VERADIGM INC. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K under the heading "Financial Statements and Supplementary Data" and the other financial information that appears elsewhere in this Form 10-K. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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 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 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. Population health management,
analytics, connectivity based on open Application Programming Interfaces
("APIs"), and patient engagement are strategic imperatives that can help address
these challenges. In the United States , for example, such initiatives will be
critical tools for success under the framework of the Quality Payment Program
("QPP"), launched by the Centers for Medicare & Medicaid Services ("CMS") in
response to the passage of the Medicare Access and CHIP Reauthorization Act
("MACRA"). As healthcare providers and payers migrate from volume-based to
value-based care delivery, interoperable 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, with doctors and other healthcare professionals interested
in 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 rapidly emerging and 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 to the United States , the healthcare IT industry in which we operate is
in the midst of a period of rapid 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.
Given that CMS annually proposes further regulations, including payment rules
for upcoming years, which require use of EHRs and other health information
technology even as we comply with previously published rules, our industry is
preparing for additional areas in which we must execute compliance. Similarly,
our ability to achieve expanded applicable product certification requirements
resulting from changing strategies at the Office of the National Coordinator for
Health Information Technology ("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). Allscripts remains committed to
satisfying evolving certification requirements and meeting conditions of
certification, including those that are expected to be finalized at the end of
the review process by ONC later this year or early next.
36
--------------------------------------------------------------------------------
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
the implementation of this law is likely driving 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.
HITECH resulted in additional related new orders for our EHR products, and we
believe that the MACRA could drive purchases of not only EHRs but also
additional technologies necessary in advanced payment models. 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 current Presidential Administration in
the 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 new 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 reform the United States healthcare system
contain various provisions, which may impact us and our clients. Continued
efforts by the current Presidential 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.
Generally, Congressional oversight of EHRs and health information technology has
increased in recent years, including a specific focus on perceived
interoperability failures and physician frustration with user burden, as well as
contributing factors to such dissatisfaction. This increased oversight could
impact our clients and our business. The passage of the 21st Century Cures Act
in December 2016 assuaged some concerns about interoperability and possible FDA
oversight of EHRs, and we await the final regulations on data blocking and
interoperability that were released in proposed form by HHS in February 2019 .
Certain of these proposals may have a significant effect on our business
processes and how our clients must exchange patient information. We will respond
as necessary to the finalized regulations on those topics, which are expected
early this year.
37
--------------------------------------------------------------------------------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, as an example. We will closely monitor regulations and/or guidance from 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. 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.
Summary of Results
During 2019, we continued to make progress on our key strategic, financial and operational imperatives aimed at driving higher client satisfaction, improving our competitive positioning by expanding the depth and breadth of our products and, ultimately, positioning the Company for sustainable long-term growth both domestically and globally. In that regard, we had success across the below key areas:
•
through both internal innovation and acquisitions. During 2019, we
completed the acquisitions of Pinnacle and Diabetes Collaborative
Registries from the American College of Cardiology and the assets of a
business engaged in the development, implementation, customization,marketing, licensing and sale of a specialty prescription drug platform
including software that collects, saves and transmits information required
to fill a prescription.
• Value-based Care: During 2019, as the healthcare industry continues its
transition toward value-based care model, we launched our new integrated
data systems and services payer and life sciences business and brand
Veradigm™, which combines data-driven clinical insights with actionable
tools for clinical workflow, research, analytics and media.
• Capital Deployment and Operational Efficiency: During 2019, we completed
the integration of Practice Fusion and Health Grid.
Total revenue for the year endedDecember 31, 2019 was$1.8 billion , an increase of 1% compared with the year endedDecember 31, 2018 . For both of the years endedDecember 31, 2019 and 2018, software delivery, support and maintenance revenue totaled$1.1 billion . Client services revenue totaled$645 million in the year endedDecember 31, 2019 , an increase of 4% compared to prior year. Gross profit and margin decreased for the year endedDecember 31, 2019 compared to prior year. These decreases were primarily due to an increase in hosting costs, higher amortization of software development costs, recognition of previously deferred costs and the sale of OneContent in 2018, which had higher margins than our other businesses.
Our contract backlog as of
OnDecember 31, 2018 , we sold all of the Class A Common Units ofNetsmart LLC ("Netsmart") held by the Company for aggregate consideration of$566 million in cash, plus a final settlement as determined following the closing. Netsmart was originally acquired inApril 2016 and we realized a gain on sale of$500.5 million . Prior to the sale, Netsmart comprised a separate reportable segment, which due to its significance to our historical consolidated financial statements and results of operations, is now reported as a discontinued operation as a result of the sale for all periods presented.
Revenues and Expenses
Revenues are derived primarily from sales of our proprietary software (either
under a perpetual or term license delivery model), subscription-based software
sales, post-contract client support and maintenance services, and managed
services solutions, such as outsourcing, private cloud hosting and revenue cycle
management.
38
-------------------------------------------------------------------------------- Cost of revenue consists primarily of salaries, incentive compensation and benefits for our billable professionals, third-party software costs, third-party transaction processing and consultant costs, amortization of acquired proprietary technology and capitalized software development costs, depreciation and other direct engagement costs. Selling, general and administrative expenses consist primarily of salaries, incentive compensation and benefits for management and administrative personnel, sales commissions and marketing expenses, facilities costs, depreciation and amortization and other general operating expenses.
Research and development expenses consist primarily of salaries, incentive compensation and benefits for our development personnel, thirdparty contractor costs and other costs directly or indirectly related to development of new products and upgrading and enhancing existing products.
Asset impairment charges consist primarily of non-cash charges relate to the retirement of hosting assets, our decision to discontinue several software development projects and the impairment of several intangible assets.Goodwill impairment charges incurred related to our Hospital and Health System business and to the acquisition of the patient/provider engagement solutions business from NantHealth during the years endedDecember 31, 2019 and 2018, respectively.
Amortization of intangible and acquisition-related assets consists of amortization of customer relationships, tradenames and other intangibles acquired through business combinations recorded under the purchase method of accounting.
Interest expense consists primarily of interest on the 1.25% Notes and on the outstanding debt under our senior secured credit facility, including the amortization of debt discounts and debt issuance costs.
Gain on sale of businesses, net consists of net gains from the divestitures during 2018 of the OneContent and Strategic Sourcing businesses, both of which were acquired as part of the EIS Business acquisition during the fourth quarter of 2017.
Other (loss) income, net included a settlement with the
Impairment of long-term investments primarily consists of other-than-temporary and realized losses associated with our available for sale marketable securities.
Equity in net income (loss) of unconsolidated investments represents our share of the equity earnings (losses) of our investments in third parties accounted for under the equity method, including the amortization of cost basis adjustments. Income from discontinued operations during years endedDecember 31, 2018 and 2017 includes activity associated with Netsmart and of two solutions acquired with the EIS Business, which were sunset in 2018.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in our consolidated financial statements and the accompanying notes. The accounting policies and estimates discussed in this section are those that we consider to be particularly critical to an understanding of our consolidated financial statements because their application involves significant judgment regarding the effect of inherently uncertain matters on our financial results. Actual results could differ materially from these estimates under different assumptions or conditions.
