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 DOJ 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 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; 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 EIS 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 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.
26
-------------------------------------------------------------------------------- Globally, healthcare providers face an aging population and the challenge of caring for an increasing number of patients with chronic diseases, as well as the urgency of the COVID-19 crisis. 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 possible 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, 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 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 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 new and revised 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 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 committed to satisfying the new certification requirements and meeting the 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 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. 27 -------------------------------------------------------------------------------- HITECH resulted in additional related new orders for our EHR products, and we believe that the MACRA may 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 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 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 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, 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. 28
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Impacts of COVID-19
The global outbreak of the novel coronavirus (COVID-19) has severely restricted the level of economic activity around the world. 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 in the quarter as we saw delays in deals with upfront software revenue and professional services implementations across our inpatient and outpatient base towards the end of the quarter. 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, the impact of COVID-19 on economic activity, 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.
First Quarter 2020 Summary
During the first 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 first quarter of 2020 was$417 million , a decrease of$15 million compared to the first quarter of 2019. For the three months endedMarch 31, 2020 , software delivery, support and maintenance revenue and client services revenue was$264 million and$153 million , respectively, compared with$275 million and$157 million , respectively, during the three months endedMarch 31, 2019 . Gross profit for the first quarter was$157 million , a decrease of$17 million compared to the first quarter of 2019. Gross margin decreased to 37.7% in the first quarter of 2020 compared to a 40.3% gross margin in first quarter of 2019.
Our contract backlog as of
Our bookings, which reflect the value of executed contracts for software, hardware, other client services, private-cloud hosting, outsourcing and subscription-based services, totaled$205 million for the three months endedMarch 31, 2020 , which represents an decrease of 28% over the comparable prior period amount of$286 million and a decrease of 34% from the fourth quarter of 2019 amount of$312 million . 29
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Overview of Consolidated Results
Three Months EndedMarch 31, 2020 Compared with the Three Months EndedMarch 31, 2019 Three Months Ended March 31, (In thousands, except percentages) 2020 2019 % Change Revenue: Software delivery, support and maintenance$ 263,612 $ 275,512 (4.3 %) Client services 153,101 156,537 (2.2 %) Total revenue 416,713 432,049 (3.5 %) Cost of revenue: Software delivery, support and maintenance 76,325 81,033 (5.8 %) Client services 152,786 148,699 2.7 %
Amortization of software development and
acquisition-related assets 30,641 28,222 8.6 % Total cost of revenue 259,752 257,954 0.7 % Gross profit 156,961 174,095 (9.8 %) Gross margin % 37.7 % 40.3 % Selling, general and administrative expenses 97,288 100,245 (2.9 %) Research and development 62,155 64,310 (3.4 %) Asset impairment charges 0 98 (100.0 %) Amortization of intangible and acquisition-related assets 6,718 6,797 (1.2 %) (Loss) income from operations (9,200 ) 2,645 NM Interest expense (12,223 ) (10,184 ) 20.0 % Other income, net 522 513 1.8 % Recovery of long-term investments 0 1,045 (100.0 %) Equity in net income (loss) of unconsolidated investments 200 (64 ) NM Loss from continuing operations before income taxes (20,701 ) (6,045 ) NM Income tax benefit (provision) 347 (1,932 ) (118.0 %) Effective tax rate 1.7 % (32.0 %) Net loss (20,354 ) (7,977 ) 155.2 % Net loss attributable to non-controlling interests 0 424 (100.0 %) Net loss attributable to Allscripts Healthcare Solutions, Inc. stockholders$ (20,354 ) $ (7,553 )
169.5 %
NM - We define "NM" as not meaningful for increases or decreases greater than
200%.
Revenue
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Revenue:
Recurring revenue $ 341,219 $ 348,636 (2.1 %)
Non-recurring revenue 75,494 83,413 (9.5 %)
Total revenue $ 416,713 $ 432,049 (3.5 %)
Three 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 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 months endedMarch 31, 2020 compared to the prior year comparable period primarily due to attrition. The decrease was partially offset by an increase in subscription revenue. Non-recurring revenue decreased for the three months endedMarch 31, 2020 compared to the prior year comparable period due to lower upfront software revenues and project delays that impacted client services revenue. The decrease was partially offset by new business from perpetual software license sales. The percentage of recurring and non-recurring revenue of our total revenue was 82% and 18%, respectively, during the three months endedMarch 31, 2020 and 81% and 19%, respectively, during the three months endedMarch 31, 2019 . 30
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Gross Profit
Three Months Ended March 31,
(In thousands, except percentages) 2020 2019 % Change
Total cost of revenue $ 259,752 $ 257,954 0.7 %
Gross profit $ 156,961 $ 174,095 (9.8 %)
Gross margin % 37.7 % 40.3 %
Three Months Ended
Gross profit and gross margin decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period, primarily due to attrition, revenue profile and unproductive labor costs due to project delays. The decrease was partially offset by new business in software subscription revenues and a reduction in headcount costs.
