provide healthcare professionals with the information, insights and connectivity required to transform healthcare by improving the quality and efficiency of patient care.

We primarily derive our revenue from sales of our proprietary software and related hardware, professional services and IT outsourcing services. These sales also are the basis for our recurring service contracts for software maintenance and certain transaction processing services. Prior to this year, we used three reportable segments: Clinical Solutions, Hospital Solutions, and Health Solutions. In connection with the integration of the Eclipsys operations, in 2012 we realigned certain functions within our business. This realignment included the integration of our sales and services functions in the first quarter of 2012 as well as our solutions research and development team. After the realignment and based on the information used by management for making operating decisions and assessing performance, we identified the following reportable segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions and IT Outsourcing.

We believe that the HITECH Act and other provisions provided by the American Recovery and Reinvestment Act (ARRA) will continue to be one of the biggest drivers of healthcare IT adoption in 2012. Management believes that to date the HITECH program has resulted in additional related new orders for all of our Electronic Health Record ("EHR") products. Large physician groups will continue to purchase EHR technology; however, the number of very large practices with over 100 physicians that have not yet acquired such technology is decreasing. Such practices may choose to replace older EHR technology in the future as "meaningful use" regulatory requirements and business realities dictate the need for updates and upgrades, as well as additional features and functionality.

We believe small- and medium-sized physician practices (those with three or fewer physicians, and four to 40 physicians, respectively) are increasingly adopting technology driven by a variety of factors, including a desire to maximize federal incentive payments, align with local hospitals, and merge with other practices, as well as other drivers. These offices typically require less time to implement and train than larger offices, so the need to plan implementations well in advance is not as critical as in larger physician organizations.

We have also seen an evolution of buying decisions toward an increase in local community-based buying activity whereby individual hospitals, health systems and integrated delivery networks are subsidizing the purchase of EHR licenses or related services for local, affiliated physicians and across their employed physician base as part of an offer to leverage buying power and help those practices take advantage of the HITECH incentives. This activity has also resulted in a pull-through effect where smaller practices affiliated with a community hospital are incited to participate in the incentive program while the subsidizing health system expands connectivity within the local provider community. This pull-through effect has resulted in new orders for Allscripts Professional EHR targeting small- and mid-sized physician practices. Management believes that the focus on new orders driven by the HITECH program and related to EHR and community-based activity will continue to expand as physicians seek to qualify for the HITECH incentives for the first time or upgrade in advance of the start of Stage 2 of the program. The associated challenge we face is to successfully position, sell, implement and support our products to the hospital, health system or integrated delivery network that is subsidizing its affiliated physicians.


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The vast majority of our acute care and ambulatory customers continue to focus on achieving "meaningful use" under HITECH. As a result, during the remainder of 2012, much of our professional services deployment capacity will be consumed by demand from our customers who wish to upgrade to the most current releases of our EHR products which are certified as meeting "meaningful use" requirements, as well as those requesting implementation of any additional modules required to achieve "meaningful use." Our professional services margins could be impacted as we continue to supplement our staff with third-party resources to help meet the demand. We expect this trend to continue into the near future as customers react to the finalized requirements for "meaningful use" Stage 2.

Although we believe that we have taken and continue to take the proper steps to take advantage of the opportunity presented by HITECH, given the effects the law is having on our customers, there can be no assurance that it will continue to result in significant new orders for us in the near term, and if it does, that we will have the capacity to meet the additional market demand in a timely fashion.

Allscripts today provides one of the most comprehensive solution offerings for healthcare organizations of every size and setting. By combining physician-office and post-acute care solutions with enterprise solutions for hospitals and health systems, we offer a unified portfolio of clinical, financial, connectivity and information solutions.

Given the breadth of our solutions portfolio and customer types, we are uniquely positioned to connect physicians, other care providers and patients across all health care provider settings including hospitals, small or large physician practices, post-acute care facilities, or in a home care setting. We continue to compete for net-new opportunities among community hospitals and health systems that are looking to one information technology vendor to provide a single, end-to-end solution across all points of care. We believe our leading market share in the ambulatory space, in particular, gives us a competitive advantage in this regard as hospitals and health systems increasingly seek to leverage the EHR to build referring relationships with independent physicians across the communities they serve.

