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Morningstar | Allscripts Reports Mixed 3Q With Poor Booking Outlook in Competitive HCIT Space

After Allscripts Healthcare Solutions reported middling third-quarter results in early November, we reduced our fair value estimate to $11.50 per share. The firm reported another sequential decline in bookings, with $246 million in total bookings representing a 12% decline sequentially and 19% decrease from last year. Further, the backlog has been essentially flat in 2018, with Allscripts ending the quarter with total contract backlog of $4.7 billion. Management attributed the weakness in bookings to Netsmart, citing the potential sale as a distraction, and said on the call that excluding Netsmart, Allscripts' bookings grew slightly year over year. However, even with modest bookings growth, the outlook for no-moat Allscripts' mature healthcare information technology business looks tough, given competition from larger HCIT players and a difficult operating environment. With less consolidation among large providers, high switching costs, and a saturated space, we believe it will be difficult to win large EHR deals for Allscripts.

Management said it is still working on negotiations for the sale of its stake in Netsmart, despite having previously indicated that a transaction would be underway by the end of the third quarter. Given Netsmart's lackluster performance in the last quarter, we believe it may be more difficult to secure a high premium for a sale, although we note that Netsmart still remains the market leader in the behavioral health and home services niche. We hope to see an update by year-end on these late-stage negotiations.

On a positive note, the firm cited several client renewals and instances of cross-selling with Sunrise and Paragon customers. While we were pleased to see that Allscripts is taking advantage of the influx of new clients with its EIS acquisition, it will probably not be a source of sustainable growth.

The firm has recently expressed its intention of building up its life sciences and payer businesses, which presents a better growth opportunity than the mature HCIT space. It has valuable data in several million patient records, but getting a foothold in this space will require serious investment by Allscripts, including potentially an acquisition down the line. While the life sciences and payer businesses provide an opportunity for near-term growth, each of those niches is fairly saturated with competition. We expect those businesses, along with cross-selling and international opportunities for the healthcare IT business, to add incrementally to Allscripts' top line over time, but we do not expect this to significantly strengthen the company's competitive advantage, and we maintain our no-moat rating.