Selling, General and Administrative Expenses
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Selling, general and administrative expenses $ 97,288 $ 100,245 (2.9 %)
Three Months Ended
Selling, general and administrative expenses decreased during the three months endedMarch 31, 2020 , compared with the prior year comparable period. The decrease is primarily due to the DOJ-related legal expenses that were incurred during the three months endedMarch 31, 2019 . Research and Development Three Months Ended March 31, (In thousands) 2020 2019 % Change Research and development$ 62,155 $ 64,310 (3.4 %)
Three Months Ended
Research and development expenses decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period, primarily due to the impact of strategic efficiency initiatives that began in 2019. Asset Impairment Charges Three Months Ended March 31, (In thousands) 2020 2019 % Change Asset impairment charges$ 0 $ 98 (100.0 %)
Three Months Ended
Asset impairment charges for the three months ended
Amortization of Intangible and Acquisition-related Assets
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Amortization of intangible and
acquisition-related
Assets $ 6,718 $ 6,797 (1.2 %)
Three Months Ended
The decrease in amortization expense for the three months endedMarch 31, 2020 , compared with the prior year comparable period, was due to normal amortization expense and certain intangible assets being fully amortized in 2019. Interest Expense Three Months Ended March 31, (In thousands) 2020 2019 % Change Interest expense$ 12,223 $ 10,184 20.0 %
Three Months Ended
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Interest expense increased during the three months ended March 31, 2020 compared
to the prior year comparable period due to higher borrowings and a full quarter
accrual of interest on the 0.875% convertible senior notes.
Other Income, Net
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Other income, net $ 522 $ 513 1.8 %
Three Months Ended
Other income, net for the three months ended
Recovery of Long-term investments
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Recovery of long-term investments
Three Months Ended
During the three months ended
Equity in Net Income (Loss) of Unconsolidated Investments
Three Months Ended March 31,
(In thousands) 2020 2019 % Change
Equity in net income (loss) of
unconsolidated investments $ 200 $ (64 ) NM
Three Months 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 Taxes
Three Months Ended March 31,
(In thousands, except percentages) 2020 2019 % Change
Income tax benefit (provision)
1.7 % (32.0 %)
Three Months Ended
Our provision for income taxes differs from the tax computed at theU.S. federal statutory income tax rate due primarily 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 months endedMarch 31, 2020 , compared with the prior year comparable period, 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$20.7 million for the three months endedMarch 31, 2020 , compared to the impacts of these items on a pre-tax loss of$6.0 million for the three months endedMarch 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). During the three months endedMarch 31, 2020 , we recorded valuation allowances of$1.6 million related toU.S. and foreign net operating loss carryforwards. Non-Controlling Interests Three Months Ended March 31, (In thousands) 2020 2019 % Change Net loss attributable to non-controlling interest $ 0$ 424 (100.0 %) 32
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Three 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 months endedMarch 31, 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 March 31,
(In thousands) 2020 2019 % Change
Revenue:Core Clinical and Financial Solutions$ 321,539 $ 341,896 (6.0 %) Data, Analytics and Care Coordination 82,062 74,259 10.5 % Unallocated Amounts 13,112 15,894 17.5 % Total revenue$ 416,713 $ 432,049 (3.5 %)
Gross Profit:
Care Coordination and Financial Solutions$ 102,414 $ 119,337 (14.2 %) Data, Analytics and Care Coordination 51,889 50,120 3.5 % Unallocated Amounts 2,658 4,638 42.7 % Total gross profit$ 156,961 $ 174,095 (9.8 %)
Income (loss) from operations:
Care Coordination and Financial Solutions$ 27,534 $ 42,498 (35.2 %) Data, Analytics and Care Coordination 19,361 17,696 9.4 % Unallocated Amounts (56,095 ) (57,549 ) 2.5 % Total (loss) income from operations$ (9,200 ) $ 2,645
NM
Core Clinical and Financial Solutions
Our Core Clinical and Financial Solutions segment derives its revenue from the
sale of 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 March 31,
(In thousands, except percentages) 2020 2019 % Change
Revenue $ 321,539 $ 341,896 (6.0 %)
Gross profit $ 102,414 $ 119,337 (14.2 %)
Gross margin % 31.9 % 34.9 %
Income from operations $ 27,534 $ 42,498 (35.2 %)
Operating margin % 8.6 % 12.4 %
Three Months Ended