Revenue Recognition
Refer to Note 2, "Revenue from Contracts with Customers" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for detailed discussion about our revenue recognition accounting policies.
Allowance for Doubtful Accounts Receivable
We rely on estimates to determine our bad debt expense and the adequacy of our allowance for doubtful accounts. These estimates are based on our historical experience and management's assessment of a variety of factors related to the general financial condition of our clients, the industry in which we operate and general economic conditions. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and related bad debt expense may be required.
Business Combinations
Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair values of the assets acquired and the liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments are reflected in our consolidated statement of operations. 39
--------------------------------------------------------------------------------
Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or between annual tests when an impairment indicator exists. If an optional qualitative goodwill impairment assessment is not performed, we are required to determine the fair value of each reporting unit. If a reporting unit's fair value is lower than its carrying value, an impairment loss equal to the excess will be recorded not to exceed the carrying amount of goodwill assigned to the reporting unit. The recoverability of indefinite-lived intangible assets is assessed by comparison of the carrying value of an asset to its estimated fair value. If we determine that the carrying value of an asset exceeds its estimated fair value, an impairment loss equal to the excess will be recorded. The determination of the fair value of our reporting units is based on a combination of a market approach, that considers benchmark company market multiples, and an income approach, that utilizes discounted cash flows for each reporting unit and other Level 3 inputs. Under the income approach, we determine fair value based on the present value of the most recent cash flow projections for each reporting unit as of the date of the analysis, and calculate a terminal value utilizing a terminal growth rate. The significant assumptions under this approach include, among others: income projections, which are dependent on sales to new and existing clients, new product introductions, client behavior, competitor pricing, operating expenses, the discount rate and the terminal growth rate. The cash flows used to determine fair value are dependent on a number of significant management assumptions such as our expectations of future performance and the expected economic environment, which are partly based on our historical experience. Our estimates are subject to change given the inherent uncertainty in predicting future results. Additionally, the discount rate and the terminal growth rate are based on our judgment of the rates that would be utilized by a hypothetical market participant. As part of the goodwill impairment testing, we also consider our market capitalization in assessing the reasonableness of the fair values estimated for our reporting units. During 2019, we made organizational changes that affected our reportable segments. Refer to Note 18, "Business Segments" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for detailed discussion about these changes. We performed our 2019 goodwill impairment test as ofOctober 1, 2019 . As a result of this test, we concluded that the carrying value of the Hospitals and Health Systems ("HHS") reporting unit exceeded its fair value. As a result, we recognized a goodwill impairment charge of$25.7 million . This goodwill impairment charge is reflected on the "Goodwill impairment charge" line in our consolidated statements of operations. The fair values of all other reporting units substantially exceeded their carrying values. As ofDecember 31, 2019 , the goodwill allocated to the HHS reporting unit was$485.5 million . We performed our 2018 goodwill impairment test as ofOctober 1, 2018 . We concluded that the carrying value of the NantHealth reporting unit exceeded its fair value as a result of this test. Our latest available financial forecasts at the time of the annual goodwill impairment test reflected that projected future operating costs exceeded projected revenues resulting in negative operating margins for the NantHealth reporting unit. As a result, we recognized a goodwill impairment charge of$13.5 million , representing the entire goodwill balance assigned to the NantHealth reporting unit. In accordance with GAAP, definite-lived intangible assets are required to be amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We estimate the useful lives of our intangible assets and ratably amortize the value over the estimated useful lives of those assets. If the estimates of the useful lives should change, we will amortize the remaining book value over the remaining useful lives or, if an asset is deemed to be impaired, a write-down of the value of the asset may be required at such time. Software Development Costs We capitalize purchased software upon acquisition if it is accounted for as internal-use or if it meets the future alternative use criteria. We capitalize incurred labor costs for software development from the time technological feasibility of the software is established, or when the preliminary project phase is completed in the case of internal use software, until the software is available for general release. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. We estimate the useful life of our capitalized software and amortize its value over that estimated life. If the actual useful life is shorter than our estimated useful life, we will amortize the remaining book value over the remaining useful life or the asset may be deemed to be impaired and, accordingly, a write-down of the value of the asset may be recorded as a charge to earnings. The carrying value of capitalized software is dependent on the ability to recover its value through future revenue from the sale of the software. At each balance sheet date, the unamortized capitalized costs of a software product are compared with the net realizable value of that product. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and client support required to satisfy our responsibility at the time of sale. The amount by which the unamortized capitalized costs of a software product exceed the net realizable value of that asset is written off. If we determine that the value of the capitalized software could not be recovered, a write-down of the value of the capitalized software to its recoverable value is recorded as a charge to earnings. 40 --------------------------------------------------------------------------------
Income Taxes
We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for net operating loss and tax credit carryforwards. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience, expectations of future taxable income, the ability to carryback losses and other relevant factors.
In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes may be required. If we ultimately determine that payment of these amounts is unnecessary, then we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected. An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain income tax positions in the income tax (provision) benefit line of our consolidated statements of operations.
We file income tax returns in
Fair Value Measurements
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market participant assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair values of assets and liabilities required to be measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their value in one of three categories (Levels 1 to 3). The values of assets and liabilities assigned to Level 3 require the most judgement and are based unobservable inputs or prices for which little or no market data exists. Therefore, Level 3 values can be susceptible to significant fluctuations, both positive and negative, from changes in the underlying assumption used by management. Refer to Note 5, "Fair Value Measurements" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for detailed information about financial assets and liabilities measured at fair value on a recurring basis.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our consolidated financial statements, refer to Note
1, "Basis of Presentation and Significant Accounting Policies" to our
consolidated financial statements included in Part II, Item 8, "Financial
Statements and Supplementary Data" of this Form 10-K.
