Feb 26, 2015
Executives
Seth Frank - Vice President of Finance & Investor Relations Paul M. Black - Chief Executive Officer, President and Director Richard J.
Poulton - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Analysts
Michael Cherny - ISI Group Inc., Research Division George Hill - Deutsche Bank AG, Research Division Jamie Stockton - Wells Fargo Securities, LLC, Research Division Charles Rhyee - Cowen and Company, LLC, Research Division David Larsen - Leerink Swann LLC, Research Division Garen Sarafian - Citigroup Inc, Research Division Nicholas Jansen - Raymond James & Associates, Inc., Research Division Eric Percher - Barclays Capital, Research Division Adam Noble - Goldman Sachs Group Inc., Research Division Saurabh Singh - Morgan Stanley, Research Division Jeffrey Garro - William Blair & Company L.L.C., Research Division
Operator
Good afternoon. My name is Jessica, and I'll be your conference operator today.
At this time, I would like to welcome everyone to the Allscripts Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Seth Frank, Vice President of Investor Relations.
Please go ahead, sir.
Seth Frank
Thank you, Jessica. Good afternoon.
Today with us on the call are Paul Black, Allscripts' President and Chief Executive Officer; and Rick Poulton, our Chief Financial Officer. Some brief safe harbor statements.
Some of the statements that we will make today may be considered forward-looking, including statements regarding future investments and our future performance. These statements involve a number of risks and uncertainties that could cause our actual results to differ materially.
These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our SEC filings for more detailed descriptions of the risk factors that may affect our results.
And now I'd like to turn the call over to Paul Black, President and Chief Executive Officer of Allscripts.
Paul M. Black
Good afternoon, and thank you for joining the Allscripts Fourth Quarter Earnings Call. I'll begin with a review of the financials, give my perspective on Allscripts' progress and update you on the corporate growth strategy for 2015 and beyond.
Fourth quarter bookings were $244 million, up 10% from the third quarter, which is typical of fourth quarter seasonality. Bookings declined compared to the fourth quarter of 2013.
Fourth quarter bookings included strong double-digit growth in ambulatory solutions, managed IT services and international sales. We saw strong a demand in population health solutions in the quarter, but bookings were down on a year-over-year basis due to the bolus of demand we experienced last year for Allscripts' industry-leading patient portal solution.
Adjusted EBITDA increased 8% for the quarter and 11% for the full year. Non-GAAP EPS increased 19% for the quarter and 15% for the year despite an increase in the effective tax rate for the year.
Allscripts revenue declined 3% for the quarter and was up just shy of 1% for the full year. For the full year, we had double-digit increases in subscription and managed IT services revenue, but this was largely offset by a reduction in low-margin nonrecurring revenues.
Rick will speak to the details regarding Allscripts' revenue and performance for the year. I want to say 2 things about it now.
Overall, we are disappointed with the revenue results for the year and the expectations gap we created with Wall Street relative to Allscripts' own plan as well as the company's actual performance. We are addressing this to the annual guidance we are providing for 2015.
We are committed to improving transparency and communication on this front. Second, even with the actual 2014 revenue performance, we can see the opportunity for operating leverage in meaningful bottom line growth and free cash flow generation.
This improved operating leverage translated into an improvement of over $70 million in free cash flow for 2014 compared to 2013. In January of 2014, we bought forward a 3-year financial plan with 4 pillars: one, continuing to generate bookings at or better than levels we've generated in 2013; two, maximize client retention; three, continue to drive SG&A efficiencies; and four, continuing to invest heavily in Allscripts solutions consistent with the 2013 levels in order to drive long-term value for the company's clients and shareholders.
Following this playbook, we expected the flow-through of high-quality bookings into revenue to yield a 3-year revenue CAGR of 5% to 8%, with the operational leverage of this model yielding a 3-year adjusted EBITDA CAGR in the 18% to 22% range. Looking at 2014 results.
Overall, we executed on every pillar of this plan. Bookings was solid and increased 2% for the year.
Client retention was strong, evidenced by the maintenance revenue results compared to the prior year. SG&A costs have declined nearly $40 million on an apples-to-apples basis compared to 2012 levels.
