Veradigm Inc.
Q1 2013 Earnings Call Transcript

Published: 10 May 2013

[Operator:]

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Q1 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Seth Frank, you may begin your conference.

[Seth Frank:]

Thank you. This is Seth Frank, Vice President of Investor Relations with Allscripts, and thanks for joining us on our first quarter 2013 earnings call. With us today are Paul Black, Allscripts' President and Chief Executive Officer; and Rick Poulton, our Chief Financial Officer. During today's discussion, we'll reference supplemental financial tables on the Investor Relations homepage of the Allscripts' website at www.investor.allscripts.com. In addition, we'll reference both GAAP and non-GAAP financial measures on today's call. Reconciliations of non-GAAP financial measures are available in news release, which includes accompanying explanations to assist you in evaluating the financial metrics we will discuss on this call. Before we begin, I will read our Safe Harbor statement. This presentation will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events and developments, the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in our most recent report on Form 10-K, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. And now I would like to introduce Paul Black, President and Chief Executive Officer of Allscripts.

[Paul M. Black:]

Thank you, Seth. Today we will discuss Q1 results and actions the Allscripts leadership team are taking to position the company to execute on our vision and return to long-term growth. Allscripts' greatest asset is our vast client base. There's nothing more important than tending to, defending and growing our extensive global client base. Since taking the CEO position in December, I visited more than 100 clients globally. These meetings have been valuable in providing direct feedback on the status of our relationship. The health and stability of the client base is improving and we still have important work to do. I know many of you have seen survey results, or in your own channel checks, have heard encouraging news about our progress. The key to ensuring client success and satisfaction is clear accountability and execution. That starts with me and extends throughout our organization into sales, services, hosting, support and our solutions development team. We have taken steps to streamline the organization's structure, aligning cross-functional teams and drive clear accountability by solution and by client. Our goal is to make sure we are aligned with our clients regarding their 2013 imperatives, as well as their long-term strategic objectives, ensuring stronger client results and leveraging all of our capabilities. One of the biggest obligations to our clients is delivering on Stage 2 Meaningful Use and ICD-10 upgrades. For Meaningful Use 2, we are beginning the early adopter program for core EHR products, which will continue through June. We have been working aggressively to ensure that these upgrades will be of the highest quality and adhere to strict timeline to help ensure Meaningful Use asset station success across the client base. We anticipate general availability of the Meaningful Use upgrade at the end of June for Sunrise 6.1 and EHR 11.4.1 and August for Pro EHR 13.0. In the interim, we made progress in executing new client activation, ICD-10 preparedness, enhanced integration of existing solutions and improved support levels to drive improved client satisfaction. Illustrating our progress, we had multiple successful new client activation to Sunrise Clinical Manager in the first quarter and a series of successful upgrades. For example, Allscripts is proud that we had extended our partnership with Baylor Health Care System in Dallas, Texas. During the first quarter, 3 additional hospitals went live on Sunrise CPOE. We spoke about Baylor University Medical Center in February, one of our largest Sunrise activations ever, and added others, including Baylor Heart and Vascular Hospital and Baylor Specialty Hospital. We also concluded a fourth activation in April at Baylor Grapevine. These have gone well, on time and on budget. In addition, we had a series of new client activations last quarter including a 200-bed community nonprofit hospital that was up and running with over 15,000 patient orders entered into the system and successfully processed within 1 week of go live. Another new acute care client, a 2-hospital system in Pittsburgh, went live with SCM CPOE and implemented dbMotion to connect affiliated hospitals, community physicians and Enterprise EHR for its own ambulatory services. We also had success with multiple client upgrades from 5 -- Sunrise 5.5 to Sunrise 6.0 in the quarter. These clients are seeing solid performance post upgrades. Satisfaction with our solutions and support has, in some cases, resulted in significant additional business. John Bosco, Senior Vice President and CIO of the North Shore LIJ Health System, stated that their experience with both Enterprise 11.4 and Sunrise 6.0 have been very positive regarding the quality of the code and the reduction in the amount of defects. This past weekend, North Shore LIJ upgraded their faculty practice to 11.4. He went on say that the services we provided as part of the upgrade were also very strong. A [ph] Ohio hospital recently underwent a big bang upgrade in March after going live on Sunrise Ambulatory in 2012. They now have a single integrated inpatient and outpatient clinical record across their Enterprise. As a result of our collective efforts, we have been able to secure high levels from client retention. That said, you will notice we did have a decline in maintenance revenue quarter-over-quarter. Rick will discuss the details in a few minutes, but overall, our client retention has remained relatively stable year-on-year. I believe we have clearly identified the remaining organizations who need attention, and we are doing everything we can to deliver on our obligation to ensure client retention. Finally, Allscripts ended the pre-existing lawsuit against a prospect who selected one of our competitors. This management team does not believe it is in the company's long-term interest to pursue such litigation. Looking at the market, we see early stages of a permanent change in the New York health care industry. To survive, clients must reengineer client care delivery, streamline cost, assume financial risk and comply with complex regulatory and financial recording requirements. I have heard this consistently from our clients. The list is long and daunting, including public and private clinical quality measures, HIPAA, ICD-10, individual state Medicaid compliance requirements, as well as potential financial penalties under the Meaningful Use. Allscripts' position in the EHR market is strong. The key focus is to strengthen our competitive position with our Sunrise platform as a cost-effective yet sophisticated open solution for hospitals seeking an integrated architecture to upgrade or replace legacy systems. That said, we believe the complete or monolithic rip and replace approach in the hospital market will decrease in prevalence over the next several years. Simply put, this is not a practical solution for the vast majority of health care organizations. Rip and replace requires 2 scarce resources

