HEALTHCARE: Healthcare Technology Company Update / Estimates Change Allscripts Healthcare Solutions, Inc. MDRX: Continuing the String of Bookings We reiterate our SW rating on Allscripts (MDRX) due to valuation. MDRX reported another impressive bookings quarter with 3Q15 bookings of $272M (consensus: $242M), driven by managed services, e.g., remote hosting. Managed services continues to be an area of strategic focus in order to create "stickier" client relationships and a more recurring revenue base. Also, MDRX is ahead of schedule realizing cost savings related to the renegotiation of a hosting agreement. This contributed to a 3Q15 non-gaap EPS beat ($0.13 vs. $0.11). Key Investment Points Bookings included a variety of impressive awards, including two "all-in" Sunrise deals with Baptist Health (Pensacola, FL) and the University Hospital of South Manchester NHS Foundation Trust (United Kingdom), as well as an expanded relationship with Catholic Health Initiatives. Also, management noted a strong and broad pipeline of deal activity in the areas of population health (dbmotion, EPSi, FollowMyHealth, etc.), inpatient, ambulatory and home care. Opportunities in international markets, such as the United Kingdom and the Asia-Pacific, were also highlighted for potential large deal sizes. MDRX reported 3Q15 revenues of $355M (up ~2% YOY), with 21% growth in managed services revenue being mostly offset by declines in client services, system sales, and maintenance fees. Non-GAAP adjusted EBITDA of $66M handily beat expectations (KBCM: $62M; consensus: $61M) due largely to a sharp sequential increase in client services gross margins (from 8.1% to 12.6%). Specifically, as reported previously, MDRX restructured its relationship with one of its remote hosting vendors (Xerox), and the financial benefits impacted results about a quarter ahead of expectations. This led to an 18.5% adjusted EBITDA margin (up 530 bps YOY), putting MDRX on pace to a 20% EBITDA margin as soon as 2H16, by our models. Looking ahead, management narrowed its guidance for 2015 (4Q15) to account for the variability of non-recurring revenues (e.g., project based services and system sales). Our revised 4Q15 outlook has revenue growing by 5.1% to $360M and EPS growing by 33.5% to $0.13. While software delivery margins benefited from mix, we view the 3Q15 EBITDA margin as mostly sustainable and a baseline for projecting margins in 2016. / (917) 368-2378 donald.hooker@key.com Jack Wallace / (917) 368-2345 jack.wallace@key.com 20 15 10 NASDAQ: MDRX Rating: Price Target: Sector Weight NA Price: $14.09 5 0 Jan-15 Vol (mil) Mar-15 May-15 Jul-15 Sep-15 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Company Data 16 15 14 13 12 11 10 Nov-15 MDRX 52-week range $11 - $15 Market Cap. (M) $2,502.4 Shares Out. (M) 177.60 Avg. Daily Volume (30D) 2,710,160.0 SI as % of Float 6.5% SI % Chg. from Last Per. 0.1% Book Value/Share $7.70 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Finally, MDRX upsized its credit facility by $150M to $700M, with incremental covenant flexibility to potentially allow for acquisitions and/or other strategic-related activity. Estimates FY ends 12/31 F2014A 1Q15A 2Q15A 3Q15A 4Q15E F2015E F2016E EPS (Net) $0.31 $0.08 $0.13 $0.13 $0.13 $0.46 $0.55 Cons. EPS -- $0.08 $0.12 $0.12 $0.14 $0.46 $0.58 Previous -- -- -- $0.11 -- $0.45 -- Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. For analyst certification and important disclosures, please refer to the Disclosure Appendix. KeyBanc Capital Markets Inc. Member NYSE/FINRA/SIPC
