Veradigm Inc.

Greetings and welcome to Allscript's first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephan Schulstein, Vice President of Investor Relations. Thank you. You may begin.

Thank you very much. Good afternoon and welcome to the Allscripts first quarter 2021 earnings conference call. Our speakers today are Paul Black, Allscripts Chief Executive Officer, and Rick Fulton, our President and Chief Financial Officer. We'll be making a number of forward-looking statements during the presentation and the Q&A part of the call. These statements are based on current expectations and involve a number of risks and uncertainties that can cause our actual results to vary materially. We undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our earnings release and SEC filings for more information with these risk factors that may affect our results. Please reference the GAAP and non-GAAP financial statements as well as the non-GAAP tables in our earnings release and the supplemental workbook that are both available on our investor relations website. And with that, I'm going to hand the call over to Paul Black to begin.

Thanks, Stephan. And thanks, everyone, for joining the call. We appreciate your interest in Allscripts. Let me begin by saying that I'm very pleased with our solid first quarter results. These results reflect the hard work and tough decisions we made last year and continue to make to position the company for long-term success. Looking back a year ago, it's gratifying to see the dramatic transformation Allscripts has made, improving our financial performance. We adjusted our priorities to help clients respond to the COVID pandemic. and we optimized our balance sheet and solutions portfolio. I'd like to once again thank our associates for their unceasing devotion to our clients and for delivering these results. While the COVID pandemic has not ended, we are becoming more optimistic given the trend lines for decreases in COVID infections in North America, increases in the percentage of population who have been vaccinated, and the efficacy of vaccine impacts on preventing COVID severe outcomes. We also believe the pandemic highlighted the significant value that health IT solutions and data bring across the continuum of care. We are proud of the actions we took and are taking to lead our clients in positioning them and us to succeed post-pandemic. When the pandemic became known to the medical community, Allscripts immediately set up a team to respond to the crisis by ensuring our solutions were updated with the necessary alerts to quickly identify risk populations. We were recognized by reaction data as having outperformed our competitors in the delivery of new functionality and services to support provider organizations throughout the pandemic. Throughout the early months, we continued to assist our clients in their recovery from the crisis. During that time, many healthcare organizations saw a reduction in elective procedures and challenges to their financial position. Once again, Allscripts was there to help our clients recover by offering full telemedicine solutions, workforce management tools, and more access to data to help them make better decisions for the business. Now as we enter into the recovery phase of the pandemic, Allscript is uniquely prepared to help consumers and our clients protect themselves and their organizations from future crises with open access to data in analytics, telemedicine, and cloud-enabled services. From the beginning and throughout the pandemic, Allscripts has been a trusted partner to our clients. Let's go to some highlights for the quarter. In the hospital business, we experienced momentum with our platform of health as we benefit from strategic R&D investments. We built a patient record across multiple care settings and revenue cycles. Our Microsoft partnership leveraged with human-centered design, driven by our long-standing vision of open, connected communities of health, is resonating in the marketplace. During Q1, we welcomed a new all-in Sunrise Platform of Health client, Mercy Iowa City. After a highly competitive process, Mercy selected Allscript's Sunrise Platform of Health, operating on Microsoft Azure as a core EHR for its community hospital and clinics. Mercy was searching for an innovative partner ready for the future of healthcare by cloud-capable features built on Azure. Mercy Iowa City's commitment to all scripts is an important validation of the vision and R&D investments we've strategically deployed over the past few years. A single medical digital record with revenue cycle, inpatient, outpatient, delivered through the cloud, and connected to the community. The integrated EHR is a complete ecosystem that optimizes software as a service model Microsoft Azure will deliver high availability, cybersecurity, disaster recovery, and business continuity features. We look forward to our long-term partnership with Mercy as we drive continuous improvement in patient and financial outcomes with them. In another validation of our health system strategy, our long-term client, Blessing Health System, substantially expanded its Allscripts relationship with Sunrise. Blessing will be adding two new hospitals and one large multi-group specialty practice to their Sunrise platform. Included in this expansion, Allscripts will also utilize, Blessing will also use Allscripts managed services and they extended their agreement through 2028. In addition, our largest client, Northwell Health, is also expanding its Sunrise platform at an additional hospital in their system, Peconic Bay Medical Center in Long Island. These new limbs, Q1, have provided additional underwriting of our health system strategy and Microsoft partnership. We expect this to provide additional momentum as we compete for new business. We've also received third-party validation for our solutions in the health system segment. We've been recognized again by BlackBook as number one in its 2021 community health systems vendors report for the fifth consecutive year. Black Book's comprehensive survey shows our commitment to providing smaller healthcare organizations with the support, cloud technology tools that they need. In our ambulatory business, we continued with our momentum from last quarter as we were able to sign another six new clients in the independent ambulatory marketplace. Our second quarter pipeline remained robust, and as we benefit from the investments we've made across our ambulatory team, our ambulatory platforms, and breadth and depth of solutions, which is further supported by our number one market share positioning. Our portfolio of offerings is highly attractive as clients look to consolidate vendors and for a complete end-to-end solution covering consumer, clinical, financial, and revenue cycle outsourcing. Our RCMS business continues to gain traction as clients pivot COVID to the recovery in their patient volumes. An example is Springfield Clinic, one of our largest revenue cycle management services relationships. Springfield Clinic has grown in central Illinois, and as a result of the Springfield Clinic trust in our recycle management services, we were awarded a large expansion of our existing partnership. With Veridigm, our business is a key piece of our strategy to address the present and future needs of healthcare delivery. Our industry-leading data analytics platform and bidirectional connectivity with providers at the point of care provides a substantial value to life sciences companies, payers, and providers. We have made purposeful investments across Veridigm to position us for relevance across multiple addressable markets. By leveraging a vast and growing electronic health record of ambulatory footprint along with strong provider relationships, Veridigm is helping to transform biopharma product development and commercialization. We are extending point-of-care workflows to include clinical research, and our vision for the future is to provide a research-as-a-care option for our providers and patients. Let me highlight a number of areas where we're seeing progress at Veridigm. In the Veridigm payer business, we signed two new clients from the top 15 health plans in the first quarter. We're providing our e-chart courier clinical data exchange solution to one of these plans and our pulsate analytics for another plan's Medicare Advantage solution. and ACA lines of business, which includes almost 400,000 lives. Our Veridigm study source platform modernizes clinical research while extending our EHR systems to include research workflows. For instance, identifying eligible study patients, efficiently enrolling them in studies, and utilizing the healthcare data to assist with their research. Before I hand the call over to Rick, I'd like to discuss how we are leading corporate social responsibility and the impact our solutions can have on improving health outcomes. We published our first CSR report quarter. Here are some updates on how we are envisioning our role within the healthcare ecosystem. The pandemic has brought to the forefront the inequities in our healthcare system. We believe healthcare IT and Allscripts have the power to reduce these inequities and help address social determinants of health. The more detailed information an electronic health record can provide to a clinician at the point of care, the more likely a patient will have a better and positive health outcome. More data enables a physician to provide a more precise, effective treatment plan for that patient. But to be truly effective, that data can't be limited to only previously documented care and treatment information. This is where data integration plays an important role. Housing status, financial situation, education level, access to nutrition, neighborhood crime rates, these are all important factors contributing to overall health. To capture community data that includes insightful information based on, say, geographical areas, requires strong partnerships with multiple community organizations and local health centers. They all must come together in an API-centric, open, interoperable health IT system. This has been the philosophy of Allstrips for over a decade. We are focused on delivering solutions that help bridge these gaps we see often in healthcare. This includes data analytics and expert consultation that provides support for at-risk patient cohort identification, software enabling the ability to direct patients to care and see service that they can afford through price tools, a means of understanding out-of-pocket costs associated with routine needs such as prescriptions, taking into consideration patient's insurance coverage and out-of-pocket fees that can vary based on where it is filled. And importantly, patient engagement strategies that include proactive outreach to encourage telehealth visits. Today, that helps patients understand their eligibility for vaccine distribution. We believe our vision of open, connected communities of health position us to help address some of these issues, while at the same time provide substantial value for our clients. To summarize, I remain very optimistic about our performance in 2021 and our ability to deliver value to our shareholders, associates, our clients, and to communities. Our scale R&D investments in building integrated platform solutions with a differentiated payer and life sciences platform and our partnership with Microsoft have positioned us to deliver relevant and long-term value-added solutions for our clients across the payer, provider, and life sciences landscape. Our improved and sustainable cost structure allows us to drive more earnings, bottom line, and generate meaningful amounts of free cash flow. With that, I'll turn it over to Rick to provide more detail of our financial position. Thank you.

