December 01, 2014 Allscripts Healthcare Solutions, Inc. Current Recommendation Prior Recommendation SUMMARY DATA NEUTRAL Outperform Date of Last Change 05/17/2012 Current Price (11/28/14) $12.02 Target Price $13.00 SUMMARY (MDRX-NASDAQ) Allscripts Healthcare Solutions third-quarter 2014 results missed the Zacks Consensus Estimate on both lines. However, earnings of $0.02 per share doubled from $0.01 reported a year ago while revenues improved 4% y/y. Also, bookings rose 16% in the quarter driven by higher client demand for the company s EHR solutions. Meanwhile, Allscripts is benefiting from the accelerated movement among medical providers to comply with federal EHR requirements. Further, its non-ehr offerings for the untapped HCIT market, such as population health management and care coordination are considered to be future growth drivers. However, Allscripts ability to integrate acquisitions remains to be proven as it continues to face strong competition in a fragmented market. Hence, we reaffirm our Neutral recommendation with a target price of $13.00. 52-Week High $19.43 52-Week Low $11.23 One-Year Return (%) -19.55 Beta 1.16 Average Daily Volume (sh) 3,686,960 Shares Outstanding (mil) 180 Market Capitalization ($mil) $2,167 Short Interest Ratio (days) 3.12 Institutional Ownership (%) 98 Insider Ownership (%) 0 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 16.6 Earnings Per Share (%) -32.2 Dividend (%) N/A using TTM EPS 85.9 using 2014 Estimate 70.7 using 2015 Estimate 40.0 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold Risk Level * Type of Stock Below Avg., Mid-Value Industry Med Info Sys Zacks Industry Rank * 98 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 365 A 370 A 361 A 351 A 1,447 A 2013 347 A 345 A 330 A 351 A 1,373 A 2014 340 A 351 A 345 A 367 E 1,403 E 2015 359 E 368 E 369 E 384 E 1,480 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.10 A $0.13 A $0.19 A $0.09 A $0.51 A 2013 $0.06 A $0.01 A $0.01 A $0.04 A $0.12 A 2014 $0.03 A $0.05 A $0.02 A $0.04 E $0.17 E 2015 $0.07 E $0.08 E $0.09 E $0.06 E $0.30 E Projected EPS Growth - Next 5 Years % 14.4 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Allscripts Healthcare Solutions, Inc. (MDRX) is a global provider of clinical software and information solutions for physicians, hospitals, health systems and acute care facilities. Allscripts serves approximately 180,000 physician practices, 2,500 hospitals, and 10,000 post acute care facilities. It has more than 7,000 employees with facilities in 24 U.S. states, Canada, India, The Philippines and Middle East. Allscripts primarily derives revenues from the sale of its proprietary software and related hardware, professional services and IT outsourcing services. These sales also drive recurring service contracts for software maintenance and certain transaction processing services. The company reported revenues of $1.37 billion in 2013. Revenues in the nine-month period ended Sep 30, 2014 increased 1.5% year over year to $1.04 billion. The company has nine operating segments, which are aggregated into three reportable segments: Clinical and Financial Solutions, Population Health, and Managed Services. The Clinical and Financial Solutions segment includes the Acute, TouchWorks, Professional Practices, Payer and Life Sciences, and International strategic business units. This segment derives its revenues from the sale of integrated clinical software applications, financial and information solutions, and related installation and maintenance services, to physician practices, hospitals and health systems of various sizes. These solutions primarily include Electronic Health Record-related software, financial and practice management software, related installation and training services, and electronic claims administration services. The Population Health segment includes the Performance and Care Logistics and Population Health strategic business units. This segment generates revenues from the sale of health management solutions, which mainly target hospitals, health systems and Accountable Care Organizations (ACO). The Managed Services segment includes the Outsourcing and Remote Hosting strategic business units. It derives its revenues from the sale of outsourcing solutions, including remote hosting solutions to healthcare organizations. REASONS TO BUY The HITECH Act, which has authorized the EHR Incentive program or the Meaningful Use program, presents significant opportunities for EHR vendors like Allscripts. In order to qualify