[Richard J. Poulton:]

Thanks, Paul. Good afternoon, everyone. As I make some comments on the numbers, please utilize the GAAP and non-GAAP financial statements on our earnings news release, as well as the supplemental data sheet available on the Investor Relations section of our website. These schedules include historical and current quarter metrics including bookings, backlog, revenue metrics and capitalized software and amortization details. I'd like to start by making a few general comments, and I will get into some more of the detailed numbers. As indicated in the release, first quarter results reflect the combination of factors including our continued efforts to focus on the existing Allscripts client base, as well as significant investments in R&D. Also, as we indicated earlier this year and as Paul has talked about, we are taking steps to cut long-term cost and become more efficient. These efforts manifest themselves in lower services margins, as well as higher operating expenses during the quarter. While our non-GAAP financial presentation adjusts for certain of these costs, other amounts such as increased R&D investment and increased nonbillable services hours are not adjusted in the non-GAAP results. In addition as you know, we completed 2 acquisitions in the quarter, dbMotion, as well as Jardogs. Both are important components of our population health management and coordinated care strategies. We see significantly enhanced demand for these solutions as we look out in the future. By integrating and controlling these assets in the future, we will benefit from the positive revenue contributions as well as improved gross margins by selling these solutions ourselves as opposed to through third-party partners. We closed these acquisitions in early March, and since we already had distributed dbMotion solutions and given the subscription nature of the Follow My Health portal platform, the financial contributions from these transactions were very immaterial during the quarter. Please note that we did record transaction-related costs of approximately $2 million associated with these acquisitions during the quarter. So now let me walk through some of the numbers. We posted flat bookings of $178 million compared with the fourth quarter of 2012. We were pleased with these results since the first quarter is typically a seasonally slower quarter compared to the fourth quarter, and they slightly exceeded our plan for the quarter. In terms of bookings mix, we saw growth within the Sunrise base. Acute client sales were the highest in absolute dollars that they have been since the first quarter of 2012, and this is an encouraging sign to us. Our SaaS and subscription transactions were 25% of total bookings, which is up 600 basis points on a year-over-year basis. While this percentage is down from Q4, it does continue a trend for the last several quarters of mid-20s percent and above and helps contribute to our increasing level of recurring revenue. As you will see in the data sheet, recurring revenue represented 74% of total revenue during the quarter. This is our highest total ever. Total non-GAAP revenue was $348 million in the quarter, and this is a 5% year-over-year as well as sequential decline. System sales revenue continue to be challenged as the market shifts to longer-term subscription contracts. In addition, much of the business we are signing on a license basis has longer implementation periods, which creates extended recognition in software revenues. Our maintenance revenue declined approximately $5 million or 4% versus the fourth quarter and is down approximately $1 million year-over-year. Let me give you some context for those numbers. In the fourth quarter, we adopted a new accounting policy whereby we elected to discontinue recognizing revenue on an accrual basis for certain clients with long-aged accounts receivable balances, and we took a cumulative charge to reflect the change at that time. Had this policy been adopted at the beginning of the year rather than at the end of the year, we would have reported lower maintenance revenue in each period during the year relative to what we've actually reported. So taking this into account, maintenance trends in Q1 really reflects stability overall compared to 2012 numbers. I'd also like to make a comment about maintenance revenue backlog. As you will see on the data sheet, we are reporting this as down $32 million or almost 4% from the year-end figure. This is largely a function of the accounting change I just mentioned, working its way into our backlog calculation, rather than a function of significant client attrition in the quarter. Overall attrition rates from our core products continue to be relatively low and as expected. Professional services revenue declined versus the fourth quarter given the large domestic activation that we completed during Q4. We were, however, encouraged by our services bookings during the quarter, and we will expect services revenue to pick up in the second half of the year as client upgrade work accelerates. Our transaction processing and other revenue grew slightly over the prior year, driven by growth in SaaS and subscription revenue, outsourcing, as well as remote hosting. Trends here were generally flat with Q4. Switching to margins. In order to aid your understanding and analysis of our system sales performance, we have classified all noncash amortization as a separate line in our cost of sales category on the income statement. We have also provided significant detail around what is driving this noncash amortization. So as you exclude that, you see that our margins for system sales remain comfortably over 50% when we think of it -- look at it on a cash basis. As I mentioned earlier, services margins were negatively impacted by our increased investment in delivering on our client commitments. In addition, margins were negatively impacted by $2.5 million of nonrecurring expenses related to the MyWay product consolidation that we have discussed previously. Turning to operating expenses. SG&A increased approximately $7 million over the prior year and was essentially flat with the fourth quarter. Reported SG&A was impacted by the following onetime items this quarter