Additionally, recently enacted public laws reforming the U.S. healthcare system may have an impact on our business. The Patient Protection and Affordable Care Act (H.R. 3590; Public Law 111-148) ("PPACA") and The Health Care and Education and Reconciliation Act of 2010 (H.R. 4872) (the "Reconciliation Act"), which amends the PPACA (collectively the "Health Reform Laws"), were signed into law in March 2010. The Health Reform Laws contain various provisions which may impact the Company and our customers. Some of these provisions (including Accountable Care Organizations and the Comprehensive Primary Care Initiative) may have a positive impact by requiring the expanded use of electronic health records and analytics tools to participate in certain federal programs, for example, while others, such as those mandating reductions in reimbursement for certain types of providers, may have a negative impact by reducing the resources available to purchase our products. Increases in fraud and abuse enforcement and penalties may also adversely affect participants in the healthcare sector, including the Company. Additionally, conversations continue in Congress around the Medicare Sustainable Growth Rate reimbursement model and possible replacement payment methodologies, some of which would further encourage the adoption of health information technology in order to satisfy possible new requirements tying the report of quality measurements to the receipt of payment through Medicare but which also currently raise ambiguity among physician populations and healthcare organizations.

Such payment and delivery system reform programs as have been launched related to the Medicare program are also increasingly being rolled out at the state level through Medicaid administrators, as well as through the private sector, presenting additional opportunity for us to provide software and services to our clients who participate.


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Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Third Quarter 2012 Summary

Bookings, which reflect the value of executed contracts for our solutions, totaled $162 million for the third quarter which is lower compared with our second quarter bookings of $194 million and the prior year bookings of $267 million. Our current quarter results were impacted by clients who delayed decisions due to speculation about Allscripts' future corporate autonomy, and also by clients who continued to delay purchase decisions as they wait for new product releases.

Revenue decreased slightly to $361 million compared with $364 million in the prior year. Increases in maintenance and transaction processing and other revenue categories were offset by decreases in system sales and professional services as we experienced a decline in orders as we continue our efforts to improve product performance and delivery execution. Revenue decreased compared with 2012 second quarter revenue of $370 million. Sequentially we realized an $8 million decrease in system sales and a $5 million decrease in professional services revenue as meaningful use upgrade services decline. These decreases offset an increase in maintenance revenue.

We generated operating cash flows of approximately $31 million in the third quarter which compares with $42 million in the prior year.

Gross research and development spending increased significantly compared with the prior year. We remain on track for approximately $190 million of gross research and development spending in 2012 and the release of several important upgrades, product enhancements and innovative solutions.

In order to better serve our clients and the healthcare market, in October 2012 we publicly announced a plan to standardize our small office electronic health record and practice management systems. As part of this plan, we will converge, over time, our MyWay Electronic Health Record System ("MyWay") and Professional Suite Electronic Health Record System.

We plan to upgrade MyWay clients electing to migrate to the converged platform between January 2013 and September 2013, at no additional cost to the MyWay clients. The upgrade will position MyWay clients for Meaningful Use Stage 2 and ICD-10 compliance, and prepare them for the shift to value-based care that focuses on costs, quality and outcomes. MyWay clients not electing to upgrade will continue to have use of the application.

As a result of the above decision and the related elimination of future cash flows from sales of the MyWay application, we recorded a non-cash charge to earnings in the quarter ended September 30, 2012 related to the impairment of previously capitalized software development costs for MyWay plus the net carrying value of a perpetual license for certain software code incorporated in MyWay totaling $11 million, on a pre-tax basis. Additional non-recurring period costs will be incurred in future quarters to upgrade the MyWay clients that elect to upgrade. The incremental period costs will be partially offset by cost savings we expect to realize through lower development and support costs. The amount of such costs and anticipated savings are not determinable at this time and will ultimately be based on the number of clients electing to migrate.

Also impacting the financial statements for the third quarter is the settlement of an acquired tax position that was included in our liability for uncertain tax benefits prior to the current quarter. Pursuant to an agreement between Misys plc and Allscripts signed in 2010, Misys agreed to indemnify Allscripts against potential contingent tax liabilities for which it could be potentially liable, arising from Allscripts' purchase of Allscripts shares from Misys in 2010. During the three months ended September 30, 2012, we recognized a tax benefit of $16 million related to the settlement of the acquired tax position for an amount less than the carrying value of the uncertain tax liability. Prior to this quarter, our consolidated balance sheet also included a tax indemnification asset related to the uncertain tax liability. Since the settlement amount was less than the carrying value of the indemnification asset, we recorded a write-off of the remaining indemnification asset, which is included in interest income and other (expense), net within the consolidated statement of operations. The resulting charge of $16 million is substantially non-deductible for tax purposes and therefore increases our effective tax rate for the entire year.

On November 8, 2012, we confirmed that in light of the ongoing interest expressed in the Company by third parties, we are evaluating strategic alternatives. There can be no assurance that this process will result in any specific transaction. As stated above, our third quarter bookings were impacted by speculation about Allscripts' future corporate autonomy and the timing of new product releases. These factors are expected to also impact future bookings and results of operations.


