Veradigm Inc. (MDRX) Earnings Call Transcript & Summary

Good morning, again. Welcome to this session of the Bofa Virtual Healthcare Conference. For those don't know me, I'm Michael Cherny, the health care technology distribution analyst here at Bofa. Much more importantly, though, in this session, we have Allscripts with us, Rick Poulton, who is President and CFO of the business, who's going to give us an update on what has been a truly unique and transformational year for the company. So with that, Rick, I don't know if you want to start off with any opening comments or let me just dive into some questions.

It's a pleasure to be here, Mike. Thanks for the invitation, and thanks for the kind words.

Perfect. So maybe let's just level set for everyone here. I don't use the term transformational lightly, but the dynamics undertaken for the business last year, I would say, were incredible. And just in terms of the sheer value that you create for shareholders, like get without really doing a whole lot to change who Allscripts fundamentally is in the business. So with that being said, and I know this might be a basic question, but with a lot of layers. Can you just remind us what are the key tenets of how Allscripts goes to market right now and where the biggest sources of strength are in terms of the competitive position?

Yes. I actually appreciate the question because we have gone through a lot of change. We did divest a couple of businesses last year, and that was all part of really a reset of the whole company. And we've reset our cost structure, reset our portfolio, reset our capital structure and balance sheet. So we -- it's a good question to what are we and who are we now? And the answer is, at our core, we're still very comprehensive provider in the inpatient and outpatient markets of just a complete set of clinical, financial tools and the related services that would go around those. And then what we've done that really differentiates ourselves from a lot of our competitors is we've also then built an entity or subsidiary that we call Veradigm, that is built to really extend that reach, extend that clinical dataset, to extend that last-mile point-of-care connectivity that we have at a very -- at scale. We extend that to the payer in the life science markets. And so Veradigm is a nice growing business for us. It's now a pretty material part of the revenue base of the remaining entity that we have at Allscripts, and we're excited about the prospects of driving value of all of that.

And so when you think about that and you look at the value generation, in particular, maybe just to step back, in terms of EPSi and CarePort businesses, they're business that clearly fit within Allscripts. They were logical assets to own, but then it felt like generated meaningfully more value than what was given credit for in the market. So can you just walk us through how you thought about that approach towards the portfolio and parting with assets that I wouldn't necessarily say were noncore, but clearly, were able to be re-rated as part of a separate entity.

Yes. I mean, these were good businesses. Obviously, we would not have gotten the value got for them, had they not been good businesses. But in the final analysis for me, I looked at the businesses themselves, you're absolutely right. They were not -- they weren't way off base on what we were doing. We had many of our current customers using those solutions. But what was different about those 2 businesses are that they had a client roster that went far beyond the Allscripts EHR client base. And in the case, frankly CarePort, most of their clients were not Allscripts EHR clients. So they definitely had a broader client set that they needed to go to. Independence was on the margin, going to be beneficial for their businesses to continue to grow. So at the business level, there was some value in being separated. And then when I combine that with just what you said a moment ago, we were getting nowhere near credit for the value that they represented. And we knew that. We tried to tell that story, best we could. But I think given that they represented a small slice of the overall Allscripts while we own them, it was hard to see through to those businesses. And so we took advantage of what were very strong market conditions, attractive. We've got to utilize some NOLs and some other tax attributes that were otherwise kind of laying trial on our balance sheet. And we took advantage of what we're at low tax rates. Hopefully, we don't know how long those are to here to stay, but all of the stars aligned, and we just thought it was the right move to make at that time.

Got it. So let's maybe start a tie back to what we consider, I would say, the traditional Allscripts. So when you think about it, I think you've had some nice recent wins, in particular, on the inpatient side. You've noted some wins on the TouchWorks side. How do you think about that integrated platform and how that allows you to continue winning business and continuing adding on as well with existing customers and what is much more of a mature saturated market, given, obviously, years of government-driven incentives?