Okay. Thanks, Paul. And thanks, everybody, for joining us today. Just one more reminder. As Stephan indicated, additional financial details are available in the Supplemental Financial Data Workbook that's posted to our Investor Relations website. So we were very pleased with our start to 2021. Overall bookings and revenue performance were in line with our plan. And our continued discipline on our cost structure created significant operating leverage, resulting in adjusted EBITDA, EPS, and free cash flow, all coming in above our expectations for the first quarter. This is the cleanest quarter of financial reporting that we have had in years, and I think the numbers really speak for themselves as they reflect the performance trend that we've now seen for several quarters. So my prepared comments will be shorter than usual. So with that overview, let me highlight a few items starting with our bookings performance. Generated $194 million of new bookings in the quarter, which was up 6% year over year and 7% sequentially in what is typically a seasonably weak bookings quarter. The first quarter result was higher than we have reported in any quarter of 2020 on a like for like basis. This reflects a continued modest improvement in the overall sales environment as our clients continue to recover from the pandemic and turn their focus to improving their operations and optimizing their healthcare IT environment. As Paul mentioned, our particular strength in our Sunrise franchise with four new hospitals in the quarter, and our ambulatory business continued its momentum with six new competitive business wins in the quarter as well. As Paul discussed around Veridigm, our business there saw some very good deal flow across its solution set, including provider, life science, and payer clients. These partners continue to recognize the unique value proposition we bring with our differentiated data and analytics platform, along with the bidirectional connection to the provider and patient point of care. Turning to our margin performance in the quarter, consolidated non-GAAP gross margin was 43.1%, which was up 480 basis points year over year. This improvement reflects the dramatic turnaround in our client services organization over the past year, as we right-sized the cost structure in that business to reflect the current revenue environment, as well as enhance the productivity of this labor base. As a result, client services margin was 19.8% in the first quarter, which was up more than 1,600 basis points on a year-over-year basis. That strong gross margin performance, along with our cost discipline around R&D and SG&A costs, resulted in a consolidated adjusted EBITDA margin of 18.3%, which was up 860 basis points on a year-over-year basis. This reflects $31 million or 83% growth in year-over-year adjusted EBITDA compared with the first quarter of 2020. As a result of our strong margin performance, along with the benefit from a lower share count, we reported first quarter gap diluted EPS of 19 cents a share, which is up from 2 cents a share that was in the first quarter of 2020. It is worth noting that we did not record any restructuring charges in the first quarter of 2021, and so this, along with our lower R&D capitalization rate, is improving our overall quality of earnings, and we expect this trend to continue to help drive our free cash flow conversion. During the quarter, we generated $56 million of cash flow in continuing operations and $35 million of free cash flow. This is a dramatic improvement from the first quarter of 2020, and a great start toward our full year goal for 2021. Subsequent to the end of the first quarter, we settled our income tax receivable as well as all remaining tax obligations related to the divestiture of Careport. So to make sure everybody understands our cash position, if we perform these transactions back to our March 31st balance sheet, our overall cash position exceeds the principal balance on our debt obligations by approximately $60 million. I will finish today by commenting on our previous comments that we have provided. We are reaffirming the full-year outlook for revenue, adjusted EBITDA, and free cash flow that we provided at the end of February on our year-end earnings call. And we're doing so because trends we saw during the first quarter remain stable. Also, given the divestiture of Careport, I'd like to provide an update on the long-term segment margin outlook that we originally provided last year. Our long-term core clinical and financial solution segment adjusted EBITDA margin outlook remains unchanged at a range of 18 to 20%. And our long-term data analytics and care coordination segment adjusted EBITDA margin outlook is updated to a range of 23 to 25% to reflect the divestiture of Careport. At the business segment level, seasonality effects and revenue mix will drive quarter-to-quarter volatility. So these targets are intended as full-year goals that we will continue to drive towards. To illustrate this point, although the first quarter adjusted EBITDA margin in data analytics and care coordination segment was well below this targeted range, we expect to see high single-digit to low double-digit year-over-year revenue growth in this segment for the balance of the year. And this is expected to drive adjusted EBITDA margin performance near the long-term range over this same period. So to wrap up, we're very pleased with the execution and results across all facets of business in the first quarter, and we remain optimistic about our outlook for 2021. With that, I'd like to open up the call for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Charles Rhee with Cowen. Please proceed with your question.