41
--------------------------------------------------------------------------------Overview of Consolidated Results
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Revenue:
Software delivery, support and $ 1,126,486 $ 1,128,263 $ 958,187 (0.2 %) 17.7 %
maintenance
Client services 645,191 621,699 539,521 3.8 % 15.2 %
Total revenue 1,771,677 1,749,962 1,497,708 1.2 % 16.8 %
Cost of revenue:
Software delivery, support and 358,946 357,039 295,593 0.5 % 20.8 %
maintenance
Client services 583,111 565,504 484,591 3.1 % 16.7 %
Amortization of software 21.4 %
development and
acquisition-related assets 116,040 102,876 84,725 12.8 %
Total cost of revenue 1,058,097 1,025,419 864,909 3.2 % 18.6 %
Gross profit 713,580 724,543 632,799 (1.5 %) 14.5 %
Gross margin % 40.3 % 41.4 % 42.3 %
Selling, general and administrative 419,774 450,967 400,688 (6.9 %) 12.5 %
expenses
Research and development 254,509 268,409 202,282 (5.2 %) 32.7 %
Asset impairment charges 10,837 58,166 0 (81.4 %) NM
Goodwill impairment charge 25,700 13,466 0 90.9 % NM
Amortization of intangible and
acquisition-related assets 27,216 26,587 17,345 2.4 % 53.3 %
(Loss) income from operations (24,456 ) (93,052 ) 12,484 (73.7 %) NM
Interest expense (43,172 ) (50,914 ) (37,540 ) (15.2 %) 35.6 %
Other (loss) income, net (138,902 ) 74 (512 ) NM 114.5 %
Gain on sale of businesses, net 0 172,258 0 (100.0 %) NM
Impairment of long-term investments (651 ) (15,487 ) (165,290 ) (95.8 %) (90.6 %)
Equity in net income of
unconsolidated investments 665 259 821 156.8 % (68.5 %)
(Loss) income from continuing (206,516 ) 13,138 (190,037 ) NM 106.9 %
operations
before income taxes Income tax benefit (provision) 23,914 (469 ) 5,514 NM (108.5 %) Effective tax rate 11.6 % 3.6 % 2.9 % (Loss) income from continuing operations, net of tax (182,602 ) 12,669 (184,523 ) NM (106.9 %) Loss from discontinued operations 0 (72,836 ) (11,915 ) (100.0 %) NM Gain on sale of Netsmart 0 500,471 0 (100.0 %) NM Income tax effect on discontinued operations 0 (32,497 ) 42,263 (100.0 %) (176.9 %) Income from discontinued operations, net of tax 0 395,138 30,348 (100.0 %) NM Net (loss) income (182,602 ) 407,807 (154,175 ) (144.8 %) NM Net loss attributable to non-controlling interests 424 4,527 1,566 (90.6 %) 189.1 % Accretion of redemption preference on redeemable convertible non-controlling interest - discontinued operations 0 (48,594 ) (43,850 ) (100.0 %) 10.8 % Net (loss) income attributable toAllscripts Healthcare
NM
NM-We define "NM" as not meaningful for increases or decreases greater than 200%.
Revenue
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 management. Non-recurring revenue consists of perpetual software
licenses sales, hardware resale and non-recurring transactions revenue, and
project-based client services revenue.
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Revenue:
Recurring revenue $ 1,395,869 $ 1,411,742 $ 1,176,720 (1.1 %) 20.0 %
Non-recurring revenue 375,808 338,220 320,988 11.1 % 5.4 %
Total revenue $ 1,771,677 $ 1,749,962 $ 1,497,708 1.2 % 16.8 %
42
--------------------------------------------------------------------------------
Year Ended
Recurring revenue decreased during the year endedDecember 31, 2019 compared to prior year due to known attrition within the EIS and other businesses partially offset with growth in subscription revenue. The sale of the OneContent business onApril 2, 2018 also contributed to the decline in recurring revenue. The OneContent business was acquired as part of the EIS Business acquisition onOctober 2, 2017 , and it contributed$13 million of recurring revenue during the first quarter of 2018, including$1 million of amortization of acquisition-related deferred revenue adjustments. Non-recurring revenue increased due to higher sales of perpetual software licenses for our acute solutions and hardware in 2019 compared to 2018, partially offset by lower client services revenue related to the timing of software activations. The percentage of recurring and non-recurring revenue of our total revenue was 79% and 21%, respectively, during the year endedDecember 31, 2019 and 81% and 19%, respectively, during the year endedDecember 31, 2018 .
Year Ended
The increase in revenue for the year endedDecember 31, 2018 compared with the year endedDecember 31, 2017 was primarily driven by incremental revenue from the acquisitions of the EIS Business in the fourth quarter of 2017 and Practice Fusion in the first quarter of 2018. Total revenue includes the amortization of acquisition-related deferred revenue adjustments, which totaled$24 million and$29 million during the years endedDecember 31, 2018 and 2017, respectively. The growth in both recurring and non-recurring revenue for the year endedDecember 31, 2018 compared with the prior year was also largely driven by incremental revenue from the previously mentioned acquisitions. The percentage of recurring and non-recurring revenue of our total revenue was 81% and 19%, respectively, during the year endedDecember 31, 2018 , compared with 79% and 21%, respectively, during the year endedDecember 31, 2017 . Gross Profit 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Total cost of revenue$ 1,058,097 $ 1,025,419 $ 864,909 3.2 % 18.6 % Gross profit$ 713,580 $ 724,543 $ 632,799 (1.5 %) 14.5 % Gross margin % 40.3 % 41.4 % 42.3 %
Year Ended
Gross profit and margin decreased during the year endedDecember 31, 2019 compared to prior year primarily due to an increase in hosting migration costs, higher amortization of software development, recognition of previously deferred costs and the sale of OneContent business onApril 2, 2018 , which carried a higher gross margin compared with our other businesses. These were partially offset with an increase in organic sales for Veradigm and our acute solutions in 2019.
Year Ended
Gross profit increased during the year endedDecember 31, 2018 compared with the year endedDecember 31, 2017 primarily due to acquisitions. From a revenue mix perspective, gross profit associated with our recurring revenue streams, which include the delivery of recurring subscription-based software sales, support and maintenance, and recurring client services improved as we continued to expand our customer base for these services, particularly those related to outsourcing and revenue cycle management. Gross profit associated with our non-recurring software delivery, support and maintenance revenue stream decreased primarily due to fewer perpetual software license sales of our acute and population health management solutions. Gross profit associated with our non-recurring client services revenue stream, which includes non-recurring project-based client services, decreased primarily driven by higher internal personnel costs, including those related to incremental resources from recent acquisitions. Gross margin decreased primarily due to lower sales of higher margin perpetual software licenses and higher amortization of software development and acquisition-related assets driven by additional amortization expense associated with intangible assets acquired as part of recent acquisitions.
Selling, General and Administrative Expenses
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Selling, general and administrative
expenses $ 419,774 $ 450,967 $ 400,688 (6.9 %) 12.5 %
Year Ended
Selling, general and administrative expenses decreased during the year endedDecember 31, 2019 compared with the prior year, primarily due to headcount reduction actions taken during 2018 as part of the integration of EIS, Practice Fusion and Health Grid acquisitions. The sale of OneContent in 2018 contributed to the decrease because there were one-time incentive compensation expenses. These decreases were partially offset with an increase in legal costs. 43 --------------------------------------------------------------------------------
Year Ended
Selling, general and administrative expenses increased during the year endedDecember 31, 2018 compared with the prior year, primarily due to higher incentive-based compensation and incremental expenses from the acquisitions of the EIS Business, Practice Fusion and Health Grid, including associated transaction-related, severance and legal expenses as a result of these acquisitions. Research and Development 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Research and development$ 254,509 $ 268,409 $ 202,282 (5.2 %) 32.7 %
Year Ended
Research and development expenses decreased during the year endedDecember 31, 2019 compared with prior year. This decrease was primarily due to the sale of OneContent onApril 2, 2018 , as there were$10 million of one-time incentive compensation costs recorded within Research and development expense as a result of the sale.
