Q3 2020 Allscripts Healthcare Solutions Inc Earnings Call
[music].
Greetings welcome to Allscripts third quarter 2020 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Then in which require operator since it started the conference. Please press star zero on your telephone keypad. Please.
Please note. This conference is being recorded I will now turn the conference over to your host Stephen Sheldon Senior Vice President Investor Relations. Thank you you may begin.
Thank you very much and welcome to the Allscripts third quarter 2020 earnings Conference call. Our speakers today are Paul Paul Black Allscripts, Chief Executive Officer, Paul <unk>, President and Chief Financial Officer.
Making a number of forward looking statements during the presentation in Q1, a part of the call. These statements are based on current expectations and involve a number of risks and uncertainties that can cause actual results to vary materially.
We undertake no obligation to revise these forward looking statements in light of new information.
Please refer to our earnings release, and I think the calling for more detail.
Descriptions of the risk factors that may affect our results. Please reference the GAAP and non-GAAP financial statement as well as non-GAAP tables in our earnings release, and the supplemental workbook or.
They are both available on our Investor relations website, and with that I'm going to hand, the call over to call block to begin.
Stefan and thanks to everyone joining the call. We appreciate your interest in Allscripts.
I'd like to begin by thanking our associates for their dedication to serving our clients continue to be on the front lines and that's pandemic.
Our solutions have enabled our clients can be more effectively fighting clinical patient care.
Also helping our clients manage secure these unprecedented clinical and financial impacts to their business.
The fundamental mission critical nature of the HR and the long standing commitment to an open <unk> architecture have never been more important. These solutions are pivotal to the delivery of care and the daily need for information about the populations our client service.
Our clients rely on US 24 hours a day, we're proud to support them through this global pandemic.
My comments today on the following topics first a review of our recent innovations in what our clients are looking for and how allscripts is positioned to serve them with leading edge solutions.
Second I'll discuss the environment given global impact of the pandemic.
Software development at Allscripts is built on a foundation of innovation. This has been demonstrated recently by the success of our patent program. We recently issued Richard five patents over the course of just eight days.
Just for context, Allscripts patent programmable last past seven years.
Has had 150 patents issued one another 150 patents currently are pending at the beginning of 2013, we had one patent some.
Some examples of these patents include higher patient engagement and adherence to patient gold tracking by connecting to our E HRC and various walnut application a precision medicine innovation enable THR is to incorporate a patient's genetic testing result at the point of care such innovation enables providers to better to other cancer treatments.
To an individual's genetic results another innovation enables us to secure data in a HIPPA compliant manner without causing performance issues often associated with encryption.
Our innovation and agility have allowed us to rise to the challenge of COVID-19 to ensure our clients care for their patients and example is all Barton I don't know call group, a leading family owned conglomerate, Qatar and Chicago based Northwestern Medicine, It's gone live with Allscripts ambulatory care services for granted.
Turning of its burst pardon medical field facility in Qatar.
This is our first sunrise client in the Middle East a great reference site, it's allscripts looks to expand our footprint around the world.
Sand Colby going you know Memorial Hospital in California, with the first Allscripts client to go live on our Sunrise community offering.
Even with the challenges brought on by the pandemic. The implementation has been extraordinarily smooth and successful [laughter] Sunrise as a service provides a cloud based health record refined to meet the needs of the community and rural Hospital market.
Oh did in Microsoft Azure, it delivers a single patient record, including clinical and financial workflows for both inpatient ambulatory settings of care.
Because he HR hosted we can offer improved cost of ownership and shorter implementation times compared to the implementation of TRID traditional on premise solutions. This.
This is a big step forward for all scripts and an example of the benefits from our Microsoft partnership and we love to see significant opportunity in the U.S. community Hospital market.
Moving to the client environment My view on the current landscape bulk a few key thing total.
Total cost of ownership physician satisfaction innovation and connect to consumers.
Regarding digital transformation plan.
Clients are looking to create or enhance the consumer experience, creating a digital front door.
This is to connect the consumer to the provider into the consumers on health record.
Many clients were on three year journey to accomplish this.
In some cases due to cope with this was accomplished in three weeks functionality that was the lever tele health scheduling and self pay.
This creates a self service environment, a lot better access by our client and users the consumer.