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Overview of Consolidated Results

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine
Months Ended September 30, 2011



                                                    Three Months Ended September 30,                  Nine Months Ended September 30,
(Dollar amounts in thousands)                     2012             2011         % Change           2012              2011          % Change
Revenue:
System sales                                   $    35,220       $  54,646          (35.5 %)    $   116,176       $   165,420          (29.8 %)
Professional services                               62,749          65,275           (3.9 %)        201,615           179,004           12.6 %
Maintenance                                        119,263         113,244            5.3 %         354,295           325,415            8.9 %
Transaction processing and other                   143,462         130,571            9.9 %         423,276           386,036            9.6 %

Total revenue                                      360,694         363,736           (0.8 %)      1,095,362         1,055,875            3.7 %

Cost of revenue:
System sales                                        29,960          39,604          (24.4 %)         96,608           110,420          (12.5 %)
Professional services                               54,534          56,305           (3.1 %)        173,260           150,367           15.2 %
Maintenance                                         36,564          32,840           11.3 %         108,850           100,963            7.8 %
Transaction processing and other                    82,600          73,014           13.1 %         246,441           204,507           20.5 %

Total cost of revenue                              203,658         201,763            0.9 %         625,159           566,257           10.4 %

Gross profit                                       157,036         161,973           (3.0 %)        470,203           489,618           (4.0 %)
  % of Revenue                                        43.5 %          44.5 %                           42.9 %            46.4 %
Selling, general and administrative expenses        90,412          92,152           (1.9 %)        280,020           297,832           (6.0 %)
Research and development                            37,802          26,032           45.2 %         112,164            72,800           54.1 %
Asset impairment charges                            11,101               0             NM            11,101                 0             NM
Amortization of intangible assets                    8,537           9,422           (9.4 %)         27,047            28,071           (3.6 %)

Income from operations                               9,184          34,367          (73.3 %)         39,871            90,915          (56.1 %)
Interest expense                                    (3,718 )        (3,746 )         (0.7 %)        (11,930 )         (16,723 )        (28.7 %)
Interest income and other (expense), net           (15,845 )           425             NM           (15,303 )           1,184             NM

(Loss) income before income taxes                  (10,379 )        31,046         (133.4 %)         12,638            75,376          (83.2 %)
Benefit (provision) for income taxes                19,754         (11,909 )       (265.9 %)         10,531           (27,750 )       (137.9 %)

Effective tax rate                                   190.3 %          38.4 %                          (83.3 %)           36.8 %
Net income                                     $     9,375       $  19,137          (51.0 %)    $    23,169       $    47,626          (51.4 %)

NM - not meaningful


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Revenue



                                                  Three Months Ended September 30,                      Nine Months Ended September 30,
(Dollar amounts in thousands)                   2012              2011          % Change             2012             2011           % Change
Revenue:
System sales                                $     35,220       $   54,646           (35.5 %)     $    116,176      $   165,420           (29.8 %)
Professional services                             62,749           65,275            (3.9 %)          201,615          179,004            12.6 %
Maintenance                                      119,263          113,244             5.3 %           354,295          325,415             8.9 %
Transaction processing and other                 143,462          130,571             9.9 %           423,276          386,036             9.6 %

Total revenue                                    360,694          363,736            (0.8 %)        1,095,362        1,055,875             3.7 %

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Total revenue decreased slightly during the three months ended September 30, 2012 compared with the prior year comparable period as increases in maintenance and transaction processing and other revenue were offset by decreases in system sales and professional services. Maintenance revenue increased primarily due to new system activations and the increase in transaction processing revenue is attributable to the expansion of IT Outsourcing services to our existing clients and growth in our client base. IT Outsourcing contributed $8 million of the increase in transaction processing and other revenue in addition to increases in SaaS and hosting revenues as we expanded our customer base. Offsetting these increases in revenue is a decrease in system sales which consists of a $12 million decrease in software revenue and an $8 million decrease in hardware revenue attributable to a decline in orders as certain clients and prospects delayed purchase decisions due to speculation about Allscripts' future corporate autonomy and others continued to delay purchase decisions as they wait for new product releases. Additionally, we continue to experience a shift in sales to smaller physician practices which typically require less robust hardware solutions. Professional services revenue decreased compared with the prior year as a result of the decline in orders referenced above and a decrease in consulting services.

