VERADIGM INC.
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, that involve risks and
uncertainties. Forward-looking statements provide current expectations of future
events based on certain assumptions and include any statement that does not
directly relate to any historical fact or pattern, including statements
regarding the potential impacts of the COVID-19 pandemic and steps we have taken
or plan to take in response thereto, statements related to the effect of
macroeconomic trends, statements regarding evolving patient care models,
statements regarding legislative, administrative and regulatory actions on our
business and opportunities related to accumulated patient data, statements
regarding our settlement agreements with the Department of Justice (the "DOJ")
and other governmental authorities, and statements regarding our expected future
investment in research and development efforts. Forward-looking statements can
also 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. Forward-looking statements
are not guarantees of future performance. Actual results could differ
significantly from those set forth in the forward-looking statements, and
reported results should not be considered an indication of future performance or
events. 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, 2019 (our "Form 10-K") and Part II, Item 1A of
this Form 10-Q under the headings "Risk Factors" and elsewhere. Certain factors
that could cause Allscripts actual results to differ materially from those
described in the forward-looking statements include, but are not limited to: the
timing or ultimate completion of the sale of our EPSi business, as the
transaction is subject to certain closing conditions, including the expiration
or termination of the waiting period under U.S. antitrust laws; our use of the
proceeds from the contemplated sale of our EPSi business; our ability to achieve
the margin targets associated with our margin improvement initiatives within the
contemplated time periods, if at all; the magnitude, severity and duration of
the COVID-19 pandemic, including the impacts of the pandemic, along with the
impacts of our responses and the responses by governments and other businesses
to the pandemic, on our business, our employees, our clients and our suppliers;
the failure by Practice Fusion to comply with the terms of the settlement
agreements with the DOJ; the costs and burdens of compliance by Practice Fusion
with the terms of its settlement agreements with the DOJ; additional
investigations and proceedings from governmental entities or third parties other
than the DOJ related to the same or similar conduct underlying the DOJ's
investigations into Practice Fusion's business practices; our ability to recover
from third parties (including insurers) any amounts required to be paid in
connection with Practice Fusion's settlement agreements with the DOJ and related
inquiries; the expected financial results of businesses acquired by us; the
successful integration of businesses recently acquired by us; the anticipated
and unanticipated expenses and liabilities related to businesses acquired by us,
including the civil investigation by the U.S. Attorney's Office involving our
Enterprise Information Solutions business; security breaches resulting in
unauthorized access to our or our clients' computer systems or data, including
denial-of-services, ransomware or other Internet-based attacks; our failure to
compete successfully; consolidation in our industry; current and future laws,
regulations and industry initiatives; increased government involvement in our
industry; the failure of markets in which we operate to develop as quickly as
expected; our or our customers' failure to see the benefits of government
programs; changes in interoperability or other regulatory standards; the effects
of the realignment of our sales, services and support organizations; market
acceptance of our products and services; the unpredictability of the sales and
implementation cycles for our products and services; our ability to manage
future growth; our ability to introduce new products and services; our ability
to establish and maintain strategic relationships; the performance of our
products; our ability to protect our intellectual property rights; the outcome
of legal proceedings involving us; our ability to hire, retain and motivate key
personnel; performance by our content and service providers; liability for use
of content; price reductions; our ability to license and integrate third party
technologies; our ability to maintain or expand our business with existing
customers; risks related to international operations; changes in tax rates or
laws; business disruptions; our ability to maintain proper and effective
internal controls; and asset and long-term investment impairment charges. The
following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I, Item 1,
"Financial Statements" in this Form 10-Q, as well as our Form 10-K filed with
the Securities and Exchange Commission (the "SEC"). We assume no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.
Each of the terms "we," "us," "our," "Company," or "Allscripts" as used herein
refers collectively to
Overview
Our Business Overview and Regulatory Environment
We deliver information technology ("IT") solutions and services to help
healthcare organizations achieve optimal clinical, financial and operational
results. We sell our solutions to physicians, hospitals, governments, health
systems, health plans, life-sciences companies, retail clinics, retail
pharmacies, pharmacy benefit managers, insurance companies, employer wellness
clinics, and post-acute organizations, such as home health and hospice agencies.
We help our clients improve the quality and efficiency of health care with
solutions that include electronic health records ("EHRs"), information
connectivity, private cloud hosting, outsourcing, analytics, patient access and
population health management.