We also saw many clients accelerate deployment of applications during the crisis and.
EMS level six was attained in the United Kingdom through a virtual deployment.
From our UK associates and the client we've seen a number of revenue sorry revenue cycle deployments weve seen a remote upgrades performed virtually as well.
We've had consolidation of platforms with clients are concerned about the total cost of ownership.
We're also seeing a great interest in the cloud and our Microsoft partnership.
Clients understand that this investment in innovation gets into a scalable innovative contemporary platform that will also overtime to reduce total cost of ownership.
The innovations we are delivering here technique.
Technology innovation from on premise to cloud.
Take advantage of the Azure product features great, Hey, Hi, cyber security and scale. These innovations will make the human experience for physicians easier chart.
Charting a great example of it to satisfy our today that will be substantially advanced by voice recognition.
<unk> auto coding and a streamlined look and feel.
We shared our vision of innovation with our clients that are highly successful allscripts client experience for ASE event earlier this month.
Bringing together thousands of the company's valued clients strategic partners associates in health care Iraqi leaders there.
The virtual conference with the largest tenant base in the company's history 11 times, the average number of clients, who historically participate in this event.
14 countries, including the United States, Canada, United Kingdom, India, Singapore, and Malaysia, and Middle East and Australia participated quite.
I've had the opportunity to speak with and hear from an impressive collection of industry thought leaders, including the Advisory Board. The Federal Bureau, Robyn investigation Halliburton married Lascar Foundation, The association of State and territory will help officers John Hopkins Bloomberg School of public health, Pfizer and the United States Congo.
Yes.
Allscripts core product teams in partnership with Microsoft shared key benefits to transitioning to the cloud hosted platforms. The plot. The product team also provide a clock clients with our latest road map in development updates that will further improve clinician satisfaction with focus on human centered design.
There were many benefits to moving to virtual platform for Haiti is significant example, this is a vast amount of data we received in real time from attendees.
Platform provides tracking capabilities for metrics, such as fashion attendance and time spent <unk> session.
We also have the ability to boost the 10 be a gain engagement by various pulling options.
More sophisticated tracking and able to compare sessions attended to current customer white space delivering real time sales leads.
During a 2020, we provided more than 97 hours of content to our clients. We found that the most highly attended session focused on product roadmaps revenue cycle optimization benefits to transition into cloud hosted platforms and of course Tele health.
Since the start of the pandemic, we've seen an increase telehealth visits by by more than 9000% our.
Our clients are very eager to learn more about best practices future enhancement and guidance on reimbursement.
I'll stress products provide functionality that helps our clients respond to cope in 19 recover from losses and protect their organizations moving forward.
Through our technology, we help coordinate outpatient care across the continuum enable COVID-19 dashboards to be shared across systems support patient screening and assessment as well daily results reporting operations management.
We managed COVID-19 transition.
We execute rapid tele health implementation, so providers can do deliver their patients the care they need.
We look forward to building upon this year's event with an even more successfully in 2021.
Finally regarding the regulatory environment for us and our clients Allscripts continues to devote resources.
Give me to ensure the company is ready to comply with the only thing its final rule on interoperability and information blocking.
This is a substandard regulation the one that we have taken seriously and started preparing for even prior to the release of the rule.
Because our business practices in approach their interoperability has always been about open connectivity, we suspect the rule will be lesser disruptive for us than it is for some of our major competitors.
We also anticipate that the regulation could be another that separates us from those to comply with the rules complexities.
From similar companies in the market to find it to be very difficult.
The deadline associate with the kids regulations were adjusted by the on C. earlier today to reflect the pandemic challenges facing the health care industry, but this is a project allscripts is preparing for from the top down and we will be ready when they require us to be so.
With that let me turn the call over to Rick to review, our financial performance and discuss our recent TPS eye care for transactions.
Okay. Thanks, Paul and thanks, everyone for joining us today.
I'd like to start by I, just want to Echo Paul's comments and once again, thank our team members for their hard work and commitment to our clients during what has been uniquely challenging times.
I'm Gonna structure my comments today around two areas first a more detailed review of our third quarter financial and operating performance along with some outlook for the fourth quarter.
Second some thoughts around capital allocation and how we're positioned for the future. Following the announcement of our definitive agreement to sell Careport and the closing of bps I. So.