And fourth, as you can see, Allscripts' research and development investments continue to deliver significant value to the solutions portfolio. While we did not expect the yield in revenue and adjusted EBITDA growth to be linear across a 3-year period, the yield from the reported revenue perspective in 2014 was disappointing due to the factors I mentioned earlier.
I am, however, encouraged by the earnings growth and free cash flow improvements in 2014. We believe continued focus on the company's operating plan will continue to pay off in the form of more predictable results over time.
We began to execute this plan by investing nearly $0.5 billion in research and development in 2013 and 2014, a 28% increase over the prior 2 years. We accelerated investments in core EHR platforms to deliver cost-efficient and robust solutions to improve Allscripts' competitive position.
This focus has driven significant positive change. We have strengthened the quality, breadth and depth of core solutions.
This has enabled us to expand business within the client base and add new clients. In total, Allscripts added nearly 800 new client accounts all points of care in 2014.
Other examples of success include achieving Meaningful Use 2 certification for all EHR solutions, a planned upgrade that supported both Meaningful Use and ICD-10 compliance; improving Sunrise Ambulatory Care to help drive value for clients and be recognized as a fully-rated ambulatory solution by Cross Research; launching Sunrise Surgical Care, adding a fully integrated complement to the Sunrise platform; and launching Sunrise Mobile Care. Today, 90% of Allscripts' eligible hospital clients have demonstrated and attested for Meaningful Use 2, a major improvement compared to 2 years ago.
We also expect a significant number of TouchWorks clients to attest for MU2 by the February 2015 deadline. At the end of 2014, Allscripts ranked third in total attestation across all solutions for eligible proprietors in hospitals.
We have also improved client satisfaction. This is reflected in recent data from Cross Research ranking Allscripts as the second most stable acute EHR provider as measured by system replacement risk.
As a result, we have improved the stability of Allscripts' client base and market share, as evidenced by improved bookings in 2014. The improvements in Sunrise are also evident in the third-party recognition we received last year.
These included Black Book market research naming Allscripts as a top inpatient EHR supplier for facilities over 300 beds. And Sunrise has just been named Best in KLAS for Global EHR.
We are also seeing client achieve important milestones leveraging Sunrise. We've recently announced that Springhill Medical Center in Mobile, Alabama achieved Stage 7, the highest level attainable on the HIMSS Analytics EMR Adoption Model.
I'm also pleased to be congratulate Allscripts' client, St. Clair Hospital in Mt.
Lebanon, Pennsylvania, which received the 2004 (2014) HIMSS Davies Enterprise Award for improving patient outcomes and financial results through health information technology. We look forward to more of these client success stories in 2015.
Within the ambulatory business, we had double-digit bookings growth in the fourth quarter, including a significant net new TouchWorks client for integrated EHR, practice management, Payerpath and FollowMyHealth, all deployed through Allscripts' hosting services. We also had a strong finish to the year in Professional EHR.
Turning to population health. dbMotion, FollowMyHealth, Care Management and cost accounting solutions are proven scalable technologies being deployed both inside and outside Allscripts' client base.
The increased consumer engagement is particularly exciting. At the end of January, there were over 3.5 million active personal accounts on FollowMyHealth platform.
These consumers are connected to approximately 326,000 caregivers, representing almost 3,200 provider organizations. DbMotion continues to scale.
Today, we have over 335 unique source systems with virtually every major EHR supplier connected to the community record. We believe we have significant competitive advantages here.
dbMotion is a solution that sits above disparate EHRs with advanced clinical workflows to create a single patient-centric community record. This provides valuable benefits such as the preservation of existing IT investments, speed of implementation and minimum risk of interruption in the transition to value-based care.
In addition, Allscripts' open technology and increasing number of industry partnerships enable us to offer bundled solutions to help clients address the changing reimbursement and competitive landscape in health care. We are doing this by working with strategic partners to deploy service offerings that expand beyond traditional IT budgets.
For example, we are bundling technology, analytics and services to provide innovative Care Management services that enable providers to participate in the economic benefits of risk-based contracting. This approach provides an asset-light alternative to M&A or physicians abandoning independent practice.