Our solutions empower healthcare professionals with the data, insights and
connectivity to other caregivers they need to succeed in an industry that is
rapidly changing from fee-for-service models to fee-for-value advanced payment
models. We believe we
27
-------------------------------------------------------------------------------- offer some of the most comprehensive solutions in our industry today. Healthcare organizations can effectively manage patients and patient populations across all care settings using a combination of our physician, hospital, health system, post-acute care and population health management products and services. We believe these solutions will help transform health care as the industry seeks new ways to manage risk, improve quality and reduce costs. Globally, healthcare providers face the urgency of the COVID-19 crisis, as well as an aging population and the challenge of caring for an increasing number of patients with chronic diseases. At the same time, practitioners worldwide are also under growing pressure to demonstrate the delivery of high-quality care at lower costs and to fully embrace expectations of efficient, patient-centered information exchange. Congressional oversight of EHRs and health information technology has increased in recent years. This increased oversight could impact our clients and our business. The passage of the 21 Century Cures Act inDecember 2016 assuaged some concerns about interoperability and possibleU.S. Food and Drug Administration ("FDA") oversight of EHRs, and the ensuing regulations on data blocking and interoperability were just released by theDepartment of Health and Human Services ("HHS") inMarch 2020 . Certain of the elements of the new regulation may have a significant effect on our business processes and how our clients must exchange patient information. In particular,Allscripts will need to complete development work to satisfy the revised and new certification criterion just released, and we and our clients will be making adjustments to business practices associated with information exchange and provision of Electronic Health Information. Population health management, analytics, data connectivity based on open Application Programming Interfaces ("APIs") and other exchange mechanisms, and patient engagement are strategic imperatives that can help address these challenges. Inthe United States , for example, such initiatives are critical tools for success under the framework of the Quality Payment Program ("QPP"), launched by theCenters for Medicare & Medicaid Services ("CMS") in response to the passage of the Medicare Access and CHIP Reauthorization Act ("MACRA"). As healthcare providers and payers continue to migrate from volume-based to value-based care delivery and also weigh compliance with the newly finalized information blocking and interoperability regulations from theOffice of the National Coordinator for Health Information Technology ("ONC") and CMS, solutions that are connected to the consumer marketplace are the key to market leadership in the new healthcare reality. Additionally, there is a small but growing portion of the market interested in payment models not reliant on insurance, such as the direct primary care model, where doctors and other healthcare professionals understand the clinical value of the interoperable EHR separate and apart from payment mechanisms established by public or commercial payers or associated reporting requirements. We believe our solutions are delivering value to our clients by providing them with powerful connectivity, as well as increasingly robust patient engagement and care coordination tools, enabling users to successfully participate in alternative payment models that reward high value care delivery. Population health management is commonly viewed as one of the critical next frontiers in healthcare delivery, and we expect this evolving area to be a key driver of our future growth, both domestically and globally. Recent advances in molecular science and computer technology are creating opportunities for the delivery of personalized medicine solutions. We believe these solutions will transform the coordination and delivery of health care, ultimately improving patient outcomes. Specific tothe United States , the healthcare IT industry in which we operate continues to experience a period of change, primarily due to new laws and regulations, as well as modifications to industry standards. Various incentives that exist today (including alternative payment models that reward high value care delivery) have been rapidly moving health care toward a time where EHRs are as common as practice management or other financial systems in all provider offices. As a result, we believe that legislation, such as the aforementioned MACRA, as well as other government-driven initiatives (including at the state level), will continue to affect healthcare IT adoption and expansion, 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. The recently finalized ONC regulation on interoperability, information blocking and certification is the most recent issuance from the government that will affect the health IT industry. The rule requires that we evaluate changes to business processes related to requests for the access, exchange or use of electronic health information. The rule, which involves complex and specific requirements, will necessitate adjustments in our interactions with the market, but we also believe it may lead healthcare organizations to further invest in technologies, such as those sold byAllscripts , that facilitate the exchange of health data and support patients' access to their information. GivenAllscripts' OPEN strategy, the company's application programming interface-based approach to connectivity launched more than a decade ago that exemplified for policy makers the potential benefits of APIs, we expect thatAllscripts may be better positioned to adjust more quickly than some other companies in our sector to the requirement to remove barriers to information exchange. In