[Operator:]

[Operator Instructions] Our first question comes from the line of Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser:]

So I have a question on the booking. Paul, on the first quarter call, you stated your goal to grow the booking year-over-year. So now after the first quarter, do you feel more comfortable with the goal? Do you feel that you're on track? And also, as we think about the bookings, right, excluding last year, which obviously, was an exceptional year, if we think about the normal seasonality of progression of bookings with the first quarter bookings being seasonally low, is that a fair way to look at it? Should I look at the historical rate of kind of like 1Q booking about 20% to 25% of your bookings and kind of like think about kind of like modeling an expansion throughout the year?

[Paul M. Black:]

Thanks for the question, Ricky. I would say that the bookings in Q1 were not necessarily as high as I would like to have them based on other opportunities that were out there that either pushed or that we're still working on. However, the bookings that we deal pull in were slightly ahead of our Q1 plan.

[Richard J. Poulton:]

I think in terms of modeling, Ricky, what we would say is traditionally, there are definitely seasonal patterns. Q4 is always the strongest quarter of the year, Q2 tends to be the second strongest, and Q1 and Q3 come in behind those. So those are directionally -- that's how we have built our plan based on those patterns of the past, and we encourage you to build your model the same way.

[Ricky Goldwasser:]

Okay. And then I know you talked about customer retention in the quarter that was positive. So can you just kind of like give us a little bit more color about kind of like your clients? Are they making kind of like long-term retention commitments? Or are clients more kind of like taking it -- taking more of a wait-and-see approach and kind of like taking it kind of like one step at a time?

[Paul M. Black:]

It's hard to make a general statement about it. Just -- but of the 100-plus clients that I've been to, most of them are very happy with what service we've been able to provide for them over the years. They have a lot invested in the relationship, and they have a lot that's already, if you will, wired and implemented, up and running. And their systems are depending on it. Their healthcare systems are depending on it today. So there's a mixed bag. There are some people that are really happy. There are some people that gave me a long list of things to go work on. A lot of -- most people gave me a short list of things to go work on, and that's what we're doing. Most of their obligations that they are consumed about for 2013 have to do with the Meaningful Use 2 adaptation and getting to ICD-10, 2 things that we talked about in the call that we're extraordinarily focused on. And the engineering organization is producing the software that's going to allow for that to occur. But I think we have a lot of very strategic relationships and a lot of very large health systems and a lot of very large physician ops practices, multi-specialty group practices, up and down both coast and in the middle of the country and globally. And the folks want us to do well. They are happy with the selection that they made. The deployments that we've had thus far with them have by and far -- by and large met with their expectations. They want us to continue to do so in 2013. It's going to be an important year for us to continue to do that. And so far so good.