Early results are encouraging. In Q4, we generated several million dollars in sales with this ACO suite of offerings.
Another new opportunity is assisting health systems manage referral patterns more efficiently, maximize revenue opportunity and manage the shift to value-based care by reducing referral leakage outside of their own networks. The revenue opportunities are significant.
Our recent analysis completed for an IDN client identified only 3% of physical therapy referrals are directed in network. In cardiology, only 50% of referrals were going in network.
This is where the scale of Allscripts client base provides a tremendous advantage. For example, we drove 10 million referrals to Allscripts Care Management in 2014.
This represents a 10% increase in referral volume compared with 2013 and can result in significant ROI for clients. I'd like to discuss a new collaboration with MaineHealth.
MaineHealth and Allscripts will collaborate on the development and delivery of cutting-edge physician medicine solutions directly to the point of care. The companies will introduce an integrated, evidence-based, personalized approach to health care solutions that include actionable clinical data, enabling physicians to make better decisions.
Taken together, we are uniquely positioned for the shift to population health management. We are leveraging the scale and network effect of the vast Allscripts installed base, the open interoperability advantages of dbMotion, the company's leading Care Management platform, the growing analytic capabilities and new service offerings to bring more value to clients as they transition to accountable care.
In managed IT services, we believe demand remains strong, and we still have work to do to improve the profitability within the hosting business. The shift to off-premise infrastructure continues.
Managed IT services bookings grew double digits in the fourth quarter and over 45% year-over-year. The opportunity within Allscripts installed base remains significant.
Today, we host approximately 55% of Sunrise clients but only 10% of TouchWorks clients and 30% of professional EHR clients, a significant cross-sell opportunity. As we continue to scale a second hosting facility this year, we expect to grow margins in 2015 and beyond.
I'm also pleased with the company's international business as we focus on significant EHR opportunity in select markets outside the United States. International bookings increased double digits in the quarter and full year compared to 2013, benefiting from the wins from the U.K.
and Singapore. In Q4, we added a new global Sunrise client, International Hospital Management Corporation, who will be installing Sunrise at Hospital CIMA in San Jose, Costa Rica.
With Sunrise gaining Best in KLAS recognition for global EHR and a growing pipeline, we expect more new international business in 2015. Looking to 2015 and beyond, I am optimistic and energized about Allscripts' prospects.
Our growth strategy is based on increasing both wallet and market share globally, providing new value-added services and finally, providing complete and innovative solutions for the health care industry to navigate to a fee-for-value reimbursement model. Allscripts' key differentiation today is the ability to integrate information and make it actionable across care sites, disparate actors and even across disparate EMR systems.
This enables multisite integration without the need to replace existing IT infrastructure. We provide an affordable alternative to rip-and-replace.
Allscripts is rapidly becoming best in class in supporting customizable integrated workflows for patients with high-morbidity, high-cost conditions and for serving targeted populations for emerging programs and interventions. We will provide the solution to allow condition-based care teams to deliver high-value care across the care venues.
We will also give clients easy access to all the data they need to help them drive value. We plan to lead the industry by marrying cost and outcome measurement tools to enable value improvement as well as support emerging reimbursement model.
Executing on this vision requires a scalable direct to consumer care engagement platform that goes far beyond today's common web portals. To do this, we are creating an advanced architecture that is team-centered, multi-site, cloud architected and subscription based.
There is more work to do. We have already improved corporate efficiency, integrated solutions, substantially improved quality and rankings and created a profitable and growing business.
And with that, I will turn the call over to Rick to discuss the financials in detail. Rick?
Richard J. Poulton
Okay. Thanks, Paul, and good afternoon, everybody.
As I review the fourth quarter and full year results, please reference both the GAAP financial statements as well as the non-GAAP tables in our earnings release and the supplemental data sheets that were posted to our Investor Relations section of our website earlier this afternoon. Let me start the review by echoing a couple of Paul's comments.
We executed pretty well during the year on each of the 4 pillars of our business plan. While overall revenue results were disappointing, there were many positive signs of progress as well.
From a financial perspective, both the fourth quarter and the full year was characterized by sequential bookings growth, stable gross margins, declining operating expenses and growth in adjusted EBITDA, free cash flow and earnings per share. So now let's talk about some of the details.