Right. Right. Right. So there's no doubt that the U.S. market is a mature market. Pretty much -- there's very little white space left in the U.S. market for new -- from moving from paper to electronic tools. But that's not true internationally. And so we do see extending our reach internationally as a nice growth factor for us for the future. We've got some pretty decent scale. We've built internationally today around some core points of presence. And we'll look to continue to extend that, but we think that's very much a growth market. And we do see opportunities here in the U.S. as well, though, Mike, it's a very fragmented market, as you said, there was a big boom era, and that's all settled out. And I think the industry will continue to evolve, like most industries do. And we'll see fewer and fewer competitors in the space. And that means there's a replacement market that the clients have to think about over time. And our expectation, we are already demonstrating it on the ambulatory side that we're a winner of some of that replacement market. And we expect to be that to be true on the inpatient side as well as we continue to invest in our platform, while others have pulled back their investment. So there is a replacement market that will fuel -- has the opportunity to fuel some growth. But you do have some use cases that continue to emerge as well outside of core EHR, and that provides some growth opportunity as well. And those use cases, we saw a big example of that last year with COVID and the need to -- the explosive growth of telemedicine. That was -- we brought those solutions to our clients, just like some of the independent telehealth entities that everybody is obviously familiar with. And that created some nice growth for us. Patient engagement, in general, is becoming a bigger and bigger deal for health systems. So we have the opportunity to expand with them with some patient engagement tools. Genomics, we've been -- we've talked a lot about genomics for years now. It's still, I think, not at mainstream level, but it is moving in that direction. And as that becomes more midstream, there'll be a need for health care providers to be able to ingest genomic information or tests they -- as appropriate and be able to then consume those tests coming back and make better decisions at the point of care. So we've tried to be at the forefront of that. It's slow, but we think it's coming. And really, it's just another example. And really, with the advent of risk-based contracts and more and more provider taking on risk, there's a lot of these requirements now to manage that risk. So those are examples of use cases that will have evolved and will continue to evolve beyond just the core clinical and financial solutions. And I think collectively, that's what represents a nice opportunity to continue to grow. They won't be -- I don't think there'll be massive growth, but they will represent nice top line growth opportunities. And if we can surround that with then growing into adjacent markets, like we're doing with Veradigm, we think we can put together a pretty good growth story.

I want to come back to a couple of things that you mentioned before. But first on these use cases, can you just give us the sense of the life cycle of one of these use cases? For example, take telehealth, for example, which obviously saw massive explosion last year. Can you talk about what Allscripts is able to do to help your customers enable telehealth in a much more effective fashion and how that responsiveness over time continues to build better partnership with these key customer space?

Yes. Well, look, listen. So fundamentally, when you talk about telehealth, I think you have to think of it in 2 camps, right? There's a camp where it just becomes another channel for a patient to interact with their health care provider. And so you maintain the relationship between health care provider and patient. And then there's the other channel, which is -- I'm a patient, and I just want to talk to somebody today. And the relationship doesn't matter to me. And if I have -- if I do that today, and then I call back next week, and I have another person, I'm okay with that. Those are 2 very different market segments. And I think they're both here to stay. And our job is to -- is really in the first segment where we're really trying to strengthen that relationship between our clients and their patients. And so telehealth for them is just another medium on how they see their patients, and it was critical that we bring that tool to that. So we have done that. We've integrated it into their daily patient engagement platform and patient portal. So it makes ease of connectivity, secure. It's so they're able to put their notes right into the clinical record and have a single concentrated record. So we think it's a great solution for our clients. It won't displace the other market that I described, but it is a key part of our client base staying relevant with their patients. So we're very happy to bring that to them.

Perfect. Tying back a bit to some of the dynamics, especially in the quarter. I know you called out, in particular, 2 customers, one was Blessing, I believe the other was Northwell, talking about customer additions. And I think that's one of the things that people may not realize about Allscripts and the traditional electronic health record market in general is you grow with your customers. So as they grow, you get to grow with them. And maybe using one or both -- I'll leave it up to you, but can you give examples of some of the expansions you've had with them and how that shows the value of the ubiquitousness of your overall go-to-market strategy and platform?