Hi, Stephan indicated additional financial details on our segments are available in the supplemental financial data workbook, that's posted on our Investor Relations Web site I will be referring to some of this information during my commentary.
So starting with the third quarter.
We are pleased that our base of recurring revenue and discipline focused on costs allowed us to deliver an 18% year over year increase in our non-GAAP earnings per share, while also generating significant free cash flow.
Consistent with the second quarter, we were able to generate $187 million of new bookings, even as we remained in primarily a virtual sales environment.
Our sales momentum remained strong in the independent ambulatory practice market, where we want to win two new loan excuse me 10, new logos and that brings us to nearly 30 for the year.
We believe the breadth of our offerings in this area position us much better in the marketplace than competitors, who have a narrower solution set.
For example, our wins during the quarter included a value based care deal that included Dbmotion at a large multi physician orthopedic practice.
Also at our varied on unit, we saw strong results for solutions targeted at both life science companies and payers.
Our data assets and point of care connectivity scale and the independent physician market segment provide us with a growing competitive advantage and we see that bearing fruit with larger contracts, including our largest lifetime contract to date during the quarter.
The sales activity bodes well for the future revenue growth that we expect from the board on business unit.
So with the buying environment similar to Q2 revenue for the quarter was also similar at $402 million.
Some improvement we saw in patient volume linked revenue was more than offset by lower revenue at ESI as that business unit was essentially in purgatory for the quarter as at a weighted government approval on sale.
On a year over year basis, the decline in recurring revenue was very similar to what we saw in Q2 and that reflects the bolus of acute care client attrition that would signal to you at the beginning of the year.
The year over year decline in non <unk> recurring revenue is largely a sign of the environment both.
Talked about both the buying environment, which is overall softer, but also highly skews towards subscription rather than an upfront license revenue.
As well as the operating environment, where in addition to the ESI impact I. Just described we also see less project based consulting and upgrades right now.
Looking ahead to the fourth quarter with the sale of the P. aside we face a headwind of approximately $7 million in terms of sequential revenue performance.
But nevertheless, we do expect Q4 revenue to be up modestly from Q3.
Turning to margin performance in the quarter, our adjusted EBITDA margin improved another 110 basis points sequentially from Q2.
And that brings us to a total of 640 basis point improvement since we began our margin improvement program in late March.
[noise] improvement in Q3 consolidated results was largely driven by the 100 basis point improvement in our core clinical and financial solutions segment.
Which which came in at an adjusted EBITDA margin of 15.9%.
Looking ahead, we are working to reduce the amount of R&D investment that we capitalize to our balance sheet each quarter and Q4, we expect our cap rate to be down approximately 600 basis points relative to what we have averaged over the last three quarters.
This is noteworthy as it represents another step toward resetting our cost and creating opportunities to improve gross margins going forward.
What I mean by that is that as you can see from table, one and our supplemental materials. The third quarter was in the first quarter in years, where we amortized more capitalized software to the piano then we capitalize current spend out of the piano during the period.
This means we no longer are creating an overhang that will dilute future margins.
Instead, we can expect amortization in the future to eventually decline in come in line with the amounts that are now being currently capitalized.
The reduction in cap rate that we anticipate in Q4 will create a headwind of approximately 100 basis points in adjusted EBITDA margin when we compare it to Q3.
But we expect to largely offset that with continued progress on our cost reduction efforts and we project consolidated adjusted EBITDA margins between 19.5 and 20%.
And adjusted EBITDA margins in our core segment between 15, and a half and 16% during Q4.
The above guidance on both revenue and adjusted EBITDA margins for Q4 as soon as we close the Careport transaction at the end of December as we currently plan.
In our GAAP operating expenses for the quarter, we recorded a restructuring charge of approximately $13 million.
Which primarily relates to severance costs and other expenses, resulting from our margin improvement plan.
This was slightly higher than we had anticipated when we spoke to you last quarter.
And that was because we were able to implement some cost reductions sooner than expected.
Looking ahead, I would expect to record a similar level of restructuring costs in the fourth quarter.
Overall, we recorded a non-GAAP earnings per share of 20 cents per share and that was up 18% year over year, even with the lower year over year revenue.