Hi, this is James on for Charles. You know, obviously, virtual care is playing a greater role in care delivery. Can you talk about what Allscripts is doing to enable virtual care?

Yeah, we've actually been talking about this for a few quarters now. We rolled out very quickly last year telehealth capabilities to our clients, and we've gotten pretty significant pickup with our clients on that. So that's contributed to our revenue, but also has been a big win for our clients as they've been able to maintain their relationship with their patients. Paul went through a lot of other items that we are doing to try to assist patients, assist our clients, I should say, during the pandemic and help them work remotely with their clients. But I think, you know, telehealth, televisits is probably at the top of the pyramid.

And also, can you talk about your capital deployment priorities given the strong cash position, you know, following the divestitures of EPSI and care points? Also, how much capacity is available under the current share of purchase program and, you know, any plans for additional authorizations in the future?

Yes, so let me take those two questions, you know, two-part question there. Our priorities are we want to continue to make smart investments in the business. We'll do that. We continue to maintain our R&D at a pretty high level, and we will look to continue to add to our capabilities as we see fit. But we also, I think, have been pretty transparent about the fact that we think our Shares have been dramatically undervalued, and so we have been focused on returning cash to shareholders. We've detailed that over several quarters now. We're coming to an end next week of an accelerated share repurchase program that we put in place in Q4. As we do that, we will have used up about two-thirds of the authorization that we just got in last November, but we still have some remaining authorization, close to $100 million of authorization left. And we will continue to monitor our stock price and do that and make incremental decisions from here. But our plan is to – we're quite comfortable with no net debt, as you heard me say. We, in fact, have net cash position right now. So we have tremendous capacity to continue to return cash to shareholders.