[Operator:]

Our next question comes from the line of Glen Santangelo with Crédit Suisse.

[Glen J. Santangelo:]

Paul, I just wanted to just get an update from you. You talked about some of your clients upgrading to 6.0. Could you maybe give us a sense for what percentage of your total clients have upgraded to 6.0 and potentially 11.4 at this point in time?

[Paul M. Black:]

The 6.0 code has been out for a while but not a long time. The number of clients that have actually upgraded and are in production on that, I would say, is less than 25%. Many clients are waiting to go straight to 6.1. So they're currently on -- most of our clients worldwide are on version 5.5 on Sunrise. On the Enterprise side, you're going from probably 11.2, 90% of the cases, and they're going from 11.2 to 11.4, and they'll eventually go to 11.4.1.

[Glen J. Santangelo:]

Maybe if I can just add one sort of follow-up question on the cost side. Rick, it seems that the company is on track to achieve its $50 million in annualized savings. And I just want to get a sense for should we be thinking about that run rate off of the 2012 expense rate and assume that we should be down $50 million from there? Or ultimately -- because if you look at 2013 expenses, you obviously have a lot of onetime items in there. And so how should we think about that savings run rate from what base?

[Richard J. Poulton:]

Yes. I mean, we were trying to set everybody up for that, to think about it relative to the 2012 base. We have a lot of onetime hits, as you just mentioned, in 2013. We also should realize some of the savings as they materialize throughout the year. So you get a little bit of a hodgepodge in 2013. So I think it's good to think about it relative go to '12.

[Glen J. Santangelo:]

And then maybe if I can just ask one last one, and then I'll jump off. Paul, it's a follow-up to the previous question I asked on 6.0. Has there been any sort of negative feedback at all? Have all the upgrades gone smoothly? Any sort of quirks or anything kind of work pointing out?

[Paul M. Black:]

This is health care. It's really hard. It's complex. So not everybody is perfectly happy. So I wouldn't say that. I don't -- I will tell you, 3 or 4 of the largest clients that have gone live have had very few issues. And that's coming off an experience that they had 2 or 3 years ago with the prior version to 5.5, which did not come off in the way that this one is coming off nor would -- was it planned to come off. So I'm very pleased with the execution both from the engineering standpoint but also from our deployment teams out in the marketplace, as well as our support organization post go live. So I would never advocate, because I haven't talked to every single client that's got it, that everybody's perfectly happy. But I'll tell you, when things are not going well, I'm spending a lot of my time on that topic, and I'm not spending any time right now on 6.0. My time is focused on making sure that we have all the deliverables lined up for 6.1, 11.4.1 and 13.0 to make sure we meet our obligations. So I'm knocking on wood here. Things are going quite well, and the 6.0 version specifically has been tested in some very large clients.

[Operator:]

Our next question comes from the line of George Hill with Citigroup.

[George Hill:]

I'll start off with the bookkeeping one for Rick. Rick, can you talk about what was the contribution in the quarter from acquisitions? I know that Jardogs and dbMotion only closed in early March, but just what was their revenue contribution in the quarter?

[Richard J. Poulton:]

Yes. Negligible, George, really almost nothing. I mean, part of it's timing and part of it again is because of our prior relationship with db. Whatever deals they had already in the pipeline, we were -- we tended to book those on a gross basis anyway.

[George Hill:]

All right, fair enough. And then I guess, Paul, can you comment a little bit on as you guys are going to market and being invited to pitch now. I guess how are you differentiating ourselves and kind of what kind of questions are you getting about Allscripts from an operational execution level vis-à-vis, I would say, your 2 principal competitors? And even, I know that we're a month into Q2, but can you give us some color on how the conversations with clients have evolved since you took over the lead role versus where we are right now, about 4 months later? Appreciate any color there.