The margin improvement that we saw in the quarter helped drive a significant increase in operating and free cash flow.
These cash flow numbers include the headwind from both a $60 million a payment that we made to the D. J during the quarter as well as our cash restructuring charges.
On a year over there on a year to date basis, our free cash flow, excluding the payments we've made the deal Jay.
Total 75 million and that is up $110 million from the prior year period.
I'd like to take a moment to recognize on applaud our client facing and collections teams are collaborating and taking on the challenge to get more efficiency out of our balance sheet.
Their hard work helped drive some of our free cash flow performance and has us reporting our lowest days sales outstanding in our accounts receivable balances in years.
So now I want to shift gears and talk about our divestitures.
As previously disclosed the purchase price of $365 million for ESI represented a multiple of approximately seven and a half times trailing 12 month revenue and approximately 18 and a half times trailing 12 month adjusted EBITDA.
And the purchase price of 1.35 billion for Careport represents a multiple of greater than 13 times care ports trailing 12 month revenue and approximately 21 times care ports trailing 12 month adjusted EBITDA.
These platforms generated above company average growth rates and margins, but it was clear to us that this was not being reflected in allscripts overall valuation and as a result, we made the decision to unlock shareholder value and we believe the multiples we received on bulk transactions demonstrate the tremendous value. We have created that we've created.
These each are adjacent areas.
Collectively these two businesses. These two business units represent less than 10% of consolidated revenue.
So there are individual growth rates had very little overall impact on Allscripts historic growth.
And their divestiture will not materially change our growth prospects for the future.
We expect to generate approximately $1.25 billion, an after tax proceeds from the two transactions.
Which for perspective represents approximately $7.50 per fully diluted share.
An approximate approximately 50% of our current enterprise value of Allscripts.
As we indicated in the press release associated with both transaction announcements, we expect to use these proceeds to reduce debt.
Invest in growth for our solutions and support significant share repurchases.
With respect to debt levels, we expect to stay below one and a half turns of leverage for the foreseeable future.
This level of debt will significantly de risk and simplify our balance sheet and greatly enhance our financial flexibility going forward.
With respect to share repurchases, we expect to conduct these initially through opportunistic open market purchases.
And we are continuing to evaluate potential using more structured approaches such as an MSR.
In either case, we believe the current valuation of Allscripts stock makes our stock a compelling value.
And lastly, we will continue to invest in our existing core solutions and varied on to drive growth returns and improve client satisfaction and retention.
In our core segment, while the domestic DHR market remains more of a replacement market than a growth market. We believe our scale and our level of R&D investment gives us a significant advantage person number of smaller competitors in the marketplace and will allow us to win market share over time.
We also believe the changing macro environment will continue to drive new use cases beyond the HR and will continue to allow us to grow with our still very large client base.
And in addition, we remain bullish about our opportunities outside the U.S. and expect and expect to expand internationally.
In our data and analytics segment are there to add business remains unique differentiator from our HR peers as we have built the industry's largest clinical dataset and analytics capabilities, which provides immense value to life science companies and payer clients.
So to wrap up overall, we are very pleased with the progress we made this year.
We have successfully helped our clients manage through a challenging time with innovative solutions and seamless remote implementations, we have demonstrated our commitment to margin expansion and free cash flow even in this challenging revenue environment.
And finally, we've been able to create a significant value with our strategic divestitures at very high multiples.
This will allow us to focus on simplifying and improving performance of the core business, reducing leverage and returning significant cash to shareholders.
So with that I'd like to open up the call for questions.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tele indicate your line is in the question give you May press star two if he would like to remove your question from the Q and for participants using speaker equipment and may be necessary to pick up the handset before pressing the star. He is our first question.
It is from Michael Cherny with Bank of America. Please proceed.
Oh, great. Thanks, so much and congratulations on the divestitures.
As as we go forward as we think about where the portfolio sits you you can you just level. So I know Paul if you gave some general thoughts but over the next three years, what do you see as the best growth opportunities based on the assets that you currently have and now that you've moved some of these other pieces out or on the way out are there.
Other assets based on what you have now that you think you want to both back onto essentially reboot, what the go to market strategy is for Allscripts.
Well Mike.
I had a question I mean look you know you know I'm the general environment, we participate in I know you cover not only us, but some of our competitors that are public companies.