Okay, thank you. Our next question comes from the line of Michael Cherney with Bank of America.

Please proceed with your question.

Afternoon, and really nice job across the board on the court. Congratulations. I wanted to dig in a little bit You know, it's been, I believe, and please correct me on timing, but close to a year since you first engaged with the consulting firm to start working on your operational dynamics. It's showing up very nicely in the margins. Can you just give us a sense of what comes next from here, where you're focused on the next leg of opportunity, and how much of what we should expect on ongoing margin expansion is will be further business improvement in some operational dynamics versus some of the mixed components that come with the growth in particular on the data and analytics side.

Yeah. So thanks, Mike, for the comments on the question. You know, I guess you have a few questions within that. So yeah, first off, yes, it was about a year ago that we brought in some assistance from the outside. to help us very rapidly scale our cost structure back to where it belonged and I'm happy with the results of that. We published long-term margin targets early in that process and we haven't forgotten about those, we haven't deviated from them other than the fact that of course with some of the portfolio changes we needed to of course refresh the margin for that and that's what I've done with this call. But, you know, we're still holding close to a high standard. I think in our core clinical and financial solution segment, you know, we will continue to really focus on efficiency on the cost side, but also look for opportunities to grow. And so, you know, we all know it's not a high-growth market, but there are pockets to grow into, and there is still a replacement market that we believe will be a net winner in. So some of the examples Paul went through on the inpatient side with our Sunrise platform, and as I said, we continue to log wounds in our ambulatory side. It makes us feel good that we have the right solution, very competitive as that replacement market comes up. So it will be a focus on cost, but also picking off some replacement wounds as well. And then, of course, you know, there's use cases that continue to evolve with that client base, too. And, you know, revenue cycle services is a big area in particular in the outpatient space. We're seeing a nice lift there from our client base, and that's providing some good growth for us. The first question today about telehealth and some of the remote patient tools that our clients are looking for gives us an opportunity to – you know, provide solutions there. So it's a combination of all of that will help the core clinical group continue its march towards its long-term goals. But, you know, as you started in your question, we've made significant improvement already. And, you know, I think we'll continue to drive a drumbeat of change. But, you know, we've made a lot of progress. And I think, you know, we're not going to see step function changes here. We're just going to see continuous improvements. On the data analytics side, as I said, we're expecting nice growth for the back half of the year, the next three quarters of the year, I should say. And that's going to do a lot for margins. So we're going to be smart about our costs there, but it's an area that ultimately we'll be investing in to support growth, but we'll get some nice operating leverage off that growth. So let me pause there, Mike. I don't know if I got all your questions or if I still left something out.

You did, Rick. I ranted probably for longer than needed. So I'll ask one more separate question that's much more quick and direct. Given where Veridigm is in its growth profile, how do you see it shaping out in the various different competitive dynamics of the market since this does seem to be an area where other companies, both traditional competitors and others, are trying to expand as well?

Yeah, well look, imitation is a serious form of flattery, right? So we see that from other folks. The good news is we're not just talking about it. We have a real platform, real client relationships over multiple years, and a real distribution network there. So I feel good about our competitive positioning. I also think we have a unique set of data assets. that are not only assets we own, but we also have some of our competitors have asked us to help them with their assets. So it's a unique asset base that is extremely difficult, if not impossible, to replicate. So we feel good about the position. And I think, as I said, as we look out for the balance of this year, we're expecting to see the growth engine start to yield some nice results there. So things feel good on that side of business.

Perfect. Thanks, Rick.

And again, congratulations. Thanks, Mike. Our next question comes from the line of Sean Dodge with RBC Capital Markets. Please proceed with your question.

Thanks. Good afternoon. Rick, your comments earlier on opportunities in the replacement market, I'd imagine the pandemic probably sidelined a lot of those decision processes. Are you seeing any change in activity level there now? I guess anything either, you know, just the fact that being kind of hopefully post-pandemic now, or are there anything kind of regulatory or otherwise that are kind of percolating here and helping to maybe catalyze some activity?

Yeah, let me start, and I'm going to ask Paul to feed on, because Paul spends a lot more time in front of the clients than I do, but... I'd remind you that we actually had some nice wins last year on our ambulatory side. So even though with the depth of the pandemic, we did see a lot of replacement market activity on the ambulatory side last year, and we were very happy with how we fared there. But I think on the inpatient side, it was a pretty slow year in 2020. So almost by definition, 2021 will be a better year than 2020, we think, in terms of opportunities. And I think that's especially true internationally. Those tend to be more public sector deals, and I think public sector all but shut down last year for obvious reasons, and we're starting to see some momentum creep back into those discussions. Let me ask Paul to add to that.