Year Ended
Research and development expenses increased during the year endedDecember 31, 2018 compared with the prior year, primarily due to higher overall personnel costs, including higher incentive-based compensation and severance, and additional expenses from the acquisition of the EIS Business, Practice Fusion and Health Grid, which were partly offset by an increase in the amount of capitalized software costs. The increase in capitalized software development costs was primarily driven by our continued investment in expanding the capabilities and functionality of our traditional ambulatory, acute and post-acute platforms as well as incremental investments in the emerging areas of precision medicine and cloud-based solution delivery. In addition, we incurred costs to integrate the solutions acquired through the above noted acquisitions. The capitalization of software development costs is highly dependent on the nature of the work being performed and the development status of projects and, therefore, it is common for the amount of capitalized software development costs to fluctuate. Asset Impairment Charges 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Asset impairment charges$ 10,837 $ 58,166 $ 0 (81.4 %) NM
Year Ended
Asset impairment charges for the year endedDecember 31, 2019 was primarily the result of impairing the remaining NantHealth acquired customer relationship intangible balance of$8.1 million . We also recognized non-cash impairment charges of$2.7 million on the retirement of certain hosting assets due to data center migrations. We incurred non-cash asset impairment charges during the year endedDecember 31, 2018 of$33.2 million related to the write-off of capitalized software as a result of our decision to discontinue several software development projects. We also recognized$22.9 million of non-cash asset impairment charges in 2018 related to our acquisition of the patient/provider engagement solutions business from NantHealth in 2017, which included the write-downs of$2.2 million of acquired technology and$20.7 million , representing the unamortized value assigned to the modification of our existing commercial agreement with NantHealth, as we no longer expect to recover the value assigned to these assets. The remaining$2.1 million of non-cash asset impairment charges recorded during the year endedDecember 31, 2018 relate to the disposal of fixed assets as a result of relocating and consolidating business functions and locations from recent acquisitions. Goodwill Impairment Charge 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Goodwill impairment charge$ 25,700 $ 13,466 $ 0 90.9 % NM 44
--------------------------------------------------------------------------------
Year Ended
We recorded a goodwill impairment charge of$25.7 million related to our Hospitals and Health Systems reporting unit during the year endedDecember 31, 2019 . We impaired all of the goodwill previously recognized as part of the acquisition of NantHealth's patient/provider engagement solutions business following the completion of our annual goodwill impairment during the year endedDecember 31, 2018 . Refer to Note 7, "Goodwill and Intangible Assets" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for further information regarding these impairments.
Amortization of Intangible and Acquisition-Related Assets
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Amortization of intangible and
acquisition-related
assets $ 27,216 $ 26,587 $ 17,345 2.4 % 53.3 %
Year Ended
The slight increase in amortization expense for the year endedDecember 31, 2019 compared with the prior year was due to incremental amortization expense associated with intangible assets as part of business combinations completed during 2018.
Year Ended
The increase in amortization expense for the year endedDecember 31, 2018 compared with the prior year was primarily due to incremental amortization expense associated with intangible assets acquired as part of business acquisitions completed during the fourth quarter of 2017 and the first half of 2018, the largest being the acquisitions of the EIS Business and Practice Fusion. Refer to Note 4, "Business Combinations" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for additional information regarding business acquisitions. Interest Expense 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Interest expense$ 43,172 $ 50,914 $ 37,540 (15.2 %) 35.6 %
Year Ended
Interest expense during the year endedDecember 31, 2019 decreased compared to the prior year due to lower average outstanding borrowings partially offset with higher interest rates.
Year Ended
Interest expense during the year endedDecember 31, 2018 increased compared with the prior year primarily due to the combination of higher average outstanding borrowings underAllscripts' senior secured credit facility and higher interest rates. The higher average outstanding borrowings were largely due to additional borrowings to finance the acquisition of the EIS Business during the fourth quarter of 2017 and the acquisitions of Practice Fusion and Health Grid during 2018. Other (loss) income, net 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Other (loss) income, net$ (138,902 ) $ 74 $ (512 ) NM 114.5 %
Year Ended
Other (loss) income, net for the year endedDecember 31, 2019 consisted of (i)$145 million settlement with the DOJ related to its civil and criminal investigations of Practice Fusion, Refer to Note 21, "Contingencies" of the Notes to our consolidated financial statements of this Form 10-K for further information regarding the investigations and (ii) offset with a$5 million reversal of an earnout related to a prior acquisition. Other (loss) income, net also consists of a combination of interest income and miscellaneous receipts and expenses.
Gain on Sale of Businesses, Net
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Gain on sale of businesses, net $ 0 $ 172,258 $ 0 (100.0 %) NM
45
--------------------------------------------------------------------------------
Year Ended
Gain on sale of businesses, net for the year endedDecember 31, 2018 consists of a gain of$177.9 million and a loss of$5.6 million from the divestitures of the OneContent and Strategic Sourcing businesses, respectively, both of which were acquired as part of the EIS Business acquisition during the fourth quarter of 2017.
Impairment of Long-term investments
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017
from 2018 from 2017
Impairment of long-term investments
Year Ended
Impairment of long-term investments during the year endedDecember 31, 2019 consisted of an impairment of$1.7 million associated with one of our long-term equity investments partially offset with a$1.0 million recovery of a long-term equity investment that had previously been impaired.
Year Ended
We recognized non-cash charges on two of our cost-method equity investments and a related note receivable during the year endedDecember 31, 2018 . These charges equaled the cost bases of the investments and the related note receivable prior to the impairment. We recorded non-cash impairment charges of$165.3 million associated with two of our long-term investments during 2017. The majority of these charges relate to our previous investment in NantHealth common stock, which we fully disposed of in connection with our acquisition of certain assets related to NantHealth's patient/provider engagement solutions business in 2017.
Equity in Net Income of Unconsolidated Investments
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Equity in net income of unconsolidated
investments $ 665 $ 259 $ 821 156.8 % (68.5 %)
Year Ended
Equity in net income (loss) of unconsolidated investments represents our share of the equity earnings (losses) of our investments in third parties accounted for under the equity method of accounting based on one quarter lag.