Well, to your point, this can't be emphasized enough. It's -- I mean, listen, what we sell is enterprise software. And so as an enterprise expands, it absolutely makes sense that we expand with your incumbent provider. And we've seen that. And we've been beneficiaries of that in many cases, like Northwell. I mean Northwell, we watched them grow to the hospital footprint they have today, and we've gone every step of the way with them. So that's -- they're now $12 billion-plus health system, and we've grown with them every step of the way. That's really for them about, obviously, simplicity of having a single footprint. It's -- they've tied a lot of tools around their Sunrise platform. So for them, it makes all the sense in the world to continue to grow with us as they grow. Blessing, obviously, not as large of a health system, but similar vein, they are growing, and they continue to grow in their footprint here in the Midwest. And we're thrilled that they wanted to continue to expand with us. I think it's sort of a natural step, but we don't take it for granted, and we have to earn out -- earn around every step of growth that we do with them. But it's really, I think, about simplicity of footprint, right, simplicity of operating environment. And when they are happy with this platform that they have and the tool set that it provides them, then it's a natural thing to continue to grow. So we're happy with that. We also announced a new logo win in the first quarter as well, and that's obviously a very different competitive dynamic. And we're very happy, obviously, to have announced the win of Mercy Iowa City because that's an example where we had to go head-to-head with competition, and it's the robustness of a solution that, obviously, ultimately, became a deciding factor why they selected us. So that was -- that's a competitive takeout, and we feel really good about it.

And as you think about the replacement market, clearly, there's a couple of third-party validators that people really focus on. Allscripts is traditionally screened incredibly well and won the most awards in Black Book, which is one of the more followed ones in particular. How -- when you go into those either first pitches or best in finals, how much of that outside validation becomes important in making sure that you're getting that seat at the table to be able to pitch? And what is, again, as we built the pitch in a tighter market?

Yes. More so, I would say all the time, referenceability is a big deal. And that referenceability happens not only with analysts like a Black Book, but it also happens with other clients who are using your systems. I think there's -- the level of diligence that is exercised now in the buying process to understand who else like them is using the system, what do they like about or what do they not like about it? Those are important, very important. So it's very -- it's a hard market to crack, if you don't have a good reference bank at this point.

Got it. You referenced the white space opportunity in international markets, which I would say, given what tends to be fairly confined earnings calls, doesn't necessarily get a ton of airplay. It wasn't that long ago that we had a focus, whether it was on one of your big Australia installations. I can think of the renewal and expansion in Singapore from a few hems ago. And then obviously, some acquisitions you made to grow within the U.K. market, in particular, it seems the Oasis deal, if I recall correctly. As you think about penetrating and attacking those international markets, what are some of the different characteristics that allows Allscripts to jump in, whether it's in the country that you've already been successful in or the other countries where there still are sizable tenders left?

Yes. Well, I mean, the good news is the U.S. is really, I think, ahead of the rest of the world as it comes to adopting digital tools. And so it makes sense that anybody in the international market would look to U.S. vendors to understand what they have and how that meets their needs. There's not to say there's not any local competition. There is internationally. But I think we have a big head start here in the U.S. and have the opportunity, I think, to be very relevant to what they need. You mentioned a lot of our key markets that -- the only one that left that was Canada. But those are our key markets. And I think like anybody entering foreign markets, you have to be able to have some level of scale to be able to do it profitably. You have to be known. You have to understand how to get known if you don't already have a big footprint. So those are some things you tackle internationally. The other challenge internationally at times is that there tend to be all public sector deals. So they're inherently difficult to predict time line-wise, and you have to inevitably wind up feeding into budget approvals and things like that. So I think the time line is getting longer and they're much harder to predict, and that's probably why we don't talk a lot about them on quarterly earnings calls because it's tough to foreshadow when things are going to happen exactly. But the need is there, and the energy is there, and we remain very optimistic that there'll be continued sizable business opportunities that will pop out of those markets.