Core Clinical and Financial Solutions revenue decreased during the three months endedMarch 31, 2020 , compared with the prior year comparable period 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 months endedMarch 31, 2020 compared with the prior year comparable period, primarily due the previously mentioned attrition, revenue profile and unproductive labor costs due to project delays. The decrease was partially offset by a reduction in headcount costs. Operating margin decreased for the three months endedMarch 31, 2020 , compared with the prior year comparable period due to a decline in gross profit. The decrease was partially offset by lower research and development expenses driven by headcount reduction actions taken during 2019. 33
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Data, Analytics and Care Coordination
Our Data, Analytics and Care Coordination segment derives its revenue from the
sale of patient engagement, care coordination, 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 March 31,
(In thousands, except percentages) 2020 2019 % Change
Revenue $ 82,062 $ 74,259 10.5 %
Gross profit $ 51,889 $ 50,120 3.5 %
Gross margin % 63.2 % 67.5 %
Income from operations $ 19,361 $ 17,696 9.4 %
Operating margin % 23.6 % 23.8 %
Three Months Ended
Data, Analytics and Care Coordination revenue increased for the three months
ended
Gross margin decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period, primarily due to headcount growth and higher costs incurred to support the growth of this segment. Operating margin slightly decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period due to a decline in gross margin. The decrease was partially offset by lower selling, general and administrative expenses driven by the DOJ-related legal expenses incurred during the three months endedMarch 31, 2019 .
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. The "Unallocated Amounts"
category also includes (i) corporate general and administrative expenses
(including marketing expenses) and (ii) revenue and the associated cost from the
resale of certain ancillary products, primarily hardware.
Three Months Ended March 31,
(In thousands, except percentages) 2020 2019 % Change
Revenue $ 13,112 $ 15,894 (17.5 %)
Gross profit $ 2,658 $ 4,638 (42.7 %)
Gross margin % 20.3 % 29.2 %
Loss from operations $ (56,095 ) $ (57,549 ) 2.5 %
Operating margin % NM NM
Three Months 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 decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period, primarily due to a decrease in hardware revenue.
Gross profit and margin decreased during the three months ended
Loss from operations decreased during the three months endedMarch 31, 2020 compared with the prior year comparable period, primarily due to a decrease in marketing expenses related to our annualHealthcare Information and Management Systems Society ("HIMSS") conference.
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. March 31, 2020
As of As of As of
March 31, December March 31, December 31, March 31,(In millions) 2020 31, 2019 2019 2019 2019 Software delivery, support and maintenance$ 2,561 $ 2,519 $ 2,717 1.7 % (5.7 %) Client services 1,946 1,848 1,324 5.3 % 47.0 % Total contract backlog$ 4,507 $ 4,367 $ 4,041 3.2 % 11.5 % 34
-------------------------------------------------------------------------------- Total contract backlog as ofMarch 31, 2020 increased compared withDecember 31, 2019 andMarch 31, 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 three months endedMarch 31, 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$212 million and available borrowing capacity of$684 million under our revolving credit facility as ofMarch 31, 2020 . The change in our cash and cash equivalents balance is reflective of the following:
Operating Cash Flow Activities
Three Months Ended March 31,
(In thousands) 2020 2019 $ Change
Net loss $ (20,354 ) $ (7,977 ) $ (12,377 )
Non-cash adjustments to net loss 65,804 66,399 (595 )
Cash impact of changes in operating assets
and liabilities (49,158 ) (22,606 ) (26,552 )
Net cash (used in) provided by operating
activities -
continuing operations (3,708 ) 35,816 (39,524 )
Net cash (used in) provided by operating
activities -
discontinued operations 0 (30,000 )30,000
Net cash (used in) provided by operating activities$ (3,708 ) $ 5,816
Three Months Ended
During the three months endedMarch 31, 2020 we had net use of cash from operating activities - continuing operations compared to net cash provided by operating activities - continuing operations during the three months endedMarch 31, 2019 . Non-cash adjustments to net loss increased during the three months endedMarch 31, 2020 compared to the prior year comparable period, primarily due to an increase in depreciation and amortization expenses and no recovery of a previously impaired investment in the current period. The increase was partially offset by a decrease in stock-based compensation expenses during the three months endedMarch 31, 2020 . The impact of changes in operating assets and liabilities is primarily due to working capital changes, the timing of incentive compensation payments and the$57.3 million payment related to the DOJ Settlement Agreements. Net cash used in operating activities - discontinued operations during the three months endedMarch 31, 2019 reflects an advance income tax payment related to the gain realized upon the sale of our investment in Netsmart onDecember 31, 2018 .