In terms of bookings, growth trends were pretty similar in the fourth quarter as they were for the whole year. Paul mentioned these earlier, but just to recap, we saw strong double-digit growth in our ambulatory solutions, managed IT services and our Payer Life Science business.
International business is still a little lumpy, so we do not see a big increase in Q4 comparisons, but we did have a strong double-digit growth for the full year in this area as well. These growth areas were offset by some decline areas.
For the quarter, Paul mentioned the impact of the year-over-year change in demand for our patient portal solution. It's again due to the MU2-driven bolus of demand last year and we do not believe is indicative of any change of market sentiment in the attractiveness of our solution.
It's important to note that overall demand for population health solutions, including portal, was strong. And on a full year basis, we saw pretty consistent booking numbers in this area.
For the full year, bookings were weighed down by a double-digit reduction in professional services. It's important to understand this area because it has a lot of impact on the revenue results and our outlook for revenue that I'll discuss in a little bit.
So to start, professional services is a labor content that tends to be project-oriented. And it primarily represents the installation and upgrade services that we perform for our clients.
So just to be clear, it does not include managed IT services such as hosting and outsourcing. So for this reason, we characterize professional services as nonrecurring revenue, whereas our managed IT services tend to be provided under multiyear contracts.
And we consider these recurring revenue sources that are included in our transaction processing and other line on the income statement. We see 2 factors that are influencing the volume of demand for professional services.
The first is actually a good thing that has allowed us to be more competitive in winning new business. We have created a much more efficient installation process for our new Sunrise and TouchWorks installs, which delivers a standard configuration solution in significantly less time, thereby lowering our cost to clients.
An example of this is we took our new TouchWorks client, Alignment Healthcare, into a live production environment within 51 days of contract signing earlier in 2014. The second factor is we are seeing some client fatigue coming off of the upgrade demands of MU2.
With the possibilities of MU3 upgrades looming next year, and in the case of our significant roster of New York-based clients, mandates to upgrade for electronic prescription of controlled substances, we see clients as wanting to catch their breaths, so to speak, and moderate any near-term upgrades that are not required. The results of the bookings and renewals we recorded during 2014 allowed us to end the year with $3.4 billion in contract backlog.
And details of this can be found on our supplemental data sheet. When I look ahead for bookings, I want to say 2 things.
First, I would point out that we saw nowhere near the level of seasonal variability in demand between quarters in 2014 that we have seen in prior years. We are not sure if that was a 1-year anomaly or rather that it's indicative of a change in buying patterns now that we see a larger level of subscription-based services and subscription-based software.
The second observation I'll make is that while we are not providing specific range guidance on bookings, we do expect bookings to grow in 2015 relative to 2014 driven by the constructive factors and outlook that Paul went through in his comments. Now I want to move on to revenue.
You've heard it twice already, but I'll say it one more time. We are disappointed with our overall reported revenue for the fourth quarter, disappointed in the overall number but also disappointed that we didn't do a better job communicating to you.
A good portion of the fall-off in professional services revenue that you see in our income statement for the quarter comes from lower demand that are referenced earlier, and this should have been forecastable at the time of our third quarter earnings call. You may recall that we highlighted that we were on our plan through 9 months during our third quarter call, and this was true.
But we are clearly telling you now, our top line results finished the year below our expectations, and we should have been able to connect those dots a little better at that time. So our commitment is to try and get better with our future communications as it comes to these type of areas.
Revenue trends were pretty similar for fourth quarter comps as they were for the whole year, so we'll talk about them together. The overall reported results were being driven by 2 largely offsetting forces.
As Paul mentioned, we had very nice double-digit growth trends in our subscription software revenue as well as our managed IT services revenue for the year. But this was largely offset by a reduction in low-margin, nonrecurring professional services as well as hardware revenue.
Collectively, these were down in the range of $20 million to $25 million year-over-year. As I mentioned, a portion of the negative impact from professional services is a function of the lower demand that I discussed.
But this revenue line is also impacted by the timing of client projects as well as some complex accounting rules that govern the timing of revenue recognition. These last 2 factors create quarter-to-quarter variability on this revenue line item, and we will unfortunately continue to have that type of variability in the future.