addition, given that CMS annually proposes new and revised regulations, including payment rules for upcoming years, which require the use of EHRs and other health information technology even as we comply with previously published rules, our industry is preparing on an ongoing basis for additional areas in which we must execute compliance. Similarly, our ability to achieve newly expanded applicable product certification requirements resulting from changing strategies at the ONC and the scope of related development and other efforts required to meet regulatory standards could both materially impact our capacity to maximize the market opportunity. All our market-facing EHR solutions and several other relevant products have successfully completed the testing process and are certified as 2015 Edition-compliant by an ONC-Authorized Certification Body (the most recent edition), and we remain 28 -------------------------------------------------------------------------------- committed to satisfying the new certification requirements and meeting the 2015 Cures Edition conditions of certification that were recently finalized by the ONC. The MACRA encouraged the adoption of health IT necessary to satisfy new requirements more closely associating the report of quality measurements to Medicare payments. Following the finalization of the Physician Fee Schedule rule each year, providers accepting payment from Medicare must select one of two payment models: the Merit-based Incentive Payment System ("MIPS") or an Advanced Alternative Payment Model ("APM"). Both of these approaches require substantive reporting on quality measures; additionally, the MIPS consolidated several preexisting incentive programs, including Medicare Meaningful Use and Physician Quality Reporting System, under one umbrella, as required by statute. We believe this law, coupled with other pay for value programs, continues to drive additional interest in our products among providers who were not eligible for or chose not to participate in the Health Information Technology for Economic and Clinical Health Act ("HITECH") incentive program but now need an EHR and other health IT solutions and among those looking to purchase more robust systems to comply with increasingly complex MACRA requirements. Additional regulations continue to be released annually, clarifying requirements related to reporting and quality measures, which will enable physician populations and healthcare organizations to make strategic decisions about the purchase of analytic software or other solutions important to comply with the new law and associated regulations. Given the ongoing expansion of payment models requiring analytics, reporting and greater data connectivity, we believe large physician groups will continue to purchase and enhance their use of EHR technology; while the number of very large practices with over 100 physicians that have not yet acquired such technology is insignificant, those considering replacement purchases are increasing. Such practices may choose to replace older EHR technology in the future as regulatory requirements (such as those related to Advanced APMs) and business realities dictate the need for updates and upgrades, as well as additional features and functionality. As incentive payment strategies shift in policies under the currentPresidential Administration inthe United States , the role of commercial payers and their continued expansion of alternative payment models and interest in attaining larger volumes of clinical data, as well as the anticipated growth in Medicaid payment models, are expected to provide additional incentives for purchase and expansion. We also continue to see activity in local community-based buying, whereby individual hospitals, health systems and integrated delivery networks subsidize the purchase of EHR licenses or related services for local, affiliated physicians and physicians across their employed physician base in order to leverage buying power and to help those practices take advantage of 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 a variety of incentive programs, while the subsidizing health system expands connectivity within the local provider community. We believe that the rules related to exceptions to the Stark Law and Anti-Kickback Statute, which were recently released in proposed form and would continue to allow hospitals and other organizations to subsidize the purchase of EHRs, will possibly further contribute to the growth of this market dynamic. We expect that these regulatory revisions from HHS will further support value-based payment models and their associated purchasing arrangements between hospitals and physician practices, including allowing subsidization of replacement EHRs and not just initial purchases. The associated challenge we face is to successfully position, sell, implement and support our products sold to hospitals, health systems or integrated delivery networks that subsidize their affiliated physicians. We believe the community programs we have in place will help us penetrate these markets. We believe we have taken and continue to take the proper steps to maximize the opportunity presented by the QPP and other new payment programs, including several announced recently, such as Primary Care First and the Pathways to Success overhaul of Medicare's National ACO program. However, given the effects the laws are having on our clients, there can be no assurance that they will result in significant new orders for us in the near term, and if they do, that we will have the capacity to meet the additional market demand in a timely fashion. Additionally, other public laws to reformthe United States healthcare system contain various provisions, which may impact us and our clients. Continued efforts by the currentPresidential Administration and several state governments to alter aspects of the Patient Protection and Affordable Care Act (as amended, the "PPACA") or to make other policy changes through Executive Orders create uncertainty for us and for our