Allscripts Healthcare Solutions - MDRX Company Update Valuation MDRX is trading at a ~11x multiple of our CY16 EBITDA estimate of $291M (consensus: $285M), which is a 25% discount to the HCIT group average of ~15x. We believe that this multiple is appropriate given our projection of ~6% revenue growth in 2016 (below the HCIT average of 11%). Over the past three years, MDRX has traded at an average NTM EBITDA multiple of ~12x (ranging from a low of 6x to high of 17x), which is a 27% discount to the group average of 16x (ranging from a low of 11x to a high of 24x). Investment Risks 3Q15 Results 4Q15 Guidance Allscripts operates in a competitive market and must consistently effectively reinvest in its businesses in order to sustain its growth. Forward estimates are contingent on the development of new growth verticals (e.g., population health management and revenue cycle management), as well as customer retention. Management reported strong 3Q15 results, mostly above consensus expectations. Bookings totaled $272M (KBCM: $246M; consensus: $242M), non-gaap revenues of $355M (KBCM: $354M; consensus: $354M), non-gaap adjusted EBITDA of $66M (KBCM: $62M; consensus: $61M), and non-gaap EPS of $0.13 (KBCM: $0.11; consensus: $0.12) Management updated its 2015 guidance, implying a weaker than expected 4Q15. Revenues are expected to be $349M-$364M (+2.5-6.9% YOY), below consensus of $365M. Adjusted EBITDA is expected to be $56M-$63M (+7.2-20.6% YOY), below consensus of $68M. Non-GAAP EPS is expected to be $0.10-$0.12 (+10.9-32.2% YOY), below consensus of $0.14. Pg.2
Allscripts Healthcare Solutions - MDRX Company Update FINANCIAL MODELS SUMMARY Figure: Operating Projections MDRX - Operating Metrics Fiscal Year End, December 2015 Fiscal Year End, December 2016 $ in Millions, Except Per Share 2013A 2014A 1QA 2QA 3QA 4QE 2015E 1QE 2QE 3QE 4QE 2016E Subscription & Recurring Transactions 271.7 293.7 78.0 79.6 77.3 78.9 313.8 83.5 86.0 84.3 86.7 340.4 Support & Maintenance 473.8 467.0 119.4 116.3 116.9 117.4 470.0 117.6 117.5 116.9 117.4 469.4 System Sales & Other 176.7 150.3 30.2 36.6 36.5 37.5 140.7 33.2 35.1 35.8 37.1 141.2 Software Delivery, Support & Maintenance 922.2 911.0 227.6 232.5 230.7 233.8 924.5 234.2 238.5 236.9 241.3 951.0 Recurring Managed Services 213.0 236.6 60.1 67.8 71.0 72.3 271.2 75.1 78.0 80.9 82.5 316.5 Other Client Services 247.5 242.2 46.9 51.4 52.8 54.5 205.6 50.6 53.5 54.4 54.5 213.0 Total Client Services 460.5 478.8 107.0 119.2 123.8 126.8 476.9 125.8 131.5 135.3 137.0 529.5 Non-GAAP Consolidated Revenues $1,382.7 $1,389.8 $334.6 $351.7 $354.5 $360.6 $1,401.4 $360.0 $370.0 $372.3 $378.2 $1,480.5 YOY Growth -5.6% 0.5% -3.1% -0.6% 2.0% 5.1% 0.8% 7.6% 5.2% 5.0% 4.9% 5.6% Software Delivery, Support & Maintenance 566.7 556.6 140.8 145.6 148.7 150.8 585.9 151.1 153.9 152.8 155.6 613.4 Client Services Gross Profit 36.5 50.6 0.6 9.7 15.6 15.9 41.8 16.4 18.4 20.3 21.9 77.0 Gross Profit, Non-GAAP $603.2 $607.2 $141.4 $155.3 $164.3 $166.6 $627.6 $167.4 $172.3 $173.1 $177.5 $690.4 Gross Margin, Non-GAAP 43.9% 44.1% 42.3% 44.2% 46.3% 46.2% 44.8% 46.5% 46.6% 46.5% 46.9% 46.6% Non-GAAP Adjusted EBITDA $179.9 $199.0 $49.9 $61.8 $65.7 $64.6 $242.0 $63.3 $73.8 $75.4 $78.9 $291.4 Adjusted EBITDA Margin, Non-GAAP 13.1% 14.4% 14.9% 17.6% 18.5% 17.9% 17.3% 17.6% 19.9% 20.3% 20.9% 19.7% Non-GAAP EPS $0.27 $0.31 $0.08 $0.13 $0.13 $0.13 $0.46 $0.10 $0.14 $0.15 $0.16 $0.55 YOY Growth n/a 14.9% 23.7% 40.8% 101.8% 33.5% 47.8% 25.4% 10.9% 12.3% 25.3% 17.5% Source: Company reports and KeyBanc Capital Markets Inc. estimates Pg.3