[Paul M. Black:]

Sure. I would say that it always depends again upon what venue I'm in. If I'm in the West Coast and I'm talking to a large physician group practice, they're talking about things that are a little bit different than talking to a large integrated delivery network, let's say, in Cleveland. But there's 7 or 8 things that they're all talking about. One is their interest in the Revenue Cycle component. They're also interested in our hosting capabilities. Some of them are interested in our total outsourcing capabilities. They are all interested in what we're doing and how we're going to help them connect the community from a population health management value-based care. Whatever the current words are that they use, shared savings, shared cost, bundled payments or capitation; those are all different vernacular that are being used by these organizations, many of whom may have anywhere from 100,000 to 400,000 lives under contract, but there are multiple contracts that have multiple different economic formulas as to how they are working with them. And then there's a new venture component they were talking about on the post-acute in the retail clinic and in the MinuteClinic kind of thing. Those are all extraordinarily interesting conversations. And in our pharmacy business, the transaction business is actually -- that's got kind of a -- it's a hidden gem, if you will, of a nice recurring base for us while we sit there from an e-prescribing standpoint, publishing a lot of transactions each and every day. The conversation, though, broadly with the CEOs is all about population health management. And that's where we're having a lot of traction, and that's where we're having quite a bit of success, especially when we look at where we are today versus where some of the other parties might be.

[George Hill:]

Okay. And then maybe just I'll put you on the spot for a second, real quick follow-up. If we look out a year from now, if you had to put a percentage figure on it, what would you estimate client retention will look like?

[Paul M. Black:]

I would say relatively high, George. I would just leave it at that. I mean, there's a lot of people that are pleased with the focus on execution. Our clients expect it. The people that work here expect it, and our shareholders kind of deserve it. So that's a huge focus from my standpoint of being able to look people in the eye, make a commitment, come back to the ranch and make sure that we're delivering for them, and that is going to be a very important component to people making a determination as to whether or not they're going to continue with us. But most of the conversations I'm in are about how we're expanding the relationship. They always want to make sure to hold our feet to the fire, which they should, but they're talking about additional applications. They're talking about additional services, and they're all talking about the population component. So I expect that to be a very high number from our standpoint.

[Operator:]

Our next question comes from the line of Michael Cherny with ISI Group.

[Michael Cherny:]

So I wanted to dig in a little bit. I know we have talked about this back at the presentation at HIMSS on the focus on recurring revenue in terms of both the way the market is going and also the predictability of revenue. As you think about that component, those SaaS bookings in the quarter were roughly 25%, what kind of contracts were those in terms of the types of clients that are pursuing SaaS and subscription base versus more traditional? And then do you have a peak level that you wanted to get to? Or is it too early at this point to identify what that may be?

[Paul M. Black:]

So we'll take the questions maybe in reverse order. I mean, we don't have a targeted number per se of how much the bookings should be. I mean, what we want to do is go to market with offerings that clients want to buy. And if for some reason any of our clients want to stay in the license model, then we'll stay in the license model with them. But we see an increasing sort of preference for the subscription basis. And frankly, we've probably lagged in having an offering that meets that need, so we're busy trying to do that. So it's not a target number other than I'll tell you, again, this is now the fourth quarter in a row where we've been mid-20s or above. And that all contributes toward a financial foundation which should create more predictable performance for us. In terms of what's going there, I'd say the looks of it are different, but one product that is particularly strong for us right now is our Care Management product. And that's a product that we sell both to our other electronic health record base, as well as some of our competitors' base as well. So that's a strong product for us. The Follow My Health portal solution is another example of the subscription base such as that as well.

[Michael Cherny:]

Great. And on the lines of Follow My Health and dbMotion, obviously, 2 partners, companies you knew well on the acquisition front to beef up the ownership, obviously, the folks in population health management. Are there any other areas from a technology perspective that you think through M&A or maybe through specific targeted R&D projects you think are necessary as you further along the population health management tool, particularly as you move, obviously, into a new world of accountable care organizations and all those other fun buzzwords?