Income Tax Benefit (Provision)
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Income tax benefit (provision) $ 23,914 $ (469 ) $ 5,514 NM (108.5 %)
Effective tax rate 11.6 % 3.6 % 2.9 %
Year Ended
The United States Tax Cuts and Jobs Act (the "Tax Act") was enacted onDecember 22, 2017 and introduced significant changes to the income tax law inthe United States . Effective in 2018, the Tax Act reducedthe United States statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the Global Intangible Low-taxed Income ("GILTI") tax and Base Erosion and Anti-Abuse Tax ("BEAT") rules, respectively. In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to income tax inthe United States . Our provision for income taxes differs from the tax computed at theU.S. federal statutory income tax rate due primarily to valuation allowance, permanent differences, income attributable to foreign jurisdictions taxed at rates different fromthe United States federal statutory income tax rate, state taxes, tax credits and certain discrete items. Our effective tax rate for the year endedDecember 31, 2019 , compared with the prior year, differs primarily due to the fact that the permanent items, credits and the impact of foreign earnings had a greater impact on the pre-tax income of$13.1 million in the year endedDecember 31, 2018 , compared to the impacts of these items on a pre-tax loss of$206.5 million for the year endedDecember 31, 2019 . 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). In the year endedDecember 31, 2019 , we recorded$0.9 million of valuation allowance, mostly against foreign deferred tax assets. 46 --------------------------------------------------------------------------------
Year Ended
The United States Tax Cuts and Jobs Act (the "Tax Act") was enacted onDecember 22, 2017 and introduced significant changes to the income tax law inthe United States . Effective in 2018, the Tax Act reducedthe United States statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the Global Intangible Low-taxed Income ("GILTI") tax and Base Erosion and Anti-Abuse Tax ("BEAT") rules, respectively. In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to income tax inthe United States . Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional expense of$15.3 million in our financial statements for the year endedDecember 31, 2017 in accordance with guidance in Staff Accounting Bulletin No. 118 ("SAB 118"), which allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. This provisional benefit included$10.1 million expense for remeasurement of deferred tax balances to reflect the lower federal rate and expense of$5.2 million for the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to income tax inthe United States . Adjustments to these provisional amounts that we recorded in 2018 did not have a significant impact on our consolidated financial statements. Our accounting for the effects of the enactment of United States Tax Reform is now complete. Due to our divestiture of our investment in Netsmart, the amounts noted above do not include the provisional amounts recorded by Netsmart in 2017. Our provision for income taxes differs from the tax computed at theU.S. federal statutory income tax rate due primarily to valuation allowance, permanent differences, income attributable to foreign jurisdictions taxed at rates different fromthe United States federal statutory income tax rate, state taxes, tax credits and certain discrete items. Our effective tax rate decreased for the year endedDecember 31, 2018 , compared with the prior year, primarily due to the effects of the stricter executive compensation deduction provisions of the Tax Act recorded in 2018, offset bythe United States federal rate reduction of 21% versus 35% in 2017. 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). In the year endedDecember 31, 2018 , we released$64.8 million of valuation allowance, mostly due to the utilization of capital loss carryforward against capital gain incurred during the year endedDecember 31, 2018 and the utilization of federal credit carryforwards.
Discontinued Operations
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017
from 2018 from 2017
Loss from discontinued operations
NM
Gain on sale of Netsmart 0 500,471 0 (100.0 %) NM
Income tax effect on discontinued
operations 0 (32,497 ) 42,263 (100.0 %) (176.9 %)
Income (loss) from discontinued
operations, net of tax $ 0 $ 395,138 $ 30,348 (100.0 %) NM
Year Ended
OnDecember 31, 2018 , we sold all of the Class A Common Units of Netsmart owned by the Company. Prior to the sale, Netsmart comprised a separate reportable segment, which due to its significance to our historical consolidated financial statements and results of operations, is now reported as a discontinued operation as a result of the sale for all periods presented. The loss from discontinued operations represents the net of losses incurred by Netsmart for the years endedDecember 31, 2018 and 2017 partly offset by earnings attributable to two solutions acquired during the fourth quarter of 2017 as part of the EIS Business that we no longer support effective as ofMarch 31, 2018 . Refer to Note 17, "Discontinued Operations" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for additional information regarding discontinued operations. Non-Controlling Interests 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Net loss attributable to non-controlling interests$ 424 $ 4,527 $ 1,566 (90.6 %) 189.1 % Accretion of redemption preference on redeemable convertible non-controlling interest - discontinued operations$ 0 $ (48,594 ) $ (43,850 ) (100.0 %) 10.8 % 47
--------------------------------------------------------------------------------
Year 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. The remaining minority interest of Pulse8 was purchased during the first quarter of 2019. We have no remaining non-controlling interest activities to report. The accretion of redemption preference on redeemable convertible non-controlling interest represents the accretion of liquidation preference at 11% per annum to the value of the preferred units of Netsmart, prior to the sale of our investment in Netsmart onDecember 31, 2018 . Segment Operations Overview of Segment Results 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Revenue: Provider$ 1,597,115 $ 1,616,022 $ 1,441,212 (1.2 %) 12.1 % Veradigm 161,216 140,326 69,879 14.9 % 100.8 % Unallocated Amounts 13,346 (6,386 ) (13,383 ) NM (52.3 %) Total revenue$ 1,771,677 $ 1,749,962 $ 1,497,708 1.2 % 16.8 % Gross Profit: Provider$ 672,206 $ 710,063 $ 674,112 (5.3 %) 5.3 % Veradigm 104,896 100,708 43,817 4.2 % 129.8 % Unallocated Amounts (63,522 ) (86,228 ) (85,130 ) (26.3 %) 1.3 % Total gross profit$ 713,580 $ 724,543 $ 632,799 (1.5 %) 14.5 % Income from operations: Provider$ 396,724 $ 402,544 $ 426,099 (1.4 %) (5.5 %) Veradigm 43,996 43,641 23,816 0.8 % 83.2 % Unallocated Amounts (465,176 ) (539,237 )
(437,431 ) (13.7 %) 23.3 %
Total (loss) income from operations
(73.7 %) NM
The results for the years ended December 31, 2018 and 2017 have been recast to
conform to the current year presentation, which reflects several changes made to
our organizational and reporting structure during the year ended December 31,
2019 . Refer to Note 18, "Business Segments" to our consolidated financial
statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Form 10-K for detailed discussion about these changes to our
segments.
Provider
Our Provider segment derives its revenue from the sale of integrated clinical
software applications, financial management and patient engagement solutions,
which primarily include EHR-related software, connectivity and coordinated care
solutions, financial and practice management software, related installation,
support and maintenance, outsourcing, private cloud hosting, revenue cycle
management, training and electronic claims administration services.
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Revenue $ 1,597,115 $ 1,616,022 $ 1,441,212 (1.2 %) 12.1 %
Gross profit $ 672,206 $ 710,063 $ 674,112 (5.3 %) 5.3 %
Gross margin % 42.1 % 43.9 % 46.8 %
Income from operations $ 396,724 $ 402,544 $ 426,099 (1.4 %) (5.5 %)
Operating margin % 24.8 % 24.9 % 29.6 %
Year Ended
Provider revenue decreased during the year endedDecember 31, 2019 , compared with the prior year comparable period due to known attrition within the EIS and other businesses and the sale of the OneContent and Strategic Sourcing businesses onMarch 15, 2018 and onApril 2, 2018 , respectively. These businesses were acquired as part of the EIS business acquisition onOctober 2, 2017 and contributed$16 million of revenue during the first quarter of 2018, including$1 million of amortization of acquisition-related deferred revenue adjustments. These decreases were partly offset by higher sales of perpetual software licenses for our acute solutions in 2019 compared to 2018 and additional revenue from the 2018 acquisition of Health Grid. 48 -------------------------------------------------------------------------------- Gross profit and margin decreased during the year endedDecember 31, 2019 compared with the prior year primarily due to the previously mentioned attrition and increased hosting migration costs. These were partially offset with lower costs due to the decline in sales. The sale of OneContent, which had higher overall profitability, compared with our other Provider businesses, contributed to the decline of gross profit and margin. Operating margin remained consistent during the year endedDecember 31, 2019 compared with prior year, as the decline in gross profit was offset by lower selling, general and administrative, and research and development expenses driven by headcount reduction actions taken during 2018 as part of the integration of the EIS and Health Grid acquisitions.