for the HITECH incentives and other payment reform opportunities, the EHR buying activity of individual hospitals, health systems and integrated delivery networks has increased. Further, as these practices choose to replace older EHR technology, it represents additional prospects in the replacement market. We note that Allscripts continues to benefit from the HITECH Act, as reflected by a significant number of client admissions during the year and additional related orders for its EHR products. In the first nine months of 2014, Allscripts added more than 550 new clients for its EHR and related solutions. Allscripts has a leading market share in both inpatient and ambulatory settings. Since incumbency is deemed to be the most significant competitive advantage, the company is believed to be a good performer in the long run. It is believed that the small and mid-sized ambulatory care market is well penetrated by EHR. Allscripts has positioned itself by working in tandem with health systems that are providing EHR to their associate physicians. Equity Research MDRX Page 2
Allscripts management is focused on various restructuring initiatives such as increasing R&D, streamlining operational efficiency, and catering to client needs. Favorable demographic trends, reinforced by a supportive regulatory environment (such as stimulus package under the Obama Administration), are expected to sustain growth in demand for EHR-related software in the foreseeable future. Further, the recent improvement in bookings has reinstated client confidence in Allscripts new offerings. Bookings improved approximately 16% year over year in the third quarter of 2014, driven by new sales of Allscripts Sunrise EHR platform to new domestic and international clients, particularly in the U.K. The impressive bookings performance also reflects higher client demand for the company s population health management solutions and managed information technology services offerings by healthcare systems, hospitals, and ambulatory markets, which should also drive long-term growth. Acquisitions have given the company increased scale and cross-selling opportunities across products and markets. In Jul 2014, Allscripts acquired privately-held Oasis Medical Solutions which positions the company well to leverage its strong clinical platform and capture a larger market share in the U.K. In 2013, Allscripts acquired Jardogs the developer of FollowMyHealth patient engagement platform and dbmotion a leading supplier of community health solutions. We believe that Allscripts dbmotion represents substantial opportunities for the company as the market demands sophisticated clinical EHR solutions. The adoption figures for FollowMyHealth are also quite impressive with over 200,000 installed clients as of Sep 30, 2014 and hundreds more currently getting implemented. REASONS TO SELL The lingering global economic weakness presents a substantial risk for Allscripts. Unlike the manufacturers of life-saving devices, the demand for the software company s products is closely tied to budgetary processes of clients. As a result, the company has suffered significant decline in system sales due to drop in customer orders. Allscripts products have a long sales cycle which involves decision-making at different managerial levels. This increases the company s operating expenses and might result in cancellation of orders. Allscripts faces volatility in bookings, on a quarter-to-quarter basis, as well as lower margins in business conducted with smaller group practices. The Professional Services segment carries lower gross margins. Allscripts continued reliance on mergers and acquisition activities presents a substantial integration risk for the company. It needs to develop operational synergies from these expansionary activities so that they do not turn out to be a waste of resources. Larger players, such as Epic and Cerner, are expected to have an advantage over smaller competitors in winning Stimulus-driven contracts. Competitors such as Cerner and Epic compete against Allscripts with a far simpler rationale for their products. Further, some competitors such as Cerner, have long ago developed unified and seamless products serving both inpatient and outpatient segments. Moreover, the market is price sensitive, particularly on the lower end. Equity Research MDRX Page 3