Total revenue increased during the nine months ended September 30, 2012 compared with the prior year as we realized increases in all revenue categories with the exception of system sales. The increase in professional services revenue was driven by increases in implementation and consulting services including the implementation of third-party solutions as compared with the prior year. On a year-to-date basis, orders for professional services have declined compared with the prior year which is reflected in the decline in professional services for the current quarter. Maintenance revenue increased primarily due to new system activations and the increase in transaction processing revenue is attributable to the expansion of IT Outsourcing services to our existing clients and growth in our client base. IT Outsourcing revenues contributed $19 million of the increase in transaction processing and other revenue in addition to increases in SaaS and hosting revenues as we expanded our customer base. Partially offsetting these increases in revenue for the nine months ended September 30, 2012 is a decrease in system sales which consists of a $31 million decrease in software revenue and a $18 million decrease in hardware revenue as we experienced a decline in orders as discussed above. Additionally, we continue to experience a shift in sales to smaller physician practices which typically require less robust hardware solutions.


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Gross Profit



                                      Three Months Ended September 30,                    Nine Months Ended September 30,
(Dollar amounts in thousands)       2012              2011          % Change            2012             2011          % Change
Total cost of revenue                203,658          201,763             0.9 %          625,159         566,257            10.4 %

Gross profit                         157,036          161,973            (3.0 %)         470,203         489,618            (4.0 %)
% of Revenue                            43.5 %           44.5 %                             42.9 %          46.4 %

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Gross profit decreased during the three months ended September 30, 2012 as we realized a decrease in revenues while costs of revenue increased primarily due to an increase in transaction processing and other costs as we added headcount and made infrastructure improvements in response to increased demand for our SaaS and hosting solutions. This increase and a $3 million increase in the amortization of software development costs were partially offset by decreases in costs of revenue associated with lower system sales and professional services revenue. Gross profit as a percent of revenue declined compared with the prior year due primarily to a higher mix of third-party systems sales which carry lower gross margin, the increases in amortization of software development costs and transaction processing-related costs discussed above, and lower utilization of professional services resources.

Gross profit decreased during the nine months ended September 30, 2012 as the increase in total revenue was offset by an increase in costs of revenue compared with the prior year comparable period as we recognized a $9 million increase in the amortization of software development costs and an increase in professional services cost of revenue primarily due to a higher mix of third-party systems sales that are more costly to implement, which offset an increase in professional services revenue. Gross profit was further impacted by an increase in transaction processing and other revenue that was offset by higher costs as we added headcount and made infrastructure improvements in response to increased demand for our SaaS and hosting solutions. Gross profit as a percent of revenue declined compared with the prior year due primarily to a higher mix of third-party systems sales which carry lower gross margin and the increases in amortization of software development costs, professional services costs and transaction processing-related costs.


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Selling, General and Administrative Expenses

Three Months Ended September 30, Nine Months Ended September 30, (Dollar amounts in thousands) 2012 2011 % Change 2012 2011 % Change Selling, general and administrative expenses 90,412 92,152 (1.9 %) 280,020 297,832 (6.0 %)

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Selling, general and administrative expenses during the three months ended September 30, 2012 were flat compared to the prior year. During the nine months ended September 30, 2012, selling, general and administrative expenses decreased compared with the prior year due to a decrease in expenses incurred relating to the Eclipsys Merger and other non-recurring costs and a decrease in people-related expenses. Partially offsetting these decreases is an increase in legal expenses related to general legal matters, including expenses related to addressing legal claims involving the Company.

Research and Development

Three Months Ended September 30, Nine Months Ended September 30, (Dollar amounts in thousands) 2012 2011 % Change 2012 2011 % Change Research and development $ 37,802 $ 26,032 45.2 % $ 112,164 $ 72,800 54.1 %

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Research and development expenses increased in the three and nine months ended September 30, 2012 primarily due to an increase in people-related expenses as we increased headcount in order to accelerate development efforts to improve performance and accelerate product integration and innovation. Also contributing to the increase for the three and nine months ended September 30, 2012 is a decrease in the capitalization of software development costs as certain quality and efficiency development efforts were not eligible for capitalization.

Asset Impairment Charges

Three Months Ended September 30, Nine Months Ended September 30, (Dollar amounts in thousands) 2012 2011 % Change 2012 2011 % Change Asset impairment charges $ 11,101 $ 0 NM $ 11,101 $ 0 NM

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

In October 2012, we publicly announced a plan to standardize our small office electronic health record and practice management systems and converge, over time, our MyWay application with our Professional Suite Electronic Health Record System. As a result of this decision and the related elimination of future cash flows from sales of the MyWay application, we recorded asset impairment charges during the three months ended September 30, 2012 related to the impairment of previously capitalized software development costs for our MyWay Electronic Health Record application plus the net carrying value of a perpetual license for certain software code incorporated in MyWay.

Amortization of Intangible Assets

Three Months Ended September 30, Nine Months Ended September 30, . . .

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