Year Ended
Provider revenue and gross profit increased during the year endedDecember 31, 2018 compared with the year endedDecember 31, 2017 , primarily due to acquisitions of the EIS business and Health Grid during the fourth quarter of 2017 and second quarter of 2018, respectively. The increase in revenue due to acquisitions was partially offset by fewer perpetual software license sales of our acute and coordinated care solutions software as there were several large transactions recorded in 2017 that did not recur in 2018. Gross margin decreased during the year endedDecember 31, 2018 compared with the prior year primarily due to lower sales of higher margin perpetual software licenses, higher internal personnel costs related to incremental resources from recent acquisitions and to support anticipated new hosting client go-lives, and higher amortization of capitalized software development and acquired technology-related intangible assets. Income from operations and operating margin decreased during the year endedDecember 31, 2018 compared with prior year due to increases in selling, general and administrative, and research and development expenses, mostly driven by recent acquisitions, partly offset by higher capitalization of internal software development expenses. Veradigm Our Veradigm segment derives its revenue from the provision of data-driven clinical insights with actionable tools for clinical workflow, research, analytics and media. Its solutions, targeted at key healthcare stakeholders, help improve the quality, efficiency and value of healthcare delivery - from biopharma to health plans, healthcare providers and patients, and health technology partners, among others. 2019 % 2018 % Year Ended December 31, Change Change (In thousands) 2019 2018 2017 from 2018 from 2017 Revenue$ 161,216 $ 140,326 $ 69,879 14.9 % 100.8 % Gross profit$ 104,896 $ 100,708 $ 43,817 4.2 % 129.8 % Gross margin % 65.1 % 71.8 % 62.7 % Income from operations$ 43,996 $ 43,641 $ 23,816 0.8 % 83.2 % Operating margin % 27.3 % 31.1 % 34.1 %
Year Ended
Veradigm revenue increased during the year endedDecember 31, 2019 compared with the prior year comparable period due to an increase in organic sales. Gross profit and income from operations increased for during the year endedDecember 31, 2019 due to an increase in organic sales and cost reductions partially offset with headcount growth and hosting migration costs. The acquisition of Practice Fusion during the first quarter of 2018 also contributed to the increases. Gross margin and operating margin decreased during the year endedDecember 31, 2019 , compared with the prior year comparable period, primarily due to (i) an increase in hosting migration costs, (ii) costs associated with recent acquisitions, (iii) headcount growth and (iv) partially offset with other cost reductions.
Year Ended
Veradigm revenue, gross profit, gross margin and income from operations increased during the year endedDecember 31, 2018 compared with the prior year comparable period primarily due to the acquisition of Practice Fusion during the first quarter of 2018. Operating margin decreased during 2018 primarily due to higher personnel costs related to incremental resources from the Practice Fusion acquisition and to support anticipated new hosting client go-lives. 49 --------------------------------------------------------------------------------
Unallocated Amounts
In determining revenue, gross profit and income from operations for our
segments, we do not include in revenue the amortization of acquisition-related
deferred revenue adjustments, which reflect the fair value adjustments to
deferred revenues acquired in a business acquisition. We also exclude the
amortization of intangible assets, stock-based compensation expense, expenses
not reflective of our core business and transaction-related costs and non-cash
asset impairment charges from the operating segment data provided to our Chief
Operating Decision Maker. Expenses not reflective of our core business relate to
certain severance, product consolidation, legal, consulting and other charges.
Accordingly, these amounts are not included in our reportable segment results
and are included in the "Unallocated Amounts" category. The "Unallocated
Amounts" category also includes (i) corporate general and administrative
expenses (including marketing expenses) and certain research and development
expenses related to common solutions and resources that benefit all of our
business units, all of which are centrally managed, and (ii) revenue and the
associated cost from the resale of certain ancillary products, primarily
hardware.
2019 % 2018 %
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Revenue $ 13,346 $ (6,386 ) $ (13,383 ) NM (52.3 %)
Gross profit $ (63,522 ) $ (86,228 ) $ (85,130 ) (26.3 %) 1.3 %
Gross margin % NM NM NM
Loss from operations
NM NM NM
Year Ended
Revenue from the resale of ancillary products, primarily consisting of hardware, is customer- and project-driven and, as a result, can fluctuate from period to period. The increase in revenue for the year endedDecember 31, 2019 compared to the prior year was primarily due to only$2 million in amortization of acquisition-related deferred revenue adjustments being recorded during 2019, compared to$24.3 million during 2018. Gross unallocated expenses, which represent the unallocated loss from operations excluding the impact of revenue, totaled$478 million for the year endedDecember 31, 2019 compared to$533 million for the year endedDecember 31, 2018 . The decrease was primarily the result of (i) lower asset impairment and goodwill charges of$35 million , (ii) lower net transaction-related severance and legal expenses of$16 million and (iii) lower acquisition-related amortization of$1 million . These were partially offset with$3 million in additional stock-based compensation expense.
Year Ended
Revenue from the resale of ancillary products, primarily consisting of hardware, is customer and project driven and, as a result, can fluctuate from period to period. Revenue for the year endedDecember 31, 2018 compared with the prior year improved primarily due to lower recognition of amortization of acquisition-related deferred revenue adjustments, which reflect the fair value adjustments to deferred revenues acquired in the EIS Business, Practice Fusion, Health Grid and NantHealth provider/patient engagement acquisitions. Such adjustments totaled$24 million for the year endedDecember 31, 2018 compared with$29 million for the year endedDecember 31, 2017 . Gross unallocated expenses, which represent the unallocated loss from operations excluding the impact of revenue, totaled$533 million for the year endedDecember 31, 2018 compared with$424 million for the prior year. The increase in the year endedDecember 31, 2018 compared with prior year was primarily driven by higher transaction-related, severance and legal expenses, primarily related to the acquisitions of the EIS Business, Practice Fusion and Health Grid, which included higher (i) asset impairment charges of$58 million , (ii) goodwill impairment charges of$14 million , (iii) transaction-related, severance and legal expenses of$30 million , and (iv) amortization of intangible and acquisition-related asset of$9 million . The increase in amortization expense was primarily due to additional amortization expense associated with intangible assets acquired as part of business acquisitions completed since the third quarter of 2017.