RECENT NEWS Third Quarter Highlights Allscripts Healthcare Solutions posted adjusted earnings of $0.02 per share in the third quarter of 2014 which missed the Zacks Consensus Estimate by $0.03. However, on a year-over-year basis, earnings doubled from $0.01 reported in the last-year quarter. Quarter Details Revenues (including deferred revenues) came in at $347.7 million, up 4% year over year. However, the figure fell shy of the Zacks Consensus Estimate of $354 million. Revenues from System sales declined 18.5% year over year to $22 million owing to low hardware sales in the third quarter. Meanwhile, revenues from Professional services increased 8% to $55 million and the same from Transaction processing and other rose 11% to $154 million. Maintenance revenues were relatively flat with the year-ago level of approximately $118 million. Bookings declined 5.5% year over year to $223 million. However, the year-ago quarter included a significant agreement for expanded software, services and managed services with PIH Health, which represented an excess of 50% of all bookings. Excluding the effect of this material agreement, bookings increased approximately 16% year over year in the quarter under review. Bookings performance in the third quarter of 2014 was driven by new sales of Allscripts Sunrise electronic health record ( EHR") platform to new domestic and international clients, particularly in the U.K. Bookings also benefited from higher client demand for the company s population health management solutions and managed information technology services offerings by healthcare systems, hospitals, and ambulatory markets. Contract backlog continued to expand and grew to $3.4 billion as of Sep 30, 2014, from $3.3 billion as of Jun 30, 2014. System sales backlogs as well as transaction processing backlogs are up significantly on a year-over-year basis, while maintenance remains stable. Adjusted gross margin fell 120 basis points (bps) year over year to 42%. On the other hand, adjusted operating margin expanded 190 bps to 3.7%, driven by lower operating expenses. The decline in operating expenses reflects initiatives to decrease corporate selling, general and administrative expenses as well as leverage from prior investments in research and development. Allscripts Healthcare exited the third quarter with cash and cash equivalents of $37.3 million, down from $39.3 million as of Jun 30, 2014. Long-term debt (including capital lease obligations) stood at $587.2 million, higher than $558.8 million as of Jun 30, 2014. Cash flow from operating activities decreased to $13.7 million from $17 million at the end of the previous quarter. In the first nine months of 2014, cash flow from operations totaled $52 million, which compares unfavorably with $63.3 million recorded in the year-ago period. Equity Research MDRX Page 4
VALUATION Allscripts Healthcare shares are currently trading at 85.9X TTM earnings, a premium to the peer group average of 69.0X and S&P 500 average of 19.0X. The stock is trading below the mid-point of the historical range of 14.4X to 200.3X TTM earnings. Thus, a chance of upside from the current level is possible. The stock is trading at 70.7X, a 19.8% discount based on our 2014 forward estimates compared to a premium of 1.1% historically, which indicates possibility of further upward movement. However, Allscripts Healthcare s 5 year estimated EPS growth rate of 14.4% is slightly lower than the peer group average. Given the mixed signals, we maintain our Neutral recommendation and set a target price of $13.00 (76.4X 2014 EPS). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Allscripts Healthcare Solutions, Inc. (MDRX) 70.7 40.0 14.4 10.7 85.9 200.3 14.4 Industry Average 88.2 76.3 16.9 27.0 69.0 154.0 20.0 S&P 500 17.6 16.5 10.7 N/A 19.0 27.7 12.0 Cerner Corporation (CERN) 42.7 34.5 16.8 30.3 44.1 46.5 28.9 athenahealth, Inc. (ATHN) 423.2 391.0 21.1 54.1 230.0 641.0 73.4 Quality Systems Inc (QSII) 29.5 22.7 12.0 9.3 32.7 42.1 13.1 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow Allscripts Healthcare Solutions, Inc. (MDRX) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 1.9 3.9 1.3 1.7 0.4 0.0 46.0 Industry Average 4.8 4.8 4.8-8.7 0.3 0.8 6.8 S&P 500 7.2 9.8 3.2 24.7 N/A 2.0 N/A Equity Research MDRX Page 5
Earnings Surprise and Estimate Revision History Equity Research MDRX Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MDRX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1136 companies covered: Outperform - 16.4%, Neutral - 76.8%, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Lead Analyst QCA Reason for Update Pritha Agrawal Aniruddha Ganguly Aniruddha Ganguly Earnings Equity Research MDRX Page 7