clients. Certain lawsuits related to the PPACA also create uncertainty for us and our clients. Some laws currently in place may have a positive impact by requiring the expanded use of EHRs, quality measurement, prescription drug monitoring and analytics tools to participate in certain federal, state or private sector programs. Others, such as adjustments made to the PPACA by the Administration, laws or regulations mandating reductions in reimbursement for certain types of providers, decreasing insurance coverage of patients, state-level requests for waivers from CMS related to Medicaid modeling, or increasing regulatory oversight of our products or our business practices, 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 or overpayment of certain incentive payments may also adversely affect participants in the healthcare sector, including us.Allscripts continues to see increased opportunities stemming from the large stores of patient data accumulated from our industry-leading client base and partnerships with other EHR companies, including NextGen Healthcare Inc., a leading provider of ambulatory-focused healthcare technology solutions. Through collaboration with researchers and life sciences companies, we believeAllscripts may play a role in the study of real-world evidence as it relates to post-market surveillance of new medicines or the study of therapeutics related to COVID-19, as examples. We continue to closely monitor regulations and/or guidance from HHS, theCDC and the FDA, as well as any new laws that take shape inCongress that may touch third-party uses of patient data and/or any related privacy implications for patient consent. 29 -------------------------------------------------------------------------------- Congressional focus on addressing the opioid epidemic in part through technological applications and reducing clinician burden is likely to continue. The Administration is also taking action in some areas that may directly or indirectly affectAllscripts and our clients, including efforts to increase health-related price transparency in order to support patients in applying market-based pressures to the nation's challenge of health cost containment. Further, CMS has finalized changes to the Evaluation & Management coding structure that ties closely to our clients' requirements to document the care they are delivering prior to payment. We expect these changes may have a positive effect on clinician satisfaction with our EHRs, though the fundamentals of payment will remain in transition to value-based payment models. New payment and delivery system reform programs, including those modeled after those of the Medicare program, are increasingly being rolled out at the state level through Medicaid administrators, as well as through the private sector, presenting additional opportunities for us to provide software and services to our clients who participate. We also must take steps to comply with state-specific laws and regulations governing companies in the health information technology space. We derive our revenues primarily from sales of our proprietary software (either as a perpetual license sale or under a subscription delivery model), support and maintenance services, and managed services, such as outsourcing, private cloud hosting and revenue cycle management.
Impacts of COVID-19
The global outbreak of the novel coronavirus (COVID-19) has severely restricted the level of economic activity around the world and the degrees of any economic recovery in various jurisdictions have not been linear. We have been carefully monitoring the COVID-19 pandemic and its impact on our global operations. We are conducting business with certain modifications to employee travel, employee work locations, and cost reduction initiatives, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners and stockholders. The COVID-19 pandemic negatively impacted revenue for the three and six months endedJune 30, 2020 , as we saw delays in deals with upfront software revenue and professional services implementations across our inpatient and outpatient base. InApril 2020 , we implemented cost actions that included headcount reductions and temporary salary measures. We believe our cost reduction actions and liquidity serve to position us appropriately and provide operating and financial flexibility to assist us in navigating through this uncertain environment. The extent to which the COVID-19 outbreak impacts the Company's results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19, resurgences or additional "waves" of COVID-19 in various jurisdictions, the impact of COVID-19 on economic activity, decisions made by policy makers attempting to affect and the actions to contain its impacts on public health and the global economy. See Part II, Item 1A, Risk Factors, for an additional discussion of risks related to COVID-19.
Critical Accounting Policies and Estimates
We adopted Accounting Standards Update No. 2016-13, "Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments" ("ASU 2016-13") on January 1, 2020 using the cumulative-effect
adjustment transition method. The guidance in ASU 2016-13 replaces the incurred
loss impairment methodology under current GAAP. The new impairment model
requires immediate recognition of estimated credit losses expected to occur for
most financial assets and certain other instruments. For available-for-sale debt
securities with unrealized losses, the losses will be recognized as allowances
rather than reductions in the amortized cost of the securities. ASU 2016-13 is
effective for annual periods beginning after December 15, 2019 , and interim
periods within those annual periods. Refer to Note 2 "Revenue from Contracts
with Customers" and Note 3 "Accounts Receivable" to our consolidated financial
statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q
for further information regarding the impact of adopting ASU 2016-13.
There were no other material changes to our critical accounting policies and estimates from those previously disclosed in our Form 10-K.