Contract Backlog
Contract backlog represents the value of bookings and support and maintenance
contracts that have not yet been recognized as revenue. A summary of contract
backlog by revenue category is as follows:
As of December 31,
(In millions) 2019 2018 % Change
Software delivery, support and maintenance
0.5 % Client services 1,848 1,350 36.9 % Total contract backlog$ 4,367 $ 3,857 13.2 % Total contract backlog as ofDecember 31, 2019 increased compared withDecember 31, 2018 . 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. 50
--------------------------------------------------------------------------------
We estimate that the aggregate contract backlog as of
(Percentage of
Year Ended December 31 , Total Backlog)
2020 35 %
2021 19 %
2022 14 %
2023 10 %
2024 7 %
Thereafter 15 %
Total 100 %
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. As ofDecember 31, 2019 , our principal sources of liquidity consisted of cash and cash equivalents of$138 million and available borrowing capacity of$819 million under our revolving credit facility. The change in our cash and cash equivalents balance is reflective of the following:
Operating Cash Flow Activities
2019 $ 2018 $
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Net (loss) income $ (182,602 ) $ 407,807 $ (154,175 ) $ (590,409 ) $ 561,982
Less: Loss from discontinued
operations 0 395,138 30,348 (395,138 ) 364,790
(Loss) income from continuing operations (182,602 ) 12,669 (184,523 ) (195,271 ) 197,192 Non-cash adjustments to net (loss) income 277,217 136,651 351,835 140,566 (215,184 ) Cash impact of changes in operating assets and liabilities (18,361 ) (60,086 )
57,746 41,725 (117,832 )
Net cash provided by operating
activities -
continuing operations 76,254 89,234 225,058 (12,980 ) (135,824 )
Net cash (used in) provided by
operating activities -
discontinued operations (30,000 ) (21,343 ) 54,357 (8,657 ) (75,700 )
Net cash provided by operating activities$ 46,254 $ 67,891 $
279,415
Year Ended
Net cash provided by operating activities - continuing operations decreased during the year endedDecember 31, 2019 compared with prior year. The decrease in income from operations and the increase in non-cash adjustments to net income in 2019 partially related to the absence in the gains on sale of divestitures, such as OneContent in 2018. The increase in non-cash adjustments to net loss in 2019 also related to higher depreciation and the amortization of right-to-use assets. The net loss and the cash impact of changes in operating assets and liabilities during 2019 reflects the$145 million settlement with the DOJ in connection with the Practice Fusion investigations. Net cash used in operating activities - discontinued operations during the year endedDecember 31, 2019 reflects an advance income tax payment related to the gain realized on the sale of our investment in Netsmart onDecember 31, 2018 .
Year Ended
Net cash provided by operating activities - continuing operations decreased during the year endedDecember 31, 2018 compared with the prior year primarily due to working capital changes and higher costs during the year endedDecember 31, 2018 compared with the prior year, which primarily included higher interest expense, transaction-related and legal expenses, and incentive-based compensation payments. The decrease in non-cash adjustments to net loss was primarily driven by lower non-cash impairment charges associated with long-term investments, intangibles and goodwill during the year endedDecember 31, 2018 compared with the prior year. Net cash provided by operating activities - discontinued operations decreased during the year endedDecember 31, 2018 compared with the prior year primarily driven by the additional tax provision relating to the gain from the sale of our investment in Netsmart onDecember 31, 2018 . Netsmart generated cash from operations during both 2018 and 2017. During 2018, Netsmart's cash provided by operations decreased by approximately$16 million primarily driven by higher interest expenses paid attributable to Netsmart's credit facilities. 51 --------------------------------------------------------------------------------
Investing Cash Flow Activities
2019 $ 2018 $
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Capital expenditures $ (16,600 ) $ (31,309 ) $ (38,759 ) $ 14,709 $ 7,450
Capitalized software (113,836 ) (113,308 ) (118,241 ) (528 ) 4,933
Cash paid for business
acquisitions, net of cash acquired (23,443 ) (177,233 ) (169,823 ) 153,790 (7,410 )
Cash received from sale of
businesses, net 0 807,764 0 (807,764 ) 807,764
Purchases of equity securities,
other investments and
related intangible assets, net (7,191 ) (16,934 ) (5,606 ) 9,743 (11,328 )
Other proceeds from investing
activities 14 54 215 (40 ) (161 )
Net cash (used in) provided by
investing activities -
continuing operations (161,056 ) 469,034 (332,214 ) (630,090 ) 801,248
Net cash used in investing
activities -
discontinued operations 0 (221,021 ) (80,758 ) 221,021 (140,263 )
Net cash (used in) provided by investing activities$ (161,056 ) $ 248,013 $
(412,972 )
Year Ended
Net cash used in investing activities - continuing operations during the year endedDecember 31, 2019 resulted from the absence of the sale of businesses compared to prior year. The sale of Netsmart and OneContent produced significant investing cash inflows during 2018, which was partially offset with cash paid for the acquisitions of Practice Fusion and Health Grid. Capital expenditures also decreased in 2019 compared with prior year.
Year Ended
We had cash inflows from investing activities - continuing operations during the year endedDecember 31, 2018 compared with cash outflows from investing activities - continuing operations during the year endedDecember 31, 2017 , which was primarily driven by cash proceeds of$567 million from the sale of our investment in Netsmart and$241 million of net cash proceeds from the divestiture of the OneContent business during 2018. Cash used in investing activities also included the purchase of Practice Fusion and Health Grid, which were mostly offset by lower overall capital expenditures during 2018. Net cash used in investing activities - discontinued operations increased during the year endedDecember 31, 2018 compared with the prior year, primarily due to larger business acquisitions completed by Netsmart during 2018.
Financing Cash Flow Activities
2019 $ 2018 $
Year Ended December 31, Change Change
(In thousands) 2019 2018 2017 from 2018 from 2017
Proceeds from sale or issuance of
common stock $ 0 $ 1,283 $ 1,568 $ (1,283 ) $ (285 )
Taxes paid related to net share
settlement of equity awards (7,286 ) (9,466 ) (7,269 ) 2,180 (2,197 )
Proceeds from issuance of 0.875%
Convertible Senior Notes 218,000 0 0 218,000 0
Payments for issuance costs on
0.875%
Convertible Senior Notes (5,445 ) 0 0 (5,445 ) 0
Payments for capped call
transaction on 0.875%
Convertible Senior Notes (17,222 ) 0 0 (17,222 ) 0
Credit facility payments (220,000 ) (713,751 ) (138,139 ) 493,751 (575,612 )
Credit facility borrowings, net of
issuance costs 279,241 430,843 325,001 (151,602 ) 105,842
Repurchase of common stock (111,460 ) (138,928 ) (12,077 ) 27,468 (126,851 )
Payment of acquisition and other
financing obligations (14,685 ) (5,198 ) (1,283 ) (9,487 ) (3,915 )
Purchases of subsidiary shares
owned by
non-controlling interest (53,800 ) (7,198 ) 0 (46,602 ) (7,198 )
Net cash provided by (used in)
financing activities -
continuing operations 67,343 (442,415 ) 167,801 509,758 (610,216 )
Net cash provided by financing
activities -
discontinued operations 0 149,432 30,784 (149,432 ) 118,648
Net cash provided (used in) by financing activities$ 67,343 $ (292,983 ) $ 198,585 $ 360,326 $ (491,568 ) 52
--------------------------------------------------------------------------------
Year Ended
Net cash provided by financing activities - continuing operations increased during the year endedDecember 31, 2019 primarily due to inflows resulting from (i) the issuance of the 0.875% Convertible Senior Notes, (ii) lower credit facility payments, partially offset with less credit facility borrowings and (iii) a decrease in the repurchase of common stock. These were partially offset by the purchase of the remaining minority interest in Pulse8 during 2019.