If you look at the balance sheet, you'll see a pretty good evidence of what I'm talking about as you look at our deferred revenue. Deferred revenue grew $30 million on a year-over-year basis, and that's in part explained by the impact of these factors.
Unfortunately, while we contemplated some decline in these low-margin areas, the results were more significant than we anticipated. As Paul mentioned, we are identifying new services opportunities for our associates, and we look forward to broadening the scope of what professional services stands for beyond just installation and upgrade services.
But for Q1, I expect professional services to be down $5 million to $10 million from Q4 levels and then begin to rebound in Q2. And so for the full year, I would expect professional services to be somewhere in the area of $200 million for the full year.
Moving to gross margins. Our total non-GAAP gross margins declined just slightly to 43.9% compared to 44.4% in the year-ago fourth quarter.
But gross margins increased 160 basis points sequentially, reflecting the low margin revenue decline that I discussed earlier relating to professional services. For the full year, non-GAAP gross margin was flat at 43.7%.
Remote hosting, which remained the gross margin drag in 2014, so the way to think about it is while we lost some low margin revenue business, and that should have otherwise perhaps driven gross margins up, the investment we made in our hosting business kept those gross margins flat. And so we're happy to be able to offset the margin drag that hosting would have otherwise driven.
We made significant investments in hosting during 2014 to improve client satisfaction and set the stage for profitable growth in the future. These investments have included adding resources as well as partnering with new organizations to provide infrastructure.
We expect relatively stable investments during 2015 but an acceleration of revenue growth as clients who have signed with us transitioned to our hosting services. So thus, we anticipate existing 2015 -- exiting 2015 at or near profitability as a significant positive ramp.
Looking at expense total. Operating expenses declined 9% on a non-GAAP basis compared with the fourth quarter of 2013.
The decline in operating expenses for the quarter reflects initiatives to decrease corporate SG&A, streamline business functions and leverage prior investments in research and development. Non-GAAP SG&A declined approximately $8 million from the year-ago period to $80.2 million.
And I'd like to remind you that there are some seasonal impacts in this cost area, so it's best to look at it for a full year basis. You may recall that 2 years ago, we set out an SG&A goal to reduce our SG&A by over $40 million on an apples-and-apples basis.
We've included a table with the press release that accounts for that and shows you the comparisons of where we ended 2014 relative to that 2012 period when we set that goal, and I'm happy to report that we met that goal. It doesn't mean we're going to stop there.
We have built a plan that continues to chase efficiencies, but did I did want to note that we were successful in accomplishing that goal we set out 2 years ago. Our total nonrecurring expenses in 2014 were $25 million, which is a pretty significant reduction from 2013 and just slightly higher than the approximately $20 million that we set out as a guidance for you a year ago.
Looking to 2015, we believe we have largely wound down these nonrecurring-type expenses. We may have a small item in Q1, but for the rest of the year, I would not expect to have much in nonrecurring expenses.
Our reported R&D for the quarter was $42 million, and we capitalized $11 million of that to our balance sheet. Total dollars capitalized increased $2 million compared to Q3, while gross R&D spend declined $2 million for the third quarter -- from the third quarter.
Our software capitalization rate was flat at 17% for 2014. When you look at this in total, our gross margin performance improved with our operating efficiencies.
Our non-GAAP operating income increased 22% in the fourth quarter and 37% for the full year. Our adjusted EBITDA for the period, which you can find on Table 5 of our press release, was $52 million, representing a 15% EBITDA margin.
Our adjusted EBITDA increased 8% compared to the year-ago period in the quarter. And for 2014, in total, our adjusted EBITDA was $199 million, an 11% increase from 2013.
With regard to some other housekeeping items, we recorded approximately $3 million of noncash interest expense related to our convertible notes. This is very similar to prior quarters.
For purposes of our non-GAAP net income, we do exclude this noncash interest charge. So our non-GAAP net income totaled $17 million or $0.09 per diluted share, which is, we believe, in line with First Call consensus and compares to $0.08 in the fourth quarter of 2013.