Second Quarter 2020 Summary
During the second quarter of 2020, we continued to make progress on our key strategic, financial and operational imperatives, which are aimed at driving higher client satisfaction, improving our competitive position by expanding the depth and breadth of our products and integrating recent acquisitions. Additionally, we believe there are still opportunities to continue to improve our operating leverage and further streamline our operations and such efforts are ongoing. Total revenue for the second quarter of 2020 was$406 million , a decrease of$38 million compared to the second quarter of 2019. For the three months endedJune 30, 2020 , software delivery, support and maintenance revenue and client services revenue was$256 million and$150 million , respectively, compared with$285 million and$159 million , respectively, during the three months endedJune 30, 2019 . Gross profit for the second quarter was$164 million , a decrease of$20 million compared to the second quarter of 2019. Gross margin decreased to 40.5% in the second quarter of 2020 compared to a 41.4% gross margin in the second quarter of 2019. 30
-------------------------------------------------------------------------------- Our contract backlog as ofJune 30, 2020 was$4.4 billion , which remained consistent compared with our contract backlog of$4.4 billion as ofDecember 31, 2019 , while increasing compared with contract backlog as ofJune 30, 2019 of$3.9 billion . Our bookings, which reflect the value of executed contracts for software, hardware, other client services, private-cloud hosting, outsourcing and subscription-based services, totaled$188 million for the three months endedJune 30, 2020 , which represents a decrease of 32% over the comparable prior period amount of$276 million and a decrease of 8% from the first quarter 2020 amount of$205 million .
Overview of Consolidated Results
Three and Six Months Ended
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except
percentages) 2020 2019 % Change 2020 2019 % Change
Revenue:
Software delivery, support and maintenance$ 256,021 $ 285,023 (10.2 %)$ 519,633 $ 560,535 (7.3 %) Client services 150,202 159,437 (5.8 %) 303,303 315,974 (4.0 %) Total revenue 406,223 444,460 (8.6 %) 822,936 876,509 (6.1 %) Cost of revenue: Software delivery, support and maintenance 74,243 84,056 (11.7 %) 150,568 165,089 (8.8 %) Client services 135,484 147,252 (8.0 %) 288,270 295,951 (2.6 %) Amortization of software development and
acquisition-related assets 32,012 29,030 10.3 % 62,653 57,252
9.4 %
Total cost of revenue 241,739 260,338 (7.1 %) 501,491 518,292 (3.2 %)
Gross profit 164,484 184,122 (10.7 %) 321,445 358,217 (10.3 %)
Gross margin % 40.5 % 41.4 % 39.1 % 40.9 %
Selling, general and
administrative expenses 114,620 105,542 8.6 % 211,908 205,787 3.0 %
Research and development 48,282 63,414 (23.9 %) 110,437 127,724 (13.5 %)
Asset impairment charges 0 3,691 (100.0 %) 0 3,789 (100.0 %)
Amortization of intangible and
acquisition-related assets 6,328 6,732 (6.0 %) 13,046 13,529 (3.6 %) (Loss) income from operations (4,746 ) 4,743 NM (13,946 ) 7,388 NM Interest expense (11,395 ) (10,424 ) 9.3 % (23,618 ) (20,608 ) 14.6 % Other loss, net (875 ) (144,994 ) (99.4 %) (353 ) (144,481 ) (99.8 %) (Impairment) recovery of long-term investments (550 ) 0 NM (550 ) 1,045 (152.6 %) Equity in net income (loss) of unconsolidated investments 16,834 218 NM 17,034 154 NM Loss before income taxes (732 ) (150,457 ) (99.5 %) (21,433 ) (156,502 ) (86.3 %) Income tax (provision) benefit (6,873 ) 527 NM (6,526 ) (1,405 ) NM Effective tax rate (938.9 %) 0.4 % (30.4 %) (0.9 %) Net loss (7,605 ) (149,930 ) (94.9 %) (27,959 ) (157,907 ) (82.3 %) Net loss attributable to non-controlling interests 0 0 NM 0 424 (100.0 %) Net loss attributable toAllscripts Healthcare
NM - We define "NM" as not meaningful for increases or decreases greater than
200%.
Revenue
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Revenue:
Recurring revenue $ 335,088 $ 350,113 (4.3 %) $ 676,307 $ 698,749 (3.2 %)
Non-recurring revenue 71,135 94,347 (24.6 %) 146,629 177,760 (17.5 %)
Total revenue $ 406,223 $ 444,460 (8.6 %) $ 822,936 $ 876,509 (6.1 %)
Three and Six Months Ended
Recurring revenue consists of subscription-based software sales, support and
maintenance revenue, recurring transactions revenue and recurring revenue from
managed services solutions, such as outsourcing, private cloud hosting and
revenue cycle
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management. Non-recurring revenue consists of perpetual software licenses sales,
hardware resale and non-recurring transactions revenue, and project-based client
services revenue.
Recurring revenue decreased for the three and six months ended June 30, 2020
compared to the prior year comparable periods, primarily due to attrition. The
decrease was partially offset by an increase in subscription revenue.