Perfect. Let's turn to Veradigm for a bit. It's a business that really got off to a strong start and some of it was amalgamating assets that you had to work well together. But one of the things I found fascinating is your ability to serve as an independent third-party vendor with the clear evidence being that you're working with other EHR vendors on the dataset. So can you give us a sense of that value proposition, how you've been able to convince competitors that they should essentially license or send over their pivot to you?

Yes. I mean it's -- so good question. I want to be clear on one thing. It's more than just data. So data is a big part of the value prop, but the other big asset that we have to bring to the payer and life science markets is, again, what I call that last-mile connectivity, the point of care. So your -- our direct interaction at the point of care is something -- and the clinical workflow. That is a pretty strong asset, too, because it's one that historically payers have had a lot of friction in getting things at the -- getting connected to the point of care. So it could be for authorization, could be for any form of authorization, whether it's for procedure, whether it's for just basic insurance coverage, but connecting with them, getting charts from the point of care, doing all kinds of interactions that they have with providers has historically been very inefficient. And as pharma, more and more wants to move the traditional clinical trial structure to more real dividends, their desire to interface at the point of care is getting -- is growing stronger and stronger as well. So that's an important asset as well. And I take the time to emphasize it because it's one of our biggest differentiators is between our own footprint in the outpatient market and the market share that we command ourselves with our 3 different outpatient EHR solutions, that scale started us down this journey. And then we built a pretty strong infrastructure around that distribution network of our own. So we have relationships with almost every large pharma, CRO and large payer organization you could name. That scale is the answer to your question. That's why a competitor who has some assets but their ability to build up the infrastructure needed to really monetize them and get enough scale of their own that they're relevant to those customers, number one, and then secondly, that they could actually reach out and effectively interface with them is the challenge. And so that's when they look at that and say, "hey, I'd rather just turn to the guys who are already doing it, and we'll negotiate a rev share kind of agreement." And that became a smart decision. And now we have 2 of our competitors who are doing business with us that way. So we think it's a great validation of what we have, why it's different. And then it just makes us stronger to include their assets along with our assets as we go to these end markets. So it's a really good win-win for both of us.

And probably on that, as you think about the competitive landscape, it feels like there's companies from so many different fields, your direct competitors, other health care companies, other tech companies, they're trying to figure out a way to better penetrate, better integrate with payers, with life sciences companies on some type of data, data analytics approaches in what become -- is becoming a -- feels very increasingly competitive market, maybe just always been incredibly competitive. How does Veradigm keep winning?

Yes. Well, look, I think you're actually right. Everybody and their mother is talking about doing something with data and data analytics and trying to do it with life science companies. So we recognize that it creates some confusion. I think at the end of the day, results have to speak for themselves, and we'll continue to post results, and I think everybody would be able to judge that. But it really comes back to some of what I said. So the risk of being competitive, it's the breadth of our EHR footprint, and I want to emphasize around allocation, in particular, because outpatient -- I mean that's where most of the prescribing behavior happens. And so to have that kind of footprint is -- what is really critical to create bidirectional information flows off of that footprint and is what really differentiates us from a lot of other folks. And so when you find that starting point with some of the assets we've acquired over the last several years and some of the exclusive relationships. So, for instance, our relationship with American College of Cardiology, and we have their registries and that data to be able to bring alongside the base of clinical data that we have, our specialty pharma platform that we acquired a couple of years ago. And now we're rolling -- we've taken that. We're rolling out what we think is a very innovative solution to the payer markets, which is around specialty pharma and how we can bring massive efficiencies into what has typically been a very inefficient process of getting specialty pharmas prescribed, authorized and to the patient. So these are just examples of a few of the assets that we picked up that are unique assets, and it's allowing us to continue to innovate. And again, our mission is continue to get rid of inefficiencies that these large payer and pharma organizations have with trying to get to the point of care or trying to get at some of the clinical data that they desire. So by being nimble, by the infrastructure we have, by some of the unique footprint and assets we have, that's what differentiates us. And it's hard to tell that in an elevator speech, but it's why we continue to post really good results. And as the year goes out, I know we're going to continue to see some good numbers coming out of that business.