The growth the growth opportunities are not the similar I think across the board I think what will what will will caused differentiation and what people realize or with different competitors realizes bolt is one their scale.
And to their level of innovation, and where they kind of see the opportunities and how quickly they strike.
From our view.
The divestitures that we've made and some of the assets that we continue have in our portfolio are very tangible indicators of our be out in front of some of these opportunities and some of where the proverbial puck is going and our ability to address those and you know we feel good about that and we think thats going to.
Fuel.
Opportunities for us in and as we readily acknowledge in what is otherwise, perhaps a slow market here in the U.S.
But I'll repeat what I said earlier I mean, there are new use cases in the U.S. that will continue to fuel growth. There is market share shift in market consolidation that we think inevitably happens, particularly as the regulatory requirements continue increase and.
Put a lot of burden on much smaller capitalize on much smaller competitors.
And.
We again weve been leaders in finding adjacent fees to grow and we think we're very well positioned with.
Our veered I'm asset base to continue that.
Okay.
Yeah. Thanks, Rick I guess, one follow up Youve done a really nice job, especially last couple of quarters and showing the the leverage improvements on the business model and driving to those margin targets are much expansion that you've talked about how.
How do you think about in a post divestiture world, where the next leg of opportunities for margin expansion above and beyond.
Yeah, well I mean, the reason we set up our margin goals are the way we did is.
I think it's important to us follow what the core and follow the data analytics and care coordination segment.
The core is really not impacted by any of the divestitures and we should be able to continue the steady progress that we've made.
Where the opportunities come from well with revenue growth will certainly get some opportunity for operating leverage.
But you know we're going to continue this you know drumbeat that we've been driving for several quarters now of turning over rocks and forcing efficiency into our organization and as much as we made a lot of good progress there's plenty of places that are still.
We think have intrinsic opportunity around them, so we'll keep pushing that.
I think the data analyst in care coordination segment side, I mean, clearly we will get a new look as careport exits.
And as that as we get closer to the end of that transaction coming to fruition and you know we look towards 2021.
Well certainly try to spell that out clear what your expectation should be for that segment.
Great. Thanks, very clear it should remain just as to be well, maybe last point to declare it should still remain.
Hey segment that produces adjusted EBITDA margins in excess of what the core producers.
Understood. Thank you.
Thanks, Mike.
Our next question is from Eric Percher with Nephron Research. Please proceed.
Sure and maybe just to start I'll extend on that last question. So above the core does this.
Divestiture require you to rethink the margin target that you had just put in front of US right. It sounds like you're standing by that is that correct.
Now that the core segment, Eric is not impacted by these divestitures I'm sorry, I meant for the noncore you said above the core but.
Toward your prior peak.
The second segment. We're divesting you know we're divesting a very high margin business I mean, we've already you know we've already.
Giving you details on the trailing 12 months. So you can see what those businesses that business has an EBITDA margin in excess of what that segment produces today. So just stands to reason that the segment margin will come down a little bit, but but I guess, what I'm, saying to you.
While the segment that itself will come down it will still remain as tall as a segment will remain a higher margin profile then of course segment those.
Yes, so what kind of wait to hear your aspiration, there and then sticking with that segment you mentioned the largest contract that you've seen to date can you give us some detail on what it is that is driving larger contracts and relative to the data and analytics, what what drives that.
Well, what what would directly attributing to the size contracts is the uniqueness of what Weve accumulated I don't know how to Satan Clara than that we have.
Across our multiple each our platforms and independent ambulatory space we have.
The largest market share and the industry by yourself and then you combine that with the data assets. We've done now with two competitors we've done deals with.
And so we add that to the base, we have a very rich set that's unique and that combined with the fact that life science companies are looking.
To to Reimagine and reengineer, what it what it means to go through the trial process. There's a lot of friction they always experience and you know. This is this is the beginning of real world evidence. So maybe not the beginning but this is a tangible example of it so we are increasingly attractive.
To those clients and I think the fact that we had our biggest contract ever is just indicative that we continue to differentiate ourselves.
That's good to hear congrats to you. Thank you.
Thanks, Sir.
Our next question is from Jeff Garro with William Blair. Please proceed.
Yeah, good afternoon, and thanks for taking the questions.
