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MDRX > SEC Filings for MDRX > Form 10-Q on 9-May-2014All Recent SEC Filings




Quarterly Report

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

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other sections of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Such statements can be identified by the use of words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. Actual results could differ from those set forth in the forward-looking statements, and reported results should not be considered an indication of future performance. Certain factors that could cause our actual results to differ materially from those described in the forward-looking statements include, but are not limited to, those discussed in

Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2013 (our "Form 10-K") under the heading "Risk Factors," which are incorporated herein by reference. We do not undertake to update any forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements for any reason, except as required by law. The following discussion should be read along with the unaudited consolidated financial statements included in this Form 10-Q, as well as our Form 10-K filed with the Securities and Exchange Commission. Each of the terms "we," "us," or "our" as used herein refers collectively to Allscripts Healthcare Solutions, Inc. and its wholly-owned subsidiaries, unless otherwise stated.


Business Overview

We are a global provider of clinical, financial, connectivity, hosting, outsourcing, analytics, patient engagement, and population health solutions and services that empower consumers, physicians, hospitals, governments, health systems, health plans, retail clinics, retail pharmacies and post-acute organizations to deliver world-class outcomes. We deliver innovative solutions that provide physicians and other healthcare professionals with the data, information, insights, and connectivity required to transform health care by improving the quality and efficiency of patient care and to navigate the transition from fee-for-service to value-based care.

Today, we believe we offer one of the most comprehensive solutions for healthcare organizations of every size and setting. By combining physician, hospital, health system, and post-acute care solutions with solutions for population health, healthcare organizations can manage patients and patient populations across all care settings. Healthcare organizations are increasingly challenged to manage risk, improve quality, and reduce costs. Our population health solutions are well positioned to address this challenge, combining a complete view of the patient across all settings of care with analytics and patient engagement solutions.

Population health management is a strategic imperative for many healthcare executives today and is a primary objective for many Accountable Care Organizations ("ACOs"). As healthcare providers and payers migrate from volume-based to value-based care delivery, interoperable population health management solutions that are connected to the consumer marketplace are the key to market leadership in the new healthcare reality. We have taken several significant steps to solidify and advance our population health management solutions, which included our acquisitions of dbMotion Ltd. ("dbMotion"), a leading supplier of community health solutions, and Jardogs LLC ("Jardogs"), the developer of FollowMyHealth, a highly-rated, cloud-based patient engagement solutions provider in 2013. We also recently released our Allscripts Care DirectorTM solution. Taken together, these solutions are delivering value to our clients by providing them with powerful connectivity, patient engagement and care coordination tools, enabling users to better comply with the Meaningful Use program. Population health management is commonly viewed as the next frontier in healthcare delivery and we expect this rapidly emerging area to be a key driver of our future growth, both domestically and globally.

The healthcare IT industry in which we operate is facing significant challenges and opportunities due to new regulations and changes in industry standards. We believe a combination of changes in federal and state law, the development of new industry standards, and various incentives that exist today for Electronic Health Record ("EHR") use, ePrescribing, and pay-for-quality initiatives, are moving health care towards an environment where EHRs are as common as practice management systems in all provider offices. As a result, we believe that the Health Information Technology for Economic and Clinical Health Act ("HITECH") and other provisions provided by the American Recovery & Reinvestment Act, among other changes in laws, will continue to be a significant driver of healthcare IT adoption, including products and solutions like ours. We also believe that we are well-positioned in the market to take advantage of the ongoing opportunity presented by these changes.

We have taken steps to position us to have what we believe will be adequate capacity to meet the demand that could result from new orders related to HITECH and other government policies driving change in health care, as well as requirements related to upgrading the software used by our current EHR clients. These steps included supplementing our internal direct sales force with a limited number of strategic distribution partners with established sales forces focused on smaller practices with one to three providers. Furthermore, we took steps to improve the efficiency of our approach to new system installations, which resulted in the standardization of certain key processes across client sites and a decrease in the number of hours required by our professional services team to enable installations of our clinical and practice management solutions.