[Richard J. Poulton:]

I think we've got a pretty good handle on what the market demand is for those. But this is somewhat of a new market. There's a component in there of analytics that everybody is working on that we're -- obviously had a bunch of different groups that were working on that inside of the company, which we've consolidated into one organization and we have a single plan for what were going to go on the population analytics side, as well as the reporting analytics from a quality standpoint that we referred to on the call. So that's one area that I think always can use additional bolstering, the Big Data piece that you hear people talk about, but the analytics and the algorithms that you run in the background to help identify and then make sure that the appropriate cohorts of your population are getting the right kind of care at the right venues. So that's a -- matching all that up, that air traffic control system, if you will, is something that we will continue to work on and perfect over time. And data -- more data running through the system helps you to perfect that as you are also tracking the outcomes, both clinically and financially. So that's probably one of the bigger areas that is a focus area for us. And then broadly, the other thing we talked about, HIMSS, the other capabilities that we have that we are continuing to invest in; our hosting capabilities, our Revenue Cycle to be able to offer total Revenue Cycle outsourcing, which we signed an agreement this quarter when we -- we have had over -- parts of our company's history done that. So it's not new area for us. But the Revenue Cycle outsourcing is important, and we'll be making continued investments internally in that, as well as our total outsourcing business, which we signed additional total outsourcing this last quarter with one client, and other clients are expressing an interest in that as well.

[Operator:]

Our next question comes from the line of Steven Halper with Lazard Capital Markets.

[Steven P. Halper:]

Two housekeeping questions. If you look at the income statement, the $3.5 million adjustment in 2012, does that go back to the change in the accounting on that accrual?

[Richard J. Poulton:]

Not really accrual per se, Steve. It's been a change we announced, I believe it was in the third quarter. It was upon further reflection, our auditors felt that some of what was embedded in our agreements needed to be called on maintenance as opposed to part of the software sale. So it was kind of like computing a maintenance stream as opposed to having their own software. So this is representing the reclass from what was previously reported. If you pulled out last year's press release, you would have saw that $3.5 million up in system sales rather than in maintenance.

[Steven P. Halper:]

Right. So the $37.2 million would have been $3.5 million higher?

[Richard J. Poulton:]

Correct.

[Steven P. Halper:]

Okay. And then the other question is what's behind the lower cap rate on the R&D expense? Can you tell us sort of what's taking priority now in terms of development and why you have less capitalize versus expense?

[Paul M. Black:]

Yes. Well, let's just level set on the question. If you'll remember from Q4, we actually had a 7% cap rate. And so we talked it about a fair amount then. We expected it to come back. You do see quarter-to-quarter volatility. So we went from mid-20s down to 7%. Now we're 13%. We had expected it to be a little higher, frankly, this quarter. It's a function of very byzantine accounting rules and requirements on documentation and things like that aligned with where we are on the -- where we are in the state of certain projects. There hasn't been any fundamental change in the direction of our efforts. It's really more driven by accounting requirements and how they are classified. So it's with the fact that we had 13% in Q1. I think it's going to be hard to see a full year in the range we have talked about in Q4. We -- at Q4 again, recall, I said we thought for the year we'd be back in that somewhere between 20% and 25% range. I think with one quarter in '13, I just expect to be at the low end of that range or maybe even lower for the full year. And we'll try to keep you updated. But it's just the facts and circumstances being overlaid on the accounting rules.

[Operator:]

Our next question comes from the line of Sandy Draper with Raymond James.

[Alexander Y. Draper:]

A couple of housekeeping items, initially for Rick, just following up on Steve's questions. So the adjustment on the system sales to maintenance revenue, will we see similar changes in the second and third quarter, or is it just this first quarter? I'm just trying to think, do I need to -- I'm thinking year-over-year for the next couple of quarters, do I need to make some type of adjustment mentally for the next couple of quarters?

[Richard J. Poulton:]

Yes. For sure, next quarter, Sandy, you'll see the same thing. And then we'll have -- frankly, off the top of my head, I can't remember if that came out. I think that was Q3 where we first reported it. And so by the time you get to Q3, then there's no more need to restate.

[Alexander Y. Draper:]

Okay. In terms of -- I know you don't probably keep an exact number, similar magnitude in sort of that $3 million, $4 million or could it be something much bigger or is that...

[Richard J. Poulton:]

For Q2?

[Alexander Y. Draper:]

Yes.

[Richard J. Poulton:]

Yes. The answer is yes, it should be similar magnitude, but we're be happy to get you that offline. I don't have that number in front of me. But it should be in the same zip code.