I'll, maybe provide a little bit more on the post divestiture profile of the data and analytics segment. If you can maybe just give us some historical context about the the revenue mix and relative growth rate for that the key remaining components like paradigm to be precise and payer Pat.
HM.
I hate to be a a downer on your question, but I mean, we're not going to talk about growth rates at a solution level like that you had a lot of transparency with what care ports contribution is.
And you know to the extent you don't want to wait for us to give more guidance at the end the year I think you have a lot of data there that you can.
Make some assumptions on but we're.
We're not talking about individual solution sets and the growth rates.
Okay fair enough well, we'll wait and see there I'll turn to I guess to the core segment then.
I guess it does apply broadly to the strategy we've seen at the company recently it seems like Theres, an underappreciated playbook that you deployed for for cloud based you chart agnostic businesses to deliver growth and higher margin. So with more focus now maybe on the core business is there a similar playbook that can generate.
Rick better results for that segment going forward.
Well, Yeah, I mean look I think we we.
Remained.
Mystified as to why we trade at such a discount to come.
Competitive peers around the core but.
But but that said, we clearly need to do some work on our cost structure that.
Thats, what 2020 is all about those efforts will not stop at the end of 2020, we have.
You know, we set our goals and clearly based on the guidance again today, we're not at those goals by the end of the year. So we're going to keep working.
But I think you know we will work on the cost structure and make sure it's rightsized for the.
Footprint, we have and then we're going to look to grow that footprint and the way. We grow. It is you know really the themes I've already talked about continue to win share in the in the in the domestic market continuing to be out front of new use cases, and bring new solution sets to the client base as the macro environment changes for them and expand.
Internationally.
Great that helps thanks for taking the question.
Sure.
Our next question is from Donald Hooker with Keybanc capital markets. Please proceed.
Oh, great. Good afternoon. So it it seems from your comments that you have worked through some of the attrition that you had called out earlier in the year you had some decision years back that I guess, Unfortunately went the way they did.
As we look forward I mean, what what can you are we sort of through the woods, there or can we kind of trust that there was maybe not any other step downs any other kind of sizable.
Step down in revenue from attrition.
Yeah, I mean, we're we're ruger was down in the sense that we what you saw.
You saw it in Q2, you saw in Q3, and you know while I've already said I expect revenue to be up sequentially.
In Q4, you know I think I also use the word modestly. So you can assume that you're going to see a similar trend in the year over year Q4.
So when we get past that as we get to next year, yeah, our expectations, we're through that pain and that we'd get back on the.
Upward slope trajectory going into next year.
Well.
And then in terms of the free cash flow, which was obviously impressive is.
Is there any kind of I don't know if you if you kind of gave us targets around margins.
Well there are any kind of metrics to kind of watch for around free cash flow does it look like that's been improving how can we think about that going forward.
Yeah, I mean, we bought we what we said in the past and what we continue to continue.
I continue to say is that you know when we look at our non-GAAP net income.
That we believe we ought to convert 85% to 90% of that into free cash flow.
Going forward and yes, we'll strive to potentially doing better than that but that's I think a good goal right now we think that's pretty efficient.
Inversion and that's going to be a you know what we're going to hold ourselves to.
Thank you.
Our next question is from Charles Rhyee Cowen.
<unk> company. Please proceed.
Yeah, Hey, thanks for taking question.
Maybe I think as we think about the fourth quarter and as we exit the year we.
We look at bookings.
Actually obviously down year over year because of of of Cove. It.
Can you give us a sense for how we should be modeling or thinking about bookings performance.
Got you and you talked about.
You know revenues improving sequentially you know as we go through the fourth quarter exit can you kind of give us a make a little censenda about what's in the backlog that gives you the confidence that we'll we'll start to see that is it is it that were already implementation phase of a number of.
Clients that will ramp up maybe some color around that would be helpful. Thanks.
Yeah, I mean, Charles the answer is.
It is really linked.
Would you say that the activity and the ability for hospitals and provider groups too also focus on the strategic priorities as that kind of come back to sort of normal levels would you say.
Yeah, I would say that that that they have come back to a not to a pre covid level. They have settled at something that's a bit less than that.
