The health care IT space is still very competitive, with Epic and Cerner (CERN) holding large shares in large hospitals, but new management has made a big difference for Allscripts (MDRX -8.54%). Strong bookings put the company on good footing for 2014, while growing interest in population health and a sizable replacement opportunity in electronic health records (EHR) offer more enduring potential.
Q4 strong, but bookings were the star
Allscripts' fourth quarter came in quite strong relative to sell-side expectations for non-GAAP numbers. Revenue fell 4% for the quarter, with growth in maintenance revenue offset by declines in the other line items, good for a modest (approximately 4%) beat with every line above expectations. Gross margin improved on both a sequential and annual basis, but operating income declined 19% from the year-ago level on higher SG&A spending (on a non-GAAP basis, SG&A is almost one-third of sales).
There was a wide range of sell-side expectations for non-GAAP operating profits, but Allscripts clearly beat expectations for its bookings. Bookings rose 52% (and 16% sequentially) in the fourth quarter, almost 14% better than the average estimate. With this strong influx of orders, Allscripts' backlog rose almost 22% at year-end.
Population health continues to draw interest
There are a lot of positive moving parts to Allscripts' bookings, as the company saw good interest in its SaaS offerings (44% of bookings) and good strength in core EHR products. One of the notable positives was also the interest in the company's population health product.
Population health is an emerging category that that uses electronic medical data to manage and improve outcomes for groups of patients through data aggregation, risk stratification, care coordination, and outreach. Allscripts' population health platform represented 40% of third quarter bookings, and that grew to 42% in this quarter.
As an emerging category, I believe population health is an invaluable growth opportunity for Allscripts. Large rivals like Epic and Cerner do not have entrenched relationships within this market, though Cerner is intending to fully ramp its Healthe Intent platform in the coming years. Allscripts is certainly going to have to deal with competition from Cerner, Epic, athenahealth (ATHN), and others, but survey results suggest that Allscripts has a very good opportunity here.
Has Allscripts put its problems behind it?
Allscripts hasn't always been the best-run health care IT company in the business, but today's management team has taken a lot of steps to turn around the business. These moves appear to already be bearing fruit and could position the company for further share gains and profit growth.
Part of the problem for Allscripts is its legacy of growth through acquisition. That has left the company selling disparate systems and lacking an integrated platform. Consolidating platforms risks alienating customers, so it is at best a multi-year project. In the meantime, management has increased R&D spending and begun offering customers a clearer product roadmap. Allscripts management has also been focusing on improving the quality of the products it offers, and that has been reflected in improving survey scores and solid customer commitments to upgrades.
One of the remaining challenges is for Allscripts to gain share in the hospital/health care system market. MU-eligible provider attestations show that Allscripts enjoys better than 11% share in the ambulatory care market (against about 6% for General Electric, 3% for Cerner, and 2% for athenahealth), but the company's share in the market for hospital health care IT systems is closer to 4% (against around 15% for Cerner).
Cerner has talked about 50% of the EHR market being ripe for competitive replacement, so I will be very interested to see if Allscripts can drive share growth with its Sunrise enterprise platform. Keep in mind, though, that athenahealth has shown itself to be a very strong fast-mover – the company has moved into clinical management (from revenue cycle management) much faster than most of its rivals expected.
The bottom line
Allscripts shares have performed pretty well over the past year as investors have started buying into the turnaround theme. With the ambulatory care market only about 50% penetrated and a large chunk of the acute care market up for competitive take-away, there is definitely an opportunity for Allscripts to make hay with better products, service, and marketing.
Like many turnarounds, Allscripts doesn't look all that cheap right now. If the company can continue to grab share from established leaders like Cerner and stay ahead of them (and others like athenahealth) in growth opportunities like population health, there could yet be worthwhile rewards from these shares.