Non-recurring revenue decreased for the three and six months ended June 30, 2020
compared to the prior year comparable periods, primarily due to lower upfront
software revenues and project delays that impacted client services revenue. The
decrease was partially offset by new business in client services revenue.
The percentage of recurring and non-recurring revenue of our total revenue was
82% and 18%, respectively, during the three months ended June 30, 2020 and 79%
and 21%, respectively, during the three months ended June 30, 2019 . The
percentage of recurring and non-recurring revenue of our total revenue was 82%
and 18%, respectively, during the six months ended June 30, 2020 and 80% and 20%
during the six months ended June 30, 2019 .
Gross Profit
Three Months Ended June 30 , Six Months Ended June 30 ,
(In thousands, except percentages) 2020 2019 % Change
2020 2019 % Change
Total cost of revenue $ 241,739 $ 260,338 (7.1 %) $ 501,491 $ 518,292 (3.2 %)
Gross profit $ 164,484 $ 184,122 (10.7 %) $ 321,445 $ 358,217 (10.3 %)
Gross margin % 40.5 % 41.4 % 39.1 % 40.9 %
Three and Six Months Ended
Gross profit and gross margin decreased during the three and six months endedJune 30, 2020 compared with the prior year comparable periods, primarily due to attrition, revenue mix and project delays. The decrease was partially offset by new business in software subscription revenues and the cost reduction initiatives.
Selling, General and Administrative Expenses
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Selling, general and
administrative expenses $ 114,620 $ 105,542 8.6 % $ 211,908 $ 205,787 3.0 %
Three and Six Months Ended
Selling, general and administrative expenses increased during the three and six months endedJune 30, 2020 , compared with the prior year comparable periods, primarily due to higher severance related to cost reduction initiatives. The increase was partially offset from lower payroll costs, also related to the cost reduction initiatives. Research and Development Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Research and development$ 48,282 $ 63,414 (23.9 %)$ 110,437 $ 127,724 (13.5 %)
Three and Six Months Ended
Research and development expenses decreased during the three and six months
ended
Asset Impairment Charges
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Asset impairment charges
Three and Six Months Ended
Asset impairment charges for the three and six months ended
Amortization of Intangible and Acquisition-related Assets
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Amortization of intangible and
acquisition-related
assets $ 6,328 $ 6,732 (6.0 %) $ 13,046 $ 13,529 (3.6 %)
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Three and Six Months Ended
The decrease in amortization expense for the three and six months ended
Interest Expense
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Interest expense $ 11,395 $ 10,424 9.3 % $ 23,618 $ 20,608 14.6 %
Three and Six Months Ended
Interest expense increased during the three and six months endedJune 30, 2020 compared to the prior year comparable periods, due to higher borrowings and the accrual of interest on the 0.875% convertible senior notes.
Other Loss, Net
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020
2019 % Change
Other loss, net
Three and Six Months Ended
Other loss, net for the three and six months endedJune 30, 2020 and 2019 consisted of a combination of interest income, and miscellaneous receipts and expenses. The large increase in 2019 was due to the$145 million settlement with the DOJ related to its civil and criminal investigations of Practice Fusion.
(Impairment) Recovery of Long-term Investments
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
(Impairment) recovery of
long-term investments $ (550 ) $ 0 NM $
(550 )
Three and Six Months Ended
During the three and six months endedJune 30, 2020 , we recorded a$0.6 million impairment for a third-party equity-method investment. During the six months endedJune 30, 2019 , we recovered$1.0 million from a third-party cost-method investment that we had previously impaired.
Equity in Net Income (Loss) of Unconsolidated Investments
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Equity in net income (loss) of
unconsolidated investments $ 16,834 $ 218 NM $ 17,034 $ 154 NM
Three and Six Months Ended
Equity in net income (loss) of unconsolidated investments represents our share of the equity earnings of our investments in third parties accounted for under the equity method of accounting based on one quarter lag. During the three and six months endedJune 30, 2020 , we recorded a$16.8 million gain from the sale of a third-party equity-method investment.