Well, it's definitely a good attempt at the elevator speech, Rick. So in this confined time frame we have it worked. Sticking on the innovation and, I would say, analytics and information gathering side, Allscripts has had a long-standing partnership with Microsoft on various different numbers of optimization of your platform and other areas. Can you just update us on where that sits right now? And especially what appears to be from public comments, Microsoft continue to expand its health care footprint. How Allscripts helped power that?

Yes. Well -- yes. Microsoft has made no secret. Think about its desire to become a bigger player in health care. And so the latest big move was obviously the acquisition of Nuance. That's an example on application software, whether they'll want to continue to do that. But on the software route, hard to say. I don't think I can answer that for them. But they've been very interested in us for a while where most of our solutions are built on microsoft.net, to start with. And then we've selected Azure as our cloud solution several years ago, and we continue to go with them. And obviously, that's a big strategic imperative for Microsoft is to drive more volume over Azure. So we have a good -- very good partnership with them. We inked a larger deal just last year with them to help bring our Sunrise platform to the cloud. And we're excited about that. We're beginning to talk to our clients about that journey. Obviously, the efficiencies that would come with them in the cloud, the ability to have a much more secure environment, given all the cyber challenges in today's environment, I think, is very attractive to clients. And then obviously, the redundancy that happens with the cloud is all, I think, very compelling features that our clients are quite interested in. And so we're working tightly with Microsoft on that. And you should expect to hear more from us as the months and years go out here. But they've been a good partner to us, but they -- they clearly have ambitions that go even beyond what Allscripts seems.

Got it. In our last few minutes, turning back to the P&L a little bit. You've undertaken some pretty significant steps on operational enhancements that are really starting to show up nicely on the margin side. Can you just give us a sense on how you approach that cost-cutting operational approach and the difference between cutting costs for cutting costs sake versus cutting cost to make Allscripts a better company?

Yes. I appreciate that question. So I think the best way to answer that is you have to think about our P&L. And if you broke it down, there are kind of 3 large buckets of costs in our P&L. The first is what we call our cost of sales, and this is anything directly related to the revenues we generate. Second big bucket would be our R&D investment. So investing back in solutions and then the third is just regular corporate SG&A. The first bucket, cost of sales, which happens to be the largest in absolute dollar terms. So again, we run gross margins -- they've been moving around a little bit. But if you think about us, is $1.5 billion top line. We run about 45% gross margins. So the ZIP code, $800 million cost buckets. And that, for me, that was not -- to use your terminology, that was about true operational driven. That wasn't just cut cost, cut costs. There were clearly some under-managed areas in those cost of sales, so such as our hosting operations were, in my view, under managed. Our labor -- some of our more labor-intensive service lines like revenue cycle services or even our project-based implementation type services, those were, again, heavy labor cost focus, and we were not running very efficient manpower scheduling, things like that. So there was a need to match costs and variablize costs with the revenue that we're getting. And so that's what we worked hard on last year or 2. But that, to me, goes under the banner of true operational improvement. And that's why you've seen such a rapid change in some of our results there because we did put in significant change in fairly short order. But that's not -- that work is not done. So we'll continue to see some -- continue to see some cranking of that and efficiencies happening there. The second big bucket, R&D, that was really where we took advantage of our global scale and moved a lot of our development costs into lower-cost markets. So we've significantly beefed up our presence in India, and that's helped us a lot. And we've got some good labor arbitrage. And then finally, G&A, that will be more of the pure just cost. We just had some bloated infrastructure that we needed to cut down.

Perfect. Well, I think that wraps up everything pretty nicely, and we're out of time. So Rick, thank you, as always, for the update. And thanks, everyone, for joining us today.

Thanks, Mike. Thanks for having me today.