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HITECH authorized the EHR Incentive program, otherwise referred to as the Meaningful Use program, which provided significant incentives to physicians and hospitals that can prove they have adopted and are appropriately using technology, such as our EHR solutions. In order to qualify for HITECH funding under the current "meaningful use" criteria, including Stage 2 criteria, our clients are required to install and implement our products, certified as having met various requirements (as currently defined under the 2010 and 2012 Office of the National Coordinator for Health Information Technology ("ONC") Final Rules and under any future HITECH regulations and guidance that ONC may release), to achieve Meaningful Use by satisfying a variety of conditions outlined by the Centers for Medicare and Medicaid Services ("CMS") in 2010, 2012 and future years. The HITECH statute provides for a phased approach to implementation of the Meaningful Use standards, which the CMS Final Rules have specified to mean Stage 1 and Stage 2 (under way), with Stage 3 reserved for future rule-making based on the experiences to date but scheduled to begin, as announced in December 2013, in 2017.

Given that CMS will release future regulations related to EHRs, our industry is presented with a challenge in preparing for compliance. Similarly, our ability to achieve product certification by the Certification Commission for Health Information Technology (which has announced it will be concluding its certification activities in 2014), the Drummond Group and/or other bodies to be accredited in the future, the changing frequency of the certification program, as announced by ONC in December 2013, and the length, if any, of additional related development and other efforts required to meet Meaningful Use standards, could materially impact our ability to maximize the market opportunity. All of our market-facing EHR solutions were certified 2011/2012 compliant by an Authorized Certification Body of ONC, in accordance with the applicable provider or hospital certification criteria adopted by the Secretary of Health and Human Services. Each of our market-facing EHRs has also recently been certified as compliant with 2014 Edition requirements, as well as the Allscripts ED, Allscripts dbMotion™ and FollowMyHealth products under the modular certification option.

We believe that to date the HITECH program has resulted in additional related new orders for our 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 quickly decreasing. Such practices may choose to replace older EHR technology in the future as Meaningful Use or other regulatory requirements and business realities dictate the need for updates and upgrades, as well as additional features and functionality. Additionally, we believe that a number of companies who certified their EHR products for Stage 1 may not be able to do so in compliance with the requirements for the 2014 Edition, which could present additional opportunities in the replacement market, particularly in the smaller physician space. As the incentive payments end in coming years, we expect that the payment adjustment phase of the program, which penalizes organizations not participating in the EHR Incentive program, will provide a different motivation for purchase and expansion, particularly among hospitals and the largest practices.

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 and other payment reform opportunities. This activity has also resulted in a pull-through effect where smaller practices affiliated with a community hospital are motivated to participate in the incentive program, while the subsidizing health system expands connectivity within the local provider community. We believe that the recent extension of the Stark and Anti-kickback exceptions, which allow hospitals and other organizations to subsidize the purchase of EHRs, will contribute to the continuation of this market dynamic. We also believe 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 in those small- and medium-sized practices who have not yet participated seek to qualify for the HITECH incentives for the first time or experienced practices upgrade in advance of their 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. We believe the community programs we have in place will aid us in penetrating this market.

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 clients, there can be no assurance that it will 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.

Additionally, other public laws to reform the U.S. healthcare system contain various provisions which may impact us and our clients. Some of these provisions may have a positive impact by requiring the expanded use of EHRs and analytics tools to participate in certain government programs, 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 payment adjustments for non-participation in certain programs may also adversely affect participants in the healthcare sector, including us. Additionally, conversations continue in the U.S. Congress around the Medicare Sustainable Growth Rate reimbursement model and possible replacement payment methodologies, which would further encourage the adoption of health IT in order to satisfy possible new requirements tying the report of quality measurements to the receipt of payment through Medicare. Resolution of this issue would also address current ambiguities among physician populations and healthcare organizations and allow them to make strategic decisions about the purchase of analytic software or other solutions important to compliance with new legislation.

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The U.S. Department of Health and Human Services is implementing a new version of the standards for HIPAA-covered electronic transactions, including claims, remittance advices, and requests and responses for eligibility. These standards are called ANSI-5010. Additionally, HIPAA requires all entities who are covered by HIPAA to upgrade to the tenth revision of the International Statistical Classification of Diseases and Related Health Problems promulgated by the World Health Organization, also known as ICD-10, for use in reporting medical diagnoses and inpatient procedures by, based on a recent delay passed into law by Congress, no earlier than October 1, 2015. These changes in coding standards nonetheless present a significant opportunity for our clients to get to the most advanced versions of our products, but they also pose a challenge due to the scale of the challenge for the industry, particularly among smaller independent physician practices who may not understand the scope of the efforts necessary to successfully transition to the ICD-10 classification. New payment and delivery system reform programs that 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.