Investing Cash Flow Activities
Three Months Ended March 31,
(In thousands) 2020 2019 $ Change
Capital expenditures $ (2,845 ) $ (4,847 ) $ 2,002
Capitalized software (28,556 ) (28,600 ) 44
(Purchases) sales of equity securities, other
investments and
related intangible assets, net (3,028 ) 32 (3,060 )
Other proceeds from investing activities 0 5 (5 )
Net cash used in investing activities
Three Months Ended
Net cash used in investing activities slightly increased during the three months endedMarch 31, 2020 , compared with the prior year comparable period. The increase in the use of cash during 2020 was primarily due to our purchase of additional investments, partially offset by lower capital spending. 35
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Financing Cash Flow Activities
Three Months Ended March 31,
(In thousands) 2020 2019 $ Change
Taxes paid related to net share settlement of
equity awards $ (3,174 ) $ (5,327 ) $ 2,153
Payments for issuance costs on 0.875%
Convertible Senior Notes (758 ) 0 (758 )
Credit facility payments (80,000 ) (5,000 ) (75,000 )
Credit facility borrowings, net of issuance
costs 210,000 120,000 90,000
Repurchase of common stock (9,714 ) (65,070 )
55,356
Payment of acquisition and other financing obligations (2,911 ) (55 ) (2,856 ) Purchases of subsidiary shares owned by non-controlling interest 0 (54,064 )
54,064
Net cash provided (used in) by financing activities$ 113,443 $ (9,516 )
Three Months Ended
During the three months endedMarch 31, 2020 we had net cash provided by financing activities compared with net use of cash in financing activities during the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , we had higher net credit facility borrowings in order to increase cash on hand and provide financial flexibility to enhance our ability to address potential future uncertainties regarding the impact of the COVID-19 pandemic. During the three months endedMarch 31, 2020 , we also repurchased a lower amount of our common stock, increased payments on debt instruments, and had an absence of minority interest purchases compared with the three months endedMarch 31, 2019 . Future Capital Requirements The following table summarizes our required minimum future payments under the 0.875% Convertible Senior Notes, the 1.25% Notes and the Senior Secured Credit Facility as ofMarch 31, 2020 . Remainder (In thousands) Total of 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) 540,000 22,500 30,000 37,500 450,000 0 0 Total principal payments 1,103,000 367,500 30,000 37,500 450,000 0 218,000 Interest payments: 0.875% Convertible Senior Notes 13,471 1,070 1,908 1,908 1,908 1,908 4,769 1.25% Cash Convertible Senior Notes (2) 2,156 2,156 0 0 0 0 0 Senior Secured Credit Facility (3) (4) 46,015 12,223 15,578 14,705 3,509 0 0 Total interest payments 61,642 15,449 17,486 16,613 5,417 1,908 4,769 Total future debt payments$ 1,164,642 $ 382,949 $ 47,486 $
54,113
(1) Amount represents the face value of the 0.875% Convertible Senior Notes,
which includes both the liability and equity portions.
(2) Assumes no cash conversions of the 1.25% Notes prior to their maturity on
(3) Assumes no additional borrowings after
required periodic installments of principal and that all drawn amounts are
repaid upon maturity.
(4) Assumes LIBOR plus the applicable margin remain constant at the rate in
effect on
Other Matters Affecting Future Capital Requirements
Research and development investment is expected to decline for the remainder of 2020 as the company is implementing cost reduction initiatives. Total spending consists of research and development costs directly recorded to expense, which are offset by the capitalization of eligible development costs. We believe that our cash and cash equivalents of$212 million as ofMarch 31, 2020 , our future cash flows, our borrowing capacity under our Revolving Facility and access to capital markets, taken together, provide adequate resources to meet future operating needs as well as scheduled payments of short and long-term debt. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of this Form 10-Q. 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 2018 stock repurchase program, each of which might impact our liquidity requirements or cause us to borrow under our Revolving Facility or issue additional equity or debt securities. 36
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Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
We have various contractual obligations, which are recorded as liabilities in our consolidated financial statements. During the three months endedMarch 31, 2020 , there were no material changes, outside of the ordinary course of business, to our contractual obligations and purchase commitments previously disclosed in our Form 10-K.
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