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Morningstar | Allscripts Reports 4% Organic Growth and Intends to Sell Netsmart Stake; Maintaining $12.30 FVE

No-moat Allscripts' second quarter was similar to its first, with recent acquisitions adding to the top line but bookings pointing to a mature market. Thanks to contributions from Netsmart and EIS, the healthcare IT player's revenue totaled $526 million, up 24% from last year. After stripping away the contribution of acquisitions and other related adjustments, organic revenue increased 4% from last year, which we believe is a nice relative improvement from last quarter's results. Acquisitions weighed on margins, but we expect improvement with integration efforts in the second half of the year. On the earnings call, management reported having signed a letter of intent to sell its stake in Netsmart, which has seen explosive growth since Allscripts acquired a 49% stake in 2016. We are not making any changes to our fair value estimate until we receive more details from management regarding the sale, but given the success of Netsmart in the behavioral health and human services segment, it may carry a premium above the present value of the cash flows we currently have modeled for this product. Accordingly, we expect that closing this position could potentially provide a modest upside bump to our fair value estimate. Additionally, Allscripts announced a share-repurchase program of $250 million, and we are pleased to see management's focus on delivering value to shareholders through these strategic moves. After factoring the recent acquisition of HealthGrid, the recent sale of OneContent, and larger-than-anticipated share repurchases in the second quarter, our fair value estimate is unchanged at $12.30 per share.

Allscripts reported bookings of $278 million, down 32% from last year and 9% from the first quarter. Contrary to last quarter, where many HCIT players reported disappointing bookings, Allscripts' competitors have largely posted sequential increases in bookings in the second quarter. We concede that the current environment, with a mature market and providers under pressure to reduce costs, will result in lumpy and unpredictable bookings across the board due to fewer deals and longer close cycles. The firm reported its first managed-services deal with an EIS client this quarter, but we would like to see more instances of cross-selling opportunities show up in bookings.

Notably, Allscripts reported that revenue from the life sciences and payer market now contributes nearly 10% of total revenue. The life sciences and payer markets are occupied with entrenched competition, but the client base doesn't face the same limiting cost pressures and scrutiny as healthcare providers. With that said, the life sciences and payer markets represent two highly complex regulatory environments, each with their own nuances. While Allscripts can lean on its regulatory expertise from ambulatory and acute healthcare IT, any misstep in life sciences or payer services could damage the company's delicate move into these markets. If Allscripts sees momentum in this base, we would expect to see bookings recover and significant investment to develop these products and services.