And that has to do with E. D visit that has to do with ambulatory visits that has to do with television that has to do with total revenues that they're that they're bringing in the door. So there's pieces, depending upon the market whether you're on the west coast, whether you're in the south leather in the East coast one in the Midwest, depending upon the state quite frankly, and how big right now.
The surges, becoming that's another if you will headwind to use that term that makes the queue for a little bit foggy or than what we would normally be able to predict but on broadly like what the doom and gloom that accompanied the shut down and the March April may timeframe.
Those volumes have come back most of our clients had a very good summer from a elective procedure standpoint. So on total why they may have been projecting in Q2 of them.
<unk> year K bad full year of 2020, most of them that I talk to the large ones are either breaking even or they're making a slight profit the combination of the.
Tears Act and as well as the stimulus that they received was extraordinarily helpful. And then the re the ability to restart the elective procedures was extract an extremely important to them.
Great. Thank you very much.
It's Charles.
Our next question is friend, Stephanie Davis fifth S. C V. Blaring. Please proceed.
Hey, guys. Thank you for taking my question.
So I I wanted to explore a debt of how intrinsically tied then buried <unk> business is your core E. H R platform just given some of the data from that business comes from your EHR assets.
Mhm.
Yeah.
Well I mean, you you captured it right with with your last piece, what you said the data flows from the H ours and and it is.
Package, then linked and we do lots of things with the information to tease out uhm learnings, but they.
They do kind of stick together that being said.
We are contracting with competitors today to add their information and their work flow opportunities to verify and platform.
And so there is real evidence already in the marketplace that those two do not have to kind of.
You know all beyond by the same same people alright, So we think of it as a nice growth buying for us, but it is not inextricably linked.
I understand I'm thinking about valuations that you guys have anything.
<unk>.
<unk>.
You see it changing because they a change in just in the market environment around <unk>.
I've got four or have you condition than a bit differently in order to make them more available.
<unk> you cut out a little bit so we didn't maybe not the greatest connection there. So I'm not sure I've got your full question, there, but I I I know at least part at the end we positioned some of these assets differently I think inside.
So I'll I'll try a shot at that answer and then you tell me what I missed from your question, but of course, yeah. We definitely we definitely are managing are different business lines and business units.
With you know with a portfolio type of approach you know maybe.
And certainly as it comes to their mirrored on think of it as you know almost like a P. E from would manage different portfolio companies managed separately different very different management team.
And you know a different framework for how we think about investing and things like that but but we mostly wanted to do that to you know we've done that with the other business units that we just announced divestiture off too and that was done to both create value by having more streamlined accountability and.
You know allow people to have different objectives across the enterprise, but you know it would also helped us by setting up that way it helped us create the transparency that we wanted for the investor base as well.
That's very helpful. Thank you.
Great. Thanks Ducky.
Our next question is from George Hell with I Shebang. Please proceed.
Hey, good evening, guys and thanks for taking the questions and I Gotta say my my first comment is the next time I have to sell something I'm, calling you guys put my questions are kind of twofold reckon. Paul first of all are there any meaningful synergies or just synergies with selling the care for any PSY business as it relates to the core EMR business and second of all I.
Understand the idea of buying back stock in paying down debt, but I guess talk to me about what you see as it relates to the growth opportunity and why not redeploy all this capital inter share repurchase of restarting it to shareholders. Because you guys haven't been able to recognize any value or get paid for the strategic I'm gonna need that you do.
Uh-huh.
Okay. So let's start with the first question George and then we may have to iterate on seconds to make sure cause I was falling you and then I want to make sure they misunderstand it.
So they're just synergies no I I. The short answer is no. Let me tell you why you know both care Port N E. P. S. I R E. H R agnostic solutions and in fact, much more of their customer base and revenues came from.
Clients, who do not run allscripts chr's than than those that did run a Oscar thr's and and in the case of care Port in particular, you know the the the vast majority of their revenue cut came from non Oscar THR clients. So you know these are businesses that.
<unk> learn to operate independent of the I'll Skip Chr for a long time and you know there is no meaningful disinterred, Jonathan if there's any this synergy from them going out the door certainly are all script th our clients many of them do run the solutions, but you know.
Again, there is value for the clients in this as well in both cases, we've sold them to enterprises that are very committed to the space that they're in and we'll continue to invest we we believe even more than we were investing in the solution stacks, so clients will benefit from it as well.