Yeah, our pipeline on the hospital side is as good as it's been for new business. for the last three or four years. So there's a lot of activity, interestingly, and that's because of, you know, the team that we have that's been going after it, but also us getting better at being in front of the opportunities that exist with consultants and just by, you know, if you will, riding the pavement very hard. As Rick said, we had a very good Q1 and we have other things that are, you know, teed up. They're all competitive, so sometimes those results are more lumpy. As Rick said, outside the United States, there's some pretty good-sized things that, you know, last year there was a big diversion at the Ministry of Health level to take care of the populations, much more so than it was to go replace electronic medical records. And so that did, in fact, slow down. But I wouldn't say that the U.S. slowed down, as Rick also said. Accurately, the new business in the ambulatory side of the marketplace was very robust last year, and we had a pretty good Q1. The existing clients are also expanding. So there's a number of organizations that are raising their hand and asking to be acquired, and that's how we're getting some of those that we talked about today, but also some of the other relationships we had last year, expand into additional hospitals that they acquired and additional physician clinics that they bought. And that always bodes well for us when that happens when our clients buy more. And those are the other, if you will, highlights to that. The thing that this is different today, I talked on it a bit, is that we have a breadth and depth and a suite of offerings that allow somebody to come in and do a bit more of a one-stop shop, not only on inpatient, outpatient revenue cycle, but also for revenue cycle outsourcing services, for total IT outsourcing services, and for some of the consulting fees that are usually reserved for perhaps an organization that may have a history in specifically only doing that We're seeing clients come to us for value-added services and for many of the things that they not have historically outsourced to somebody like us, and we're seeing that as well. Some of that, I think, does come from the pandemic where those organizations actually sent those people home, and like a lot of the people that were working, if you will, in the back office, and they're noticing that freed up space inside the hospital, and they're actually interested in perhaps looking at somebody else to take that function over for them, given that they've already, if you will, moved it out of the four walls of the hospital or four walls of the clinic. So that's another interesting dynamic, I think, that's come out of the pandemic that we will certainly try to work on aggressively with our clients.

Okay. That's very helpful. Thanks. And then Maybe on the rollout of the new Sunrise platform, how long do you expect it will take to get the majority of your kind of client base upgraded, transitioned over? And then the choice they have to migrate to the Microsoft hosting, can you walk through maybe how that changes the cost or economics for them? And is that a decision you expect most that migrate will make?

I think that as you bifurcate the market into new business versus those that are already clients of ours that are already hosted in one of our data centers versus the third option of people that are on-premise, I think the on-premise folks are going to be very interested in this, especially when they think about the things I talked about earlier around cyber, around continuous operations, and around some of the capabilities that come native in the cloud around data texting, voice recognition, the ambient technology that you read about Microsoft doing, not only with their acquisition of Nuance, but even before that, the capabilities that come native inside the cloud are pretty interesting to people, especially as folks are trying to get to more of a keyboardless experience for the physicians when you think about the broader topic of physician fatigue. So those are all things that help drive us towards that. But when we do new business, our new business is almost exclusively cloud-based. So that's number one. The people that are on-prem are going to move over a period of time, I'd say the next 18 to 24 months. Some people are already moving, and then other folks that are already hosted, depending upon what their contract looks like with us, will host over the course of the next, I would say, 3 to 5 years.

Okay, great. Thanks again.

Thanks for the question, Sean.

Our next question comes from the line of Jeff Garrow with Piper Sandler. Please proceed with your question.

Yeah, good afternoon, and thanks for taking the questions, and congrats on the quarter. I wanted to ask about bookings, and Sean's question was a nice segue here. I was hoping that you could comment on the mix of bookings between recurring revenue and non-recurring in the quarter, and particularly in the light of what sounded like a very good sunrise quarter, and then knowing how that product is evolving with the Microsoft relationship that you just referenced?

Well, let me start by, we don't typically report, as you know, bookings on a recurring versus non-recurring basis. We don't really categorize it that way, but I guess what I can say is this, there's Nothing about the quarter that I think fundamentally changes the mix we have today. So we're 80-ish percent recurring, 20% non-recurring. Non-recurring again is primarily made up of project-based services, software licenses to the extent some people still buy them on a perpetual license upfront basis as opposed to through a subscription. Sometimes we have some hardware sales. But those tend to be the things that are the non-recurring aspects. And there's nothing about the composition of first quarter that, in my view, fundamentally changes that. So that's on that part. I think the contribution to get all the way to the full 194 million that we reported of bookings Yes, Sunrise had a good quarter. The new deal with Mercy was a nice deal, as was both the Blessing and the Northwell Hospital extensions. But we have the other big areas of the company, so the ambulatory franchise and also Veridigm, were also significant contributors to the overall bookings mix. There was nothing unusually skewed, in my view, about Booking's performance for first quarter on any area of the company.