[Alexander Y. Draper:]

Okay, super. Second question. Given the -- I appreciate the more detailed disclosure around the cost. Looking at the amortization, I just want to make sure I'm getting it right. You've got the amortization and software development cost and acquisition up in cost of goods. Then you also have another amortization of intangibles down below the gross profit line. There's a 7.5 that matches up. I want to make sure I'm not double counting; those are 2 distinct numbers, the 7.5 that's up in cost of goods and then there's an additional 7.5 that's down in the more operating expenses. Is that correct?

[Richard J. Poulton:]

Yes, that's true, Sandy. trust me, if I could have rounded it differently, I would have because I know it is a little confusing. But it's an unfortunate reality that it just happens to be the same number. But it's 2 different -- represents 2 different things.

[Alexander Y. Draper:]

Okay. So were all those amortization costs up in cost of goods directly related to systems sales? Or were they spread through the different pieces of cost of goods to the different revenue components?

[Richard J. Poulton:]

Previously, they were in system sales. And that, frankly, is why we started to see some really goofy margin numbers start to show up around system sales. And it's -- I know -- I can just tell you, we fielded lots and lots and lots of questions about that, and so it's with that in mind is why we've decided to show you -- I think we've provided a lot of detail, but just to break it out, so you can distinguish the cash from non-cash pieces.

[Alexander Y. Draper:]

Okay, yes, that's really helpful. And maybe the same thing, a follow-up offline to try to get some similar numbers for the other quarters. Broader question probably for Paul. When you think about bringing on dbMotion, does that change at all your philosophy around ADX and then [ph] -- I mean, does dbMotion replace anything or replace an older strategy? Or is it really supplemental? And what was in development around ADX and the integrated product is still really unchanged?

[Paul M. Black:]

There's a few areas of overlap that we are working with each individual client where there has been some ADX integration systems, but there's a set of additional capabilities that you get with dbMotion that you didn't have with ADX, so we're walking through client by client and helping them roadmap, understand what we're going to do with that. But I would expect over time for there to be a unified answer in that regard as far as how we would sit on top of not only other heterogeneous EHRs but on top of a couple that we actually have in our legacy systems.

[Operator:]

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

[Charles Rhyee:]

Paul, I wanted to go back to an earlier question regarding our retention, maybe asked it in a different way. Obviously, you had a number of clients leave prior to your coming on board, clients who were unhappy with probably a fair laundry list of things. Decisions that will be made over the next -- I don't know, for a certain amount of period could still reflect upper key processes that started a while ago. When you look across the client base, can you give a sense of how much you think there's left to maybe wash through sort of the system -- I don't know, if there's -- are there anything that are sort of on the final stages? Do you have -- do you feel like you have some opportunities to maybe halt those?

[Paul M. Black:]

To the extent that there is -- where people have expressed disaffection or where people have expressed a lack of, let's say, interest in pursuing our relationship, we're going out and talking to them and we're demonstrating our new solutions. And we're also talking to them about what they currently have that they're going to have to upgrade irrespective of what they may want to do 2 and 3 years from now. We're trying to have a discussion about the difference between the single architecture in some cases between -- in that as juxtapose versus the single community-based patient record. And a number of those conversations are resonating pretty well. All of those, though, are contingent upon our execution in 2013 against Meaningful Use 2 requirements and ICD-10. So to me, there's a substantial amount of performance that's going to be graded this year by our clients, and we'll be measured against that performance in 2013 at making any final determinations. And in that case, I'm talking about the low percentage of people who are actually having that conversation go through their heads. There's been a number of places that I've gone that because of Q1 and the first, if you will, 90 days, not just because I'm here but because of deliveries that we've made this year for them or software that we put in place to remediate some issues that they may have had, they're pretty pleased. And they are, if you will, giving me a grade card and giving the company grade cards based on that plus our ability to be responsive. And the organization understands the need to execute, and the organization understands the need to retain clients. And there are many, many people that are working on that. We did receive a call the other day from one of our clients that had asked to extend their relationship with us, who had previously signed with a different supplier. And so there's things like that, that are also going on in the marketplace. There's other people that are coming into the market and may have come into one of our installed bases with promises or expectations that they set, but they are not able to meet. And at least in one organization, and I at least have one example of that, where they have asked to extend their relationship with us. So it can go both ways. I, of course, am doing everything we can to make sure that it doesn't happen, but there will be some. That's how I would leave it right now.