So so that's my view on the on the first part of your question George on the second part I think you are I thought you were going down a path to saying why don't we preserve all the cash but then I then I think at the end you twisted your why don't we put it all towards share repurchases. Yeah, just try it just give it all.
Because whether it was nuts martyr <unk> like like I agree that your stocks seems to be undervalued, but you guys just can't get paid for the value. Your great. So yeah, well. So you noticed spend my use of capital a cat, but I you know I didn't talk about M&A right, because I think you're right I think for the most part the market is not rewarded us for <unk>.
Mart M&A transactions and those included frankly emanated included work with it around that smart and included work we did around the airport I mean, those were both and some value tremendously by someone on the net but we haven't gotten the value. So that's why I was monetized it and you know the only if your question is well why even bother them.
To pay down debt at all.
The short answer is I mean, we have some EBITDA earnings going out the door. So we have to recalibrate to the new pro forma EBITDA anyway, but the reason I'm taken it down a few turns is cause I think it's I think that's the smart way to keep powder drive for the future in the event. We you know see a different situation asset price.
It is not being as frothy as they are today and we see opportunities to enhance our platform through you know not blockbuster M&A, but through some targeted things that might makes sense. You know we should retain the flexibility to do that and so that's we'll keep some dry powder with the balance sheet.
But you know I mean I use the word we expect to do substantial share repurchases and I've set. It now three times you know, we definitely see a what our viewers a mispriced stock and we tend to.
Give some of that cash back to shareholders.
Thanks, I appreciate the car wreck.
Like Serge.
Our next question is from Steve Harper with Cantor Fitzgerald. Please proceed.
Alright, so just going back to the R&D, you'll capitalize versus expense, so basically you're bringing a cap right down and you're more of the R&D Oh go onto the income statement.
Is that the way, we should think about it.
Yeah, that's right yeah, that's what creates the head headwind that I referred to.
Understood. So so what do you think about you after the divestitures of course.
What do you think is sort of a target right for your total cash outlay for you know orange R&D between the capitalize part because you'll still have some capitalized part.
And expenses I'll need from statement.
Yeah, I mean well between.
What's the ratio of capitalize the non capitalized does that I don't know if that was your advocate cash out the door yeah Oh.
That about forget about the accounting treatment of expense first capital and just what's your what's your R&D investment right. That's your question Yep.
Yeah, you know look I mean, I'm gonna <unk> preface it by saying those ratios you have to kind of scratch under the covers a little bit because we have built up in a bigger and bigger you know a decent chunk of our revenue services, which of course doesn't require any R&D. So you know if you're thinking about analysis she.
Be thinking about it across competitors or something like that you should be thinking about it.
Essentially at a gross level, but also as a percent of software related revenue as opposed to all revenue or an overall basis I would still expect to be in a similar range to where we've been in the past, which is somewhere between 15 and 20% of revenue will go into R&D.
And then one other question going back to George's.
<unk> about share repurchase so.
Why wouldn't you just go like forget about the size right you know of share repurchase versus acquisition that message was clear how fast can we expect.
You to go in terms of share repurchase like when.
Well, our blackout window opens Tuesday, so as far as I'm concerned an opportunistic buyer as of Tuesday, and as I said in my remarks were also studying other structures that allow you know more.
Rapid deployment faster, yeah, and just to remind me what what what authorization.
<unk> do you have right now from the board.
Wow, that's yeah. So that all goes hand in hand to today, we we we sitting here as we speak we have a little under 50 million Bucks left.
So this is the topic will be discussing with a board and a couple of weeks when we have before me.
Thank you.
You're welcome.
So you have reached the end of our question and answer session I would like to turn the conference over two Pavlak C. L for closing remarks.
Thank you picked everybody for being able to call during the pandemic of the team we've been very assertive, we've made decisions and executed on them. It's been all hands on deck false contact sport, where we've taken care of our clients tirelessly executed our theme of enhancing shareholder value accelerated our strategy of unlocking value a P. P O sign care.
Port and we simultaneously executed on significant cost pick out measures to align our cost base with the realities of the COVID-19 impact on revenues, we expect that these initiatives to create shareholder value cause you have entrusted us to deliver thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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