Income Taxes
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except percentages) 2020 2019 % Change 2020 2019 % Change
Income tax (provision) benefit $ (6,873 ) $ 527 NM $ (6,526 ) $ (1,405 ) NM
Effective tax rate (938.9 %) 0.4 % (30.4 %) (0.9 %)
Three and Six Months Ended
Our provision for income taxes differs from the tax computed at theU.S. federal statutory income tax rate primarily due to permanent differences, income attributable to foreign jurisdictions taxed at different rates, state taxes, tax credits and certain discrete items. Our effective tax rate for the three and six months endedJune 30, 2020 , compared with the prior year comparable periods, differs primarily due to the fact that the permanent items, credits and the impact of foreign earnings had less impact on the pre-tax loss of$0.7 million and$21.4 million in the three and six months endedJune 30, 2020 , respectively, compared to the impacts of these items on a pre-tax loss of$150.5 million and$156.5 million for the three and six months endedJune 30, 2019 , respectively. 33 -------------------------------------------------------------------------------- In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). During the six months endedJune 30, 2020 , we recorded valuation allowances of$1.1 million related toU.S. and foreign net operating loss carryforwards. Non-Controlling Interests Three Months Ended June 30, Six Months Ended June 30, % (In thousands) 2020 2019 Change 2020 2019 % Change Net loss attributable to non-controlling interest$ 0 $ 0 NM $
0
Three and Six Months Ended
The net loss attributable to non-controlling interest represents the share of earnings of consolidated affiliates that is attributable to the affiliates' common stock that is not owned by us for each of the periods presented. We purchased all of the outstanding minority interests inPulse8, Inc. during the first quarter of 2019. Segment Operations The segment disclosures below for the three and six months endedJune 30, 2019 have been revised to conform to the current year presentation. Refer to Note 15 "Business Segments" of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion on the impact of the change. Overview of Segment Results Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Revenue: Core Clinical and Financial Solutions$ 311,099 $ 347,782 (10.5 %)$ 631,431 $ 688,194 (8.2 %) Data, Analytics and Care Coordination 85,161 87,985 (3.2 %) 173,519 170,391 1.8 % Unallocated Amounts 9,963 8,693 14.6 % 17,986 17,924 0.3 % Total revenue$ 406,223 $ 444,460 (8.6 %)$ 822,936 $ 876,509 (6.1 %) Gross Profit: Care Coordination and Financial Solutions$ 108,522 $ 122,322 (11.3 %)$ 208,856 $ 242,447 (13.9 %) Data, Analytics and Care Coordination 49,032 55,676 (11.9 %) 100,697 103,406 (2.6 %) Unallocated Amounts 6,930 6,124 13.2 % 11,892 12,364 (3.8 %) Total gross profit$ 164,484 $ 184,122 (10.7 %)
(Loss) income from operations: Care Coordination and Financial Solutions$ (16,033 ) $ (11,734 ) 36.6 %
Data, Analytics and Care Coordination 7,267 12,534 (42.0 %) 16,932 16,854 0.5 % Unallocated Amounts 4,020 3,943 2.0 % 5,867 7,792 (24.7 %) Total (loss) income from operations$ (4,746 ) $ 4,743 NM$ (13,946 ) $ 7,388 NM
Core Clinical and Financial Solutions
Our Core Clinical and Financial Solutions segment derives its revenue from the
sale of patient engagement, integrated clinical software applications and
financial management solutions, which primarily include EHR-related software,
financial and practice management software, related installation, support and
maintenance, outsourcing, private cloud hosting and revenue cycle management.
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except
percentages) 2020 2019 % Change 2020 2019 % Change
Revenue $ 311,099 $ 347,782 (10.5 %) $ 631,431 $ 688,194 (8.2 %)
Gross profit $ 108,522 $ 122,322 (11.3 %) $ 208,856 $ 242,447 (13.9 %)
Gross margin % 34.9 % 35.2 % 33.1 % 35.2 %
Loss from operations $ (16,033 ) $ (11,734 ) 36.6 % $ (36,745 ) $ (17,258 ) 112.9 %
Operating margin % (5.2 %) (3.4 %) (5.8 %) (2.5 %)
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Three and Six Months Ended
Core Clinical and Financial Solutions revenue decreased during the three and six months endedJune 30, 2020 , compared with the prior year comparable periods primarily due to lower upfront software revenues, attrition and project delays that impacted client services revenue. The decrease was partially offset by an increase in managed services revenue. Gross profit and margin decreased during the three and six months endedJune 30, 2020 compared with the prior year comparable periods, primarily due to the previously mentioned attrition, revenue profile and project delays. The decrease was partially offset by the cost reduction initiatives. Operating margin decreased for the three and six months endedJune 30, 2020 , compared with the prior year comparable period due to a decline in gross profit. The decrease was partially offset by the cost reduction initiatives.