Year Ended
We used cash in financing activities - continuing operations during the year endedDecember 31, 2018 compared with cash inflows from financing activities - continuing operations during the year endedDecember 31, 2017 , which was primarily driven by higher repayments of borrowings outstanding under our senior secured credit facility and higher common stock repurchases. We used a portion of the proceeds from the sale of our investment in Netsmart to repay balances outstanding under our senior secured credit facilities at the end of 2018. We borrowed funds in 2018 to purchase Practice Fusion and Health Grid and to acquire the remaining outstanding minority interest in which we initially acquired a controlling interest inApril 2015 . Net cash provided by financing activities - discontinued operations increased during the year endedDecember 31, 2018 compared with the prior year primarily due to higher borrowings by Netsmart used to finance business acquisitions.
Future Capital Requirements
The following table summarizes future payments under our 0.875% Convertible
Senior Notes, 1.25% Cash Convertible Senior Notes and Senior Secured Credit
Facility as of
(In thousands) Total 2020 2021 2022 2023 2024 Thereafter Principal payments: 0.875% Convertible Senior Notes (1)$ 218,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 218,000 1.25% Cash Convertible Senior Notes (2) 345,000 345,000 0 0 0 0 0 Senior Secured Credit Facility (3) 410,000 27,500 30,000 37,500 315,000 0 0 Total principal payments 973,000 372,500 30,000 37,500 315,000 0 218,000 Interest payments: 0.875% Convertible Senior Notes 13,469 1,070 1,908 1,907 1,908 1,907 4,769 1.25% Cash Convertible Senior Notes (3) 4,313 4,313 0 0 0 0 0 Senior Secured Credit Facility (3) (4) 48,892 16,267 15,225 14,093 3,307 0 0 Total interest payments 66,674 21,650 17,133 16,000 5,215 1,907 4,769 Total future debt payments$ 1,039,674 $ 394,150 $ 47,133 $ 53,500 $ 320,215 $ 1,907 $ 222,769
(1) Assumes no cash conversions of the 1.25% Cash Convertible Senior Notes prior
to their maturity on
(2) Amount represents the face value of the 0.875% Convertible Senior Notes,
which includes both the liability and equity portions.
(3) Assumes no additional borrowings after
amounts are repaid upon maturity.
(4) Assumes LIBOR plus the applicable margin remain constant at the rate in
effect on
Revolving Credit Facilities
We have a$900 million senior secured revolving facility (the "Revolving Facility") that expires onFebruary 15, 2023 . A total of up to$50 million of the Revolving Facility is available for the issuance of letters of credit, up to$10 million of the Revolving Facility is available for swingline loans, and up to$100 million of the Revolving Facility could be borrowed under certain foreign currencies. We had no borrowings and$1.0 million of letters of credit outstanding under the Revolving Facility as ofDecember 31, 2019 . We had$819 million available, net of outstanding letters of credit, under the Revolving Facility as ofDecember 31, 2019 . There can be no assurance that we will be able to draw on the full available balance of the Revolving Facility if the financial institutions that have extended such credit commitments become unwilling or unable to fund such borrowings. Refer to Note 9, "Debt" to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for further information.
Other Matters Affecting Future Capital Requirements
We completed renegotiations withAtos to improve the operating cost structure of our private cloud hosting operations during 2019. The new agreement also provides for the payment of initial annual base fees of$35 million per year (an increase from$30 million ) plus charges for volume-based services currently projected using volumes estimated based on historical actuals and forecasted projections. We incurred$100 million and$56 million during 2019 and 2018, respectively, of expenses under our agreements withAtos . These costs are included in cost of revenue in our consolidated statements of operations. Our total investment in research and development efforts during 2019 increased compared to 2018, as we continue to build and expand capabilities and functionality in Veradigm and ourConsumer Health offerings while reducing investment in traditional ambulatory, acute and post-acute platforms. Our total spending consists of research and development costs directly recorded to expense, which are offset by the capitalization of eligible development costs. 53
-------------------------------------------------------------------------------- We believe that our cash and cash equivalents of$138 million as ofDecember 31, 2019 , our future cash flows, and our borrowing capacity under our Revolving Facility, taken together, provide adequate resources to fund our ongoing cash requirements for the next twelve months. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of this Form 10-K. We will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, and the repurchase of our common stock under our stock repurchase program, each of which might impact our liquidity requirements or cause us to borrow under our credit facilities or issue additional equity or debt securities. If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we might be required to obtain additional sources of funds through additional operating improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.
Contractual Obligations and Commitments
We enter into obligations with third parties in the ordinary course of business. The following table summarizes our significant contractual obligations as ofDecember 31, 2019 and the effect such obligations are expected to have on our liquidity and cash in future periods, assuming all obligations reach maturity. We do not believe that our cash flow requirements can be assessed based upon this analysis of these obligations as the funding of these future cash obligations will be from future cash flows from the sale of our products and services that are not reflected in the following table. Payments due by period (In thousands) Total 2020 2021 2022 2023 2024 Thereafter Balance sheet obligations: (1) Debt: Principal payments$ 973,000 $ 372,500 $ 30,000 $ 37,500 $ 315,000 $ 0 $ 218,000 Interest payments 66,674 21,650 17,133 16,000 5,215 1,907 4,769 Finance leases 132 85 40 7 0 0 0 Other obligations: (2) Non-cancelable operating leases 134,503 27,647 23,277 21,640 19,497 13,862 28,580 Purchase obligations (3) 66,844 37,097 18,734 11,013 0 0 0 Agreement with Atos 451,049 95,301 86,808 82,101 75,995 74,375 36,469 Letters of credit 1,015 1,015 0 0 0 0 0
Total contractual obligations
(1) Our liability for uncertain tax positions was
2019. Liabilities that may result from this exposure have been excluded from
the table above since we cannot predict, with reasonable reliability, the
outcome of discussions with the respective taxing jurisdictions, which may or
may not result in cash settlements. We have also excluded net deferred tax
liabilities of
future amounts that will be settled in cash are uncertain.
(2) We have no off-balance sheet arrangements as defined in Item 303 of
Regulation S-K as of
consideration associated with acquisitions of
31, 2019. Such contingent consideration obligations are excluded from the
above table since their payment is based on future financial objectives, the
achievement of which we cannot predict.
(3) Purchase obligations consist of minimum purchase commitments for
telecommunication services, computer equipment, maintenance, consulting and
other commitments.
54
--------------------------------------------------------------------------------
© Edgar Online, source