We primarily derive our revenues from sales of our proprietary software and related hardware, professional services and IT outsourcing services. These sales are also the basis for our recurring service contracts for software maintenance and certain transaction processing services. We revised our reportable segments effective December 1, 2013 in connection with changes to our organizational and management structure that were announced earlier in 2013. Prior to this change, we had five reportable segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions and IT Outsourcing.

The changes to our organizational and management structure were aimed at improving our operational effectiveness, enhancing our competitiveness and creating a greater focus on client needs. These changes, which involved the creation of strategic business units, were designed to transition us towards a flatter business unit model aligned with key products and services, and away from a functional organization. After the finalization of these changes and based upon the information used by our Chief Operating Decision Maker ("CODM") for making operating decisions and assessing performance, we identified nine operating segments, which were aggregated into three reportable segments:
Clinical and Financial Solutions, Population Health, and Managed Services.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates as previously disclosed in our Form 10-K.

First Quarter 2014 Summary

During the first quarter of 2014, we continued to make steady progress on our key strategic and operational imperatives, which are aimed at delivering on our critical client obligations, expanding the depth and breadth of our products and platforms, and reducing expenses. In addition, we continued to work toward expanding our business in the post-acute space, particularly in the areas of population health management and consumer health care engagement, where we believe we currently offer some of the industry's leading solutions. During the first quarter of 2014 compared with the first quarter of 2013, our quarterly bookings increased by approximately 26%, gross profit improved by approximately 3% and selling, general and administrative expenses decreased approximately 14%. We believe these results reflect improving operational efficiency and leverage.

Our bookings, which reflect the value of executed contracts for our solutions, totaled $223 million for the first quarter of 2014, compared with $274 million for the fourth quarter of 2013 and $178 million for the first quarter of 2013. This represents growth of approximately 26% compared to first quarter of 2013 and a decrease of approximately 19% compared to the fourth quarter of 2013. The decrease on a sequential basis was expected as our bookings in the fourth quarter of 2013 represented our highest level of quarterly bookings since the fourth quarter of 2011. In addition, there is a modest seasonal pattern in our quarterly bookings, with our fourth quarter bookings typically being the highest, and our first quarter bookings typically being the lowest compared to our bookings in the second and third quarters of a specific year. Approximately 36% of our total bookings for the first quarter of 2014 were derived from our population health management solutions. During the first quarter of 2014, we continued to improve product performance and delivery execution, and we believe that the market has responded positively to these initiatives as evidenced by the sequential improvement in our bookings in each quarter of 2013 and the 26% increase in bookings compared to the first quarter of 2013.

Total revenue for the first quarter of 2014 was $340 million compared with $347 million for the first quarter of 2013. While our bookings continue to increase, our revenue for the first quarter of 2014 does not reflect the full impact of the increase in bookings due in part to the timing of revenue recognition driven by the multi-year nature of new agreements, including an increase in the proportion of subscription-based arrangements and managed services contracts. Revenue from professional services declined compared with the prior year quarter, primarily as a result of the timing of services associated with several large contracts in the first quarter of 2013 that did not recur in the first quarter of 2014, as well as a decrease in consulting services. Revenue from maintenance and transaction processing and other increased compared with the prior year quarter reflecting the stability of our client base and an increase in the proportion of recurring revenue from SaaS-based (or subscription-based) services.

Gross research and development spending in the first quarter of 2014 totaled $61 million and consists of research and development expense of $52 million and capitalized software development costs of $9 million. This compares with gross research and development spending of $59 million in the first quarter of 2013. We continue to focus our development efforts on improving

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performance, accelerating product integration, and building new innovative solutions. Our research and development spending also includes development to meet government specifications for products that will enable clients to achieve Meaningful Use standards and comply with other industry regulations.

In order to better serve our clients and the healthcare market, we continue to converge, over time, our MyWay and Professional Suite small office EHR and practice management systems. We have been upgrading those MyWay clients who have elected to upgrade to Professional Suite, at no additional cost to these clients. We believe that our convergence program positions MyWay clients to achieve Meaningful Use Stage 2 and ICD-10 compliance, and prepares them for the shift to value-based care that focuses on costs, quality and outcomes. During the first quarter of 2014, we incurred approximately $2 million in costs and expenses associated with our convergence program, compared with approximately $7 million incurred in the fourth quarter of 2013 and approximately $6 million incurred in the first quarter of 2013. While we expect to incur additional costs and expenses in future quarters in connection with such actions, we anticipate that related future costs will further decrease as we complete remaining customer upgrades.