Data, Analytics and Care Coordination
Our Data, Analytics and Care Coordination segment derives its revenue from the
sale of care coordination, practice reimbursement and payer and life sciences
solutions, which are mainly targeted at hospitals, health systems, other care
facilities, payers, life sciences companies and other key healthcare
stakeholders. These solutions enable clients to transition, analyze and
coordinate care while improving the quality, efficiency and value of healthcare
delivery across the entire care community.
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except
percentages) 2020 2019 % Change 2020 2019 % Change
Revenue $ 85,161 $ 87,985 (3.2 %) $ 173,519 $ 170,391 1.8 %
Gross profit $ 49,032 $ 55,676 (11.9 %) $ 100,697 $ 103,406 (2.6 %)
Gross margin % 57.6 % 63.3 %
58.0 % 60.7 %
Income from operations
0.5 %
Operating margin % 8.5 % 14.2 % 9.8 % 9.9 %
Three and Six Months Ended
Data, Analytics and Care Coordination revenue decreased for the three months endedJune 30, 2020 compared with the prior year comparable period due to a decrease in volume-based revenues. The decrease was partially offset by an increase in subscription revenue. New business in subscription revenue and client services contributed to the increase in revenue for the six months endedJune 30, 2020 compared with the prior year comparable period. Gross profit and margin decreased during the three and six months endedJune 30, 2020 compared with the prior year comparable periods, primarily due to higher costs incurred to support the growth of this segment.
Operating margin decreased during the three and six months ended
Unallocated Amounts
The EPSiTM operating segment is included in the "Unallocated Amounts" category
as it does not meet the requirements to be a reportable segment nor the criteria
to be aggregated into the two reportable segments.
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except
percentages) 2020 2019 % Change 2020 2019 % Change
Revenue $ 9,963 $ 8,693 14.6 % $ 17,986 $ 17,924 0.3 %
Gross profit $ 6,930 $ 6,124 13.2 % $ 11,892 $ 12,364 (3.8 %)
Gross margin % 69.6 % 70.4 % 66.1 % 69.0 %
Income from operations $ 4,020 $ 3,943 2.0 % $ 5,867 $ 7,792 (24.7 %)
Operating margin % 40.3 % 45.4 % 32.6 % 43.5 %
Three and Six Months Ended
Revenue increased during the three and six months endedJune 30, 2020 , compared with the prior year comparable periods, primarily due to an increase in upfront software revenue and maintenance revenue. Gross profit and margin increased during the three months endedJune 30, 2020 , compared with the prior year comparable period, primarily due to an increase in upfront software revenue and maintenance revenue. Headcount growth to support implementation services contributed to the slight decline in gross profit and margin for the six months endedJune 30, 2020 compared with the prior year comparable period. Income from operations increased during the three months endedJune 30, 2020 , compared with the prior year comparable period, primarily due to an increase in upfront software revenue and maintenance revenue. The cost reduction initiatives contributed to the decline in income from operations for the six months endedJune 30, 2020 compared with the prior year comparable period. 35
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Contract Backlog
Contract backlog represents the value of bookings and support and maintenance
contracts that have not yet been recognized as revenue. A summary of contract
backlog by revenue category is as follows:
% Change vs.
As of As of As of
June 30, December June 30, December 31, June 30,
(In millions) 2020 31, 2019 2019 2019 2019Software delivery, support and maintenance$ 2,491 $ 2,519 $ 2,527 (1.1 %) (1.4 %) Client services 1,942 1,848 1,358 5.1 % 43.0 % Total contract backlog$ 4,433 $ 4,367 $ 3,885 1.5 % 14.1 % Total contract backlog as ofJune 30, 2020 increased compared withDecember 31, 2019 andJune 30, 2019 . Total contract backlog can fluctuate between periods based on the level of revenue and bookings, as well as the timing and mix of renewal activity and periodic revalidations.
Liquidity and Capital Resources
The primary factors that influence our liquidity include, but are not limited to, the amount and timing of our revenues, cash collections from our clients, capital expenditures and investments in research and development efforts, including investments in or acquisitions of third parties. Our liquidity was influenced by the COVID-19 pandemic during the six months endedJune 30, 2020 . We increased cash on hand through additional credit facility borrowings to provide financial flexibility and enhance our ability to address potential future uncertainties regarding the impact of the COVID-19 pandemic. Our principal sources of liquidity consisted of cash and cash equivalents of$205 million and available borrowing capacity of$689 million under our revolving credit facility as ofJune 30, 2020 . The change in our cash and cash equivalents balance is reflective of the following:
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