Thank you.

That's helpful. That may not answer your question, Jeff, but let's start with that backdrop and then see what else you want to ask us.

Very helpful, Collin. I wasn't expecting specific percentages. Maybe a little bit more commentary on what a Sunrise deal looks like today in terms of recurring versus non-recurring, and if the Microsoft relationship changes how something like a Mercy deal hits bookings and then translates to the P&L.

So a new logo relationship, Mercy, is typically structured as either a 7- to 10-year deal or Most of the structure of the deal, everything is bundled in kind of a single subscription price. So that is largely – there's a little bit of initial implementation services, so there is some non-recurring revenue that goes with it, but they're largely – they actually probably look a lot like what our long-term average is now with 80-20 when you break it all down. So nothing unusual about that deal and nothing that really changes what we look like today because of that deal. It's structured all as recurring revenue once you get past the initial implementation fees. The deals where it's an additional hospital with a client that's already in place, That could be different based on how our relationship is with clients. So some clients are long-term clients who started on perpetual licenses and when they need a few more licenses for a new facility, that tends to be they'll follow the same structure of the deal that they already have. Others started as a subscription model and they'll just look to add on top of that subscription. It tends to follow what the client was like, Jeff, and so nothing beyond that generalization is hard to say. It's very client-specific what the structure of a deal would look like.

Got it. Very helpful. One last one for me. I wanted to ask about the ambulatory market and the comments around consolidating vendors. Just curious what types of organizations are pursuing consolidation of vendors now and how your portfolio that segments for different parts of the market might help you address those consolidation efforts.

I think some of the consolidation that I was referring to are things that we brought to them. Specifically, during the pandemic, they were saying that their clinic visits were going down. They were saying perhaps they were unable to see patients a full year ago. they actually had some financial pressures. And so they were talking to us about some of their woes. We talked to them about the number of different relationships that they had. And it might be more cost effective, and it turned out to be more cost effective to put more of those relationships into one buyer's bucket, if you will, and that was us. So as we have a broad breadth and depth of offerings, we would look at their accounts payable and work with them to try to figure out if we could consolidate many more pieces of business that we didn't currently have a larger, if you will, percent of their spend coming to us versus, in some cases, 20 or 30 other players. And that was a way for them to become more efficient and achieve their goal, which is to overall reduce their IT spend a bit.

And, you know, that benefited us because that percent that they continued to spend actually increased our share. Perfect. Thanks again. You bet. Thanks for the question.

Our next question comes from the line of Eric Percher with Nefron Research. Please proceed with your question.

Thank you. And Rick, appreciate what you termed it, a clean quarter. Two quick clarifying questions and then one for Paul on the clarifications. So cap software at $18.1 million, is that about right-sized relative to percent of revenue or absolute level? And then I want to make sure I understood the debt comment, which I think was that there's $60 million of net cash without stating what the cash or debt level was. So just wanted to clarify those two.

Yeah, thanks Eric. Yeah, so on the second question, yes, I mean that was in an effort to make sure everybody understood the cash position. It's a net of $60 million if you pro forma the tax settlement that we did in early April, and then you just compare that. As you know, the convertible bonds that we have outstanding don't show up on the balance sheet at face value. They accrete upward over time. To cut through all that noise for just anybody who is a little less familiar with it, I want to make sure everybody understood. If you just compare net cash to face value of the bonds, we're in a net $60 million cash position.

Make sense? Yeah, and cap software. Okay.

You were a little hard to hear, so let me just make sure I understand what your question was. So 18.1 was the amount of spend this quarter that we capitalized, right? So we spent the gross of $67 million, right? And that's where I think I lost you a little bit on what your question was. So you may have to repeat it, but the capitalization rate... Yeah, that's where I was going. Okay. So the cap rate, you know, I've been talking about that for a few quarters. We've, you know, been trying to drive the capitalization rate down and, you know, not continue to just build up costs on the balance sheet. So for three quarters now, we've been, you know, amortizing more to income than we've been capitalizing. So I feel good that, you know, the quality of the earnings continues to get better and better. That trend should continue. The rate, you know... We were at 30% in Q3, dropped to 23% in Q4, went to 27% this quarter. You know, that's around the edges. You're going to see a little bit of movement on the percent just because of the accounting rules, you know, intersecting with what our gross spend is during the quarter. So you'll get a little bit of bubbling there. But, you know, I definitely expect that number to sit in the 20s and not go back up to where we had gotten to, which was almost like the mid-30s.