Disclosure Appendix Allscripts Healthcare Solutions, Inc. - MDRX Allscripts Healthcare Solutions, Inc. is an investment banking client of ours. We have received compensation for investment banking services from Allscripts Healthcare Solutions, Inc. during the past 12 months. We expect to receive or intend to seek compensation for investment banking services from Allscripts Healthcare Solutions, Inc. within the next three months. During the past 12 months, Allscripts Healthcare Solutions, Inc. has been a client of the firm or its affiliates for non-securities related services. As of the date of this report, we make a market in Allscripts Healthcare Solutions, Inc.. Reg A/C Certification The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this research report. Three-Year Rating and Price Target History Rating Disclosures Distribution of Ratings/IB Services Firmwide and by Sector KeyBanc Capital Markets IB Serv/Past 12 Mos. HEALTHCARE IB Serv/Past 12 Mos. Rating Count Percent Count Percent Overweight [OW] 346 45.35 75 21.68 Sector Weight [SW] 406 53.21 67 16.50 Underweight [UW] 11 1.44 0 0.00 Rating Count Percent Count Percent Overweight [OW] 20 45.45 4 20.00 Sector Weight [SW] 22 50.00 3 13.64 Underweight [UW] 2 4.55 0 0.00 Pg.4
Disclosure Appendix (cont'd) Rating System Overweight - We expect the stock to outperform the analyst's coverage sector over the coming 6-12 months. Sector Weight - We expect the stock to perform in line with the analyst's coverage sector over the coming 6-12 months. Underweight - We expect the stock to underperform the analyst's coverage sector over the coming 6-12 months. Note: KeyBanc Capital Markets changed its rating system after market close on February 27, 2015. The previous ratings were Buy, Hold and Underweight. Additionally, Pacific Crest Securities changed its rating system to match KeyBanc Capital Markets rating system after market close on April 10, 2015, in conjunction with the merger of the broker dealers. The previous ratings were Outperform, Sector Perform and Underperform. Other Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC ( KBCMI ), and KeyBank National Association ( KeyBank N.A. ), are marketed. Pacific Crest Securities is a division of KeyBanc Capital Markets Inc. KeyBanc Capital Markets Inc. ( KBCMI ) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This report has been prepared by KBCMI. The material contained herein is based on data from sources considered to be reliable; however, KBCMI does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgment of KBCMI and are subject to change without notice. This report may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. No portion of an analyst s compensation is based on a specific banking transaction; however, part of his/her compensation may be based upon overall firm revenue and profitability, of which investment banking is a component. Individuals associated with KBCMI (other than the research analyst(s) listed on page 1 of this research report) may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by NASD Rule 2711(h)(1)(A), financial interest, if any, by any research analysts listed on page 1 of this report will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosure Appendix. KBCMI itself may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by NASD Rule 2711(h)(1)(B), if KBCMI beneficially owns 1% or more of any class of common equity securities of the subject company(ies) in this research report as of the end of the month immediately preceding the date of publication of this research report will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosures Appendix. This communication is intended solely for use by KBCMI clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of KBCMI. Pg.5