On February 18, 2013, we announced a North American site consolidation plan (the "Site Consolidation Plan") designed to create a more simplified and efficient organization that is aligned more closely with our business priorities. The Site Consolidation Plan included the closing of twelve offices and one warehouse. We are also implementing changes to corporate operating models intended to reduce costs associated with product solutions development. The costs of implementing these changes primarily consist of employee severance and relocation costs, and lease exit costs. During the three months ended March 31, 2014, we recognized a benefit of approximately $2 million due to the release of previously accrued severance costs that we no longer expect to pay. Additional estimated costs yet to be incurred in connection with the Site Consolidation Plan primarily include lease exit costs of approximately $1 million. We expect to complete the Site Consolidation Plan and incur all remaining related costs by the end of 2014.

During the first quarter of 2014, we incurred approximately $2 million of additional costs in connection with the dbMotion acquisition, which primarily consist of employee compensation costs and are included in selling, general and administrative expenses in our accompanying statement of operations for the three months ended March 31, 2014.

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Overview of Consolidated Results

Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31,

                                                          Three Months Ended March 31,
(Dollar amounts in thousands)                     2014                 2013             % Change
System sales                                   $   23,389           $   27,031              (13.5 %)
Professional services                              50,364               61,084              (17.5 %)
Maintenance                                       117,077              117,708               (0.5 %)
Transaction processing and other                  149,455              141,243                5.8 %

Total revenue                                     340,285              347,066               (2.0 %)

Cost of revenue:
System sales (exclusive of amortization
of software development and
acquisition-related assets shown below)             7,983               13,329              (40.1 %)
Amortization of software development and
acquisition-related assets                         21,031               19,539                7.6 %
Professional services                              47,900               57,582              (16.8 %)
Maintenance                                        35,720               36,597               (2.4 %)
Transaction processing and other                   89,465               85,591                4.5 %

Total cost of revenue                             202,099              212,638               (5.0 %)

Gross profit                                      138,186              134,428                2.8 %
  % of Revenue                                       40.6 %               38.7 %
Selling, general and administrative
expenses                                           89,946              104,232              (13.7 %)
Research and development                           52,305               50,659                3.2 %
Asset impairment charges                              195                  319              (38.9 %)
Amortization of intangible and
acquisition-related assets                          7,651                7,501                2.0 %

Loss from operations                              (11,911 )            (28,283 )            (57.9 %)
Interest expense                                   (7,233 )             (4,637 )             56.0 %
Other (expense) income, net                           (32 )              8,131             (100.4 %)

Loss before income taxes                          (19,176 )            (24,789 )            (22.6 %)
Income tax (provision) benefit                     (1,566 )             13,197             (111.9 %)

Effective tax rate                                   (8.2 %)              53.2 %
Net loss                                       ($  20,742 )         ($  11,592 )             78.9 %

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                                               Three Months Ended March 31,
      (Dollar amounts in thousands)         2014           2013         % Change
      System sales                       $    23,389     $  27,031          (13.5 %)
      Professional services                   50,364        61,084          (17.5 %)
      Maintenance                            117,077       117,708           (0.5 %)
      Transaction processing and other       149,455       141,243            5.8 %

      Total revenue                      $   340,285     $ 347,066           (2.0 %)

Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31, 2013

System sales decreased during the three months ended March 31, 2014 compared with the prior year comparable period. The decrease in system sales consisted of a $3 million decrease in hardware revenue and a $1 million decrease in software revenue. Hardware revenue is generally recognized in the period of sale and, therefore, is primarily driven by the level of bookings. While our bookings during the first quarter of 2014 were higher compared with our bookings during the first quarter of 2013, a higher proportion of our bookings during the first quarter of 2014 was represented by sales of population health management products and solutions, which generally require less robust hardware solutions for our clients. In addition, revenue associated with many of our population health management products and solutions is recognized over an extended period of time based on a subscription term and is included in transaction processing and other. As a result, the recent increases in bookings since the first quarter of 2013 did not result in significant additional software revenue.

Professional services revenue decreased during the three months ended March 31, 2014 compared with the prior year comparable period, primarily as a result of the timing of services delivery associated with several large contracts in the first quarter of 2013 that did not recur in the first quarter of 2014. In addition, we experienced a decrease in consulting services due to a higher bookings mix of subscription-based population health management products and solutions, which generally require lower levels of professional services to implement.

Maintenance revenue remained flat overall during the three months ended . . .

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