[Charles Rhyee:]

I mean, is there -- do you think there's a lot left on maybe people who are permanently unhappy that probably would leave regardless? Or do you think that there's no situation like that, that you don't think you have an opportunity at least to go in and talk with them?

[Paul M. Black:]

We're talking to everybody and I, of course, have -- I'm an eternal optimist, as well as I also know what capabilities we have, and I've also been in many places that are extremely happy with us. So I know that we can create an environment of success for our clients, both in an ambulatory standpoint and an inpatient standpoint, as well as from a single architecture or a community. So depending upon what their desires are and how they want to align with this, I'm confident that we can do that. So of course, my answer is always going to be we think that we can go in and true-up any relationship through additional performance, not through discussion and not through talk, but through performance and delivery.

[Operator:]

Our last question comes from the line of Sean Wieland with Piper Jaffray.

[Sean W. Wieland:]

So you started out the call talking -- saying that your client base is the greatest asset. And I was wondering if you could give us any insight as to what percentage of that client base is running a product that's currently marketed by your sales force?

[Paul M. Black:]

That is running the current version?

[Sean W. Wieland:]

Meaning that is using a product that you're selling today?

[Paul M. Black:]

All of them.

[Sean W. Wieland:]

Like so you don't have anyone on MyWay anymore or on some of the older platforms, the older practices?

[Paul M. Black:]

Oh, I'm sorry, I'm sorry. Yes, I've got a few of those, of the MyWay that are left. They were migrating to Pro. I apologize, I misunderstood your question.

[Sean W. Wieland:]

Okay. And how about some of the older practice management systems that are out there? I just wanted to get a sense of how much of the base is using legacy software versus the stuff -- the newer stuff?

[Richard J. Poulton:]

Yes. I mean, Sean, we don't have the number for you on that. Obviously, certain people have certain preferences for what they have and what they don't have. We think the MU2 requirements in particular will force a lot more of the base towards current generation products or making decisions on that, but we don't have a data point for you on that.

[Paul M. Black:]

Yes, I've been to some of the legacy practice management clients. I've been to a lot of them actually, and it's a remarkably stable product. They're remarkably happy with it. They actually are one of our lowest users of our support system, if you will. They log the lowest number of calls. So that's an environment that we are carefully monitoring and making sure that we have continued conversations with them. Many of those clients, because of our relationship with them, have a different electronic medical record. And so we have a lot of touch points with them in various different product sets.

[Sean W. Wieland:]

Okay. And the deal that you mentioned with the PBM piqued my interest a little bit. Can you give us any more details on that?

[Paul M. Black:]

Yes. With those guys, we went in with them and we are, if you will, building a different type of transaction. And that transaction is going to allow us to use our medication history file versus having to go through an alternate source that they've been -- in this particular case, that they've been going through in the past. And that, combined with the online adjudication capabilities of the processor, allow us to create a different transaction for some health care organizations and some insurance companies that are looking at an alternate route in order to adjudicate that pharmacy client. It's pretty interesting.

[Operator:]

Mr. Black, I will now turn the call back to you. Please continue with your presentation or closing remarks.

[Paul M. Black:]

You bet. thanks for your questions today. As you can see, we are beginning to make many critical decisions to return Allscripts to a trajectory of long-term growth. We're securing our installed base and continuing in an unwavering focus on client focus and commitment. We're investing in the future and have moved aggressively to secure strategic architectural platforms that will accelerate our competitiveness, including our ability to deliver on our Open, Connected Community of Health vision. While this quarter was not optimal from a profitability perspective, we generated positive cash flow, and bookings were solid, illustrating the depth and breadth of our offerings. We are making substantial progress in our initiatives to improve our operational effectiveness. And finally, we look forward to welcoming our clients at our annual client user group, the Allscripts Client Experience, or ACE, August 21 through 23 in Chicago. We also plan to host the investor community for a day, as we have done in the past. Look for more details on that soon. Thank you very much for your patience and your time.

[Operator:]

This concludes today's conference call. You may now disconnect.