Okay, that's where I was going on room for improvement. And then, Paul, on the topic of Microsoft, it feels like they are everywhere of late and, you know, I think beyond nuance and access last week, you know, seeing alignments with health systems and even biopharma manufacturers. When you see that expansion, does it appear to you like to us that they're expanding faster or broader than maybe was expected a year or two ago? And do you think there are opportunities that extend beyond some of the core that we've talked about? And as we think about Veridigm, are there opportunities that you get excited about relative to the moves that they seem to be making?

The appearance and the reality of what's going on with Microsoft, in my opinion, are that they are absolutely getting into healthcare in a very big way. They will continue to be an enterprise software player. They'll continue to have, if you will, an operating system that resides inside of their cloud. I think it's interesting to think between them and perhaps some of the other people that are out there in the marketplace. Specifically, when you go to the cloud, you're going to also pick up all the work that they have with the operating systems they have had over time, but also layer-end capabilities that people are going to be extraordinarily interested at go to the cloud. Things around AI, things around voice, things around ambient, things around, you know, the fiber obviously comes with that. Those things are pretty interesting to people because of the rate at which you can put them into production. So that is a big piece, Eric, as to why I think we're going to get a lot of traction as a result of that. And Microsoft, as many other people have historically noted, healthcare is a very large marketplace. Some of the things that they're doing in this marketplace, my expectation is that they'll also leverage into some of the other industries that they serve and some of the other very large organizations they work with around the globe. They are targeting a lot of large healthcare enterprises. They're targeting a lot of large, if you will, ministries of health in different countries around the world, and it's not short on them the ability not only to have an Azure relationship with those organizations, but also then to drive additional applications and capabilities into those organizations in a rapid manner. So my alignment or our alignment with them we think is very strategic. They have been incredibly great to work with. The engineers there are supplying us with the intellectual capital of those people of how we can get to where we need to get to in an exciting point in time is helpful. And then also just working with and going hand-in-hand with Microsoft as we are calling on some of these large institutions. They are all interested in listening to what a joint relationship might look like as they think about additional capabilities that sit either on top of or in place of existing historic, if you will, electronic health-only opportunities.

That's interesting. Thank you. I didn't really get to your answer. Oh, I'm sorry.

I didn't really get to your final, Eric, on VeriDyme. We've had a lot of discussions with Microsoft around that as well. They're very interested in the closed-loop nature that we offer of what we can do with pharma and payers, and they continue to be interested in that. set of capabilities that we have. They also see it as unique in that the payer relationships, we have the farmer relationships, and we have provider relationships.

Not everybody else has all three of those.

Our next question comes from the line of Stephanie Davis with SVB Learing. Please proceed with your question.

Hey guys, I echo my congrats and thanks for making time for the questions. It sounds like you have been very busy this quarter. I'd love to hear more about your longer-term Veridigm strategy around the pharma digital ad spend wallet. Do you see any pockets of opportunity that leverage your Veridigm life sciences relationships with your clinician-facing real estate and your core EHR? Or is that something that you're only using for in the practice use side of the business?

Yeah. So, you know, as you know, Stephanie, that's how Practice Fusion started, right, was doing a lot of ads, pharma-like ads, and, you know, went through a learning curve on what was okay to do and, you know, kind of helpful as part of clinical decision support and what was not okay to do in terms of, you know, things that might be viewed as problematic you know, fostering more prescription activity, right? So they've kind of learned that lesson along the way. So I think we're really good at that. We can go ahead. Because of the pure cloud nature of Practice Fusion, it's much easier to deliver those opportunities to a wide client base than it is with some of the client server technology of some of our other EHR platforms. The longer-term answer to your question is absolutely. I mean, that's what, you know, there's opportunities. That was a big part of the acquisition case when we bought PraxFusion is we knew that they were doing some things that we felt we had a larger base to leverage that across, and we will continue to pursue that.

Are there any opportunities in some of the adjacencies around the EHR, such as the patient portal or maybe even having some sort of embedded telemedicine solution? with an ad component there for the consumer and clinician facing?

Yeah, let me say it this way. To say it as an ad maybe is a little too narrow. Are there opportunities to create new revenue streams off of the users of our personal health records? And are there opportunities to bring information to providers and reduce some of the friction that they have with interacting with the heirs? The answer is absolutely. I mean, that's really what Veridigm is doing for a living. And they spin up new product streams and new solution streams, you know, every quarter. So, you know, it's a place where we innovate on new solutions. You know, there are There is a pretty good web of rule books. You've got to weave your way through when we do that. So we intersect the commercial opportunities with a pretty strong view from our – review from our compliance group to make sure we are staying within the rules. But yes, the opportunity is very real.

Thank you. And then just one quick one from me. Microsoft has been known to sometimes do one-way exclusivity on these partnerships. Is there anything like that into the deal? fully clean.

No, very clean.

Awesome. Awesome to hear. Thank you, guys.

Thanks, Bethany. Our next question comes from the line of Donald Hooker with KeyBank Capital Markets. Please proceed with your question.

Hey, great. Good afternoon. I just want to make sure a lot of questions have been asked here, of course, but just for my edification here so I understand. So you guys obviously... All right. When I think about the progress you've made with operating margins or EBITDA margins in the core clinical and financial solution segment, I mean, just to be clear, you are at the top of your long-term range there from what I understand from your comments. This was a seasonally weak quarter, and it sounds like things might be a little bit better next quarter. Is there a reason why margins might recede from here?

Well, I think let's make sure we don't mix and match some of the comments, Don. The seasonal weakness was a comment I made with what is typically the bookings activity in the first quarter. It just tends to be a softer quarter. And that's why we were very happy with where we came out for the quarter. Not only did we have a good sequential lift in bookings. It was the highest we've seen throughout all of last year. So that was more a commentary on the selling environment's improvement a little bit. I think as you talk about even Dow margins, I purposefully made it clear that we'll see quarter to quarter volatility. That is a big function of revenue mix during a quarter. The revenue mix was favorable in Q1, and we had a good boost in our EBITDA margins. We also had a nice flat curve to some of our SG&A in that segment. I'm going to see a little bit of a lift there over the next couple quarters, so I think Your observation is right. The quarter was a great quarter. It was at the high end of the range. I don't think we're going to see that for each of the next three quarters in this segment. And so we'll see a little bit of a tail off here probably in that segment while the other segment grows. And so all my comments around segment margins were meant to just be clear that these are annual goals and we will see some quarter-to-quarter volatility.

Okay, thank you for clarifying that. Maybe a mundane question here. You have the two segments, and you have an unallocated segment, I guess, which my understanding was the EBSI, which is now gone. I guess is there some sort of runoff here? Is there sort of this is going to be – how do we sort of work that into our model? Yeah, it was –

It was a little more than EPSI, Don. What you see this quarter is not going to vary much. The reason we need it is we have some transfer pricing we do between the two segments, and obviously we have to eliminate that revenue when we do consolidation. We also have a couple of what I call public company costs that we don't allocate out to the business segments. We keep the So there's a little bit of pool of company costs. And then there's just the necessary elimination that has to happen for intercompany revenue. So what you see in Q1 is a pretty steady level, I think. You could use that in any modeling that you want to do.

Thanks so much. Have a good day. Our next question comes from the line of George Hill with Deutsche Bank. Please proceed with your questions.

Yeah, hi, it's for George. Thanks for taking the questions. So we've talked about the significant improvement in cost structure in the survey segment this quarter. Going forward to achieve the long-term margin goal, do you need to get more aggressive on the cost containment side, or is it mostly going to be driven by revenue expansion?

Well, we've kind of covered a lot of that question in the last few questions. You know, I think as just the previous question noted, This quarter's segment margin for our core clinical is the best it's ever been. It's at the high end of the guidance range, we said. But I'm tempering that by saying the goals are annual goals, and I think we're going to see some quarter-to-quarter volatility. But largely, as we talked about earlier, this is one of, I think, continued cost-focused No step function changes, but cost-focused, along with some modest replacement market wins, as well as some new pockets of demand opportunity. That's what's going to drive the core clinical and financial solutions on their continued journey upward. The data analytics business, we're going to see a lot more of top-line lift, which will really be the catalyst for its margins to improve.

Great, thanks. And maybe a quick one. We've seen improvement in client attrition last quarter. Could you provide some color on the client attrition in the core business in Q1 and the turn trends you expect to see for the rest of the year? Thank you.

Everything about our assumptions and beliefs around attrition are reflected in the guidance we've given. And, you know, we pointed out client attrition last year because we had a particular bolus that we knew was going to hit us, and we knew that we shared that up front so that everybody could understand some of the year-over-year comparisons. You know, if we ever got to a point where we had such a bolus again, we'll provide the same guidance, but that was not what we needed to do for 2021. And again, our outlooks reflect everything that we see happening on that front.

This concludes our Q&A.

I'd like to hand it back to Mr. Black for closing remarks.

Thanks, everybody, for spending time with us today. 2020 was a big year for us where we did a lot of reset, as we talked about at the J.P. Morgan Conference, and we reset our cost structure, reset a bunch of different things inside the company, our portfolio, as well as we got a lot of focus on unlocking some value of some assets in the company. I think about where we are today. Throughout the first quarter, we are showing a lot of resiliency with regard to not only the people that work here, but also our clients, having now experienced some 14 months of a pandemic. And there's a lot of clients who've been on the front end of this that we respect everything that they've done. We're also starting to see a return to normalcy with regard to patient volumes and with regard in the United States to the revenues that our clients are seeing and expecting as a result of their day-to-day operations, which gives us the confidence to reaffirm the guidance that we gave you today. We appreciate your time and your interest in Allspreps. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.