For the full year, our non-GAAP net income increased 17% to $56 million or $0.31 per diluted share. Looking at the cash flow statement.
We generated $51 million in cash flow from operations in the fourth quarter and $104 million for the full year. A significant reduction in our cash charges -- nonrecurring charges during 2014 as well as narrowing CapEx requirements drove this improvement.
We are pleased to have improved free cash flow by approximately $70 million when you look at it on a year-over-year basis. Now turning to our guidance.
As you have read, we are introducing 2015 guidance today. This guidance replaces the 3-year outlook we've provided at the beginning of 2014.
Investor input has been very clear around the preference for annual guidance metrics, and this is also generally in line with the practice of our peer companies in our competitive space. We anticipate 2015 non-GAAP revenue of between $1.43 billion and $1.46 billion.
I would add that, that's also our outlook for GAAP revenue as we don't expect to have GAAP to non-GAAP adjustments in 2015. Our adjusted EBITDA outlook is between $230 million and $250 million and our non-GAAP EPS between $0.42 per diluted share and $0.50 per diluted share.
So to summarize, many of the tenets of the playbook for growth we began discussing 2 years ago are playing out. Recurring revenue is growing.
We are managing costs and managing our client retention. The operating leverage in our financial model is becoming more and more evident as cash flow and adjusted EBITDA are growing as well.
While top line trends are not what we want them to be, we are encouraged that the strategic components of the business are expanding and doing relatively well. From a growth perspective, Paul highlighted some important third-party data that has fortified our competitive position in the market.
We believe we have a strong set of assets going into 2015 for growth markets like population health as well as our core EHR platform that is a compelling offering for those organizations considering EHR replacement domestically as well as internationally. So with that, thank you for listening, and I will now open this up for questions.
Operator
[Operator Instructions] And your first question comes from Michael Cherny.
Michael Cherny - ISI Group Inc., Research Division
So Paul, you're just past your 2-year anniversary on this business, and obviously, when you took over in December 2012, it was a very different organization. And you outlined a lot of the positives you'll be able to drive with the help of the associates and your management team with the business.
You also talked about some of the challenges. If you think back maybe to then, think back on the transition over the last couple of years, what's been the biggest kind of positive surprise or claim that you're happy in terms of the goals you achieved?
Obviously, I know that the revenue is not where you want it to be and you're working hard on that, but in terms of what are you most proud of, is it the stabilization of your product base? Is it the customer retention that you're starting to see?
I just want to get a sense of relative to what you initially anticipated when you took over this job, what you're most pleased with.
Paul M. Black
Michael, I would say I'm most pleased with the fact that we discovered and reenergized an installed base that has, for the most part, stuck with us during this time, not only to make it through the ICD-10 transitions that are going through but also through the MU2. So as I see it, I think on the very first call that we had the lot of outstanding obligations to the client and we wanted to make sure through R&D, through our client organizations, through our professional services organizations, that we fulfilled those obligations.
So I'm probably very -- or most pleased with the fact that our clients are attesting for and demonstrating adherence to the MU2 process because that was extraordinarily important to everybody. I'm also very proud of these teams being able to get clarity around the product development and getting more productivity out of the research and development organization to deliver new products to fill some of the gaps that we had that have not been filled in the prior years.
A lot of feedback from clients, both on TouchWorks, Sunrise, Pro, on -- here are some gaps, here are some things we want you to get completed to make these solutions better. And the last thing I would say is I think we have very well positioned the company for the trend, moving from fee-for-service to value-based care.
Our Population Health Management solutions are leading in the industry. The FollowMyHealth consumer engagement solutions are leading in the industry, and I'm pretty proud of that.
Again, it's been a long pull here of very good, solid team effort with everybody inside this organization but also a lot of support from our clients. And lastly, the work that's been done to stabilize the financial underpinnings of the company have allowed us to be able to do a lot of the investments that we needed to make in order to pull this off, and I think that's also been very a important component to the overall stability of the company.
Operator
Your next question comes from George Hill.
George Hill - Deutsche Bank AG, Research Division
And I guess, Rick, I'll start with you. So you guys didn't necessarily back off a long-term guidance.
You expressed some disappointment and replaced it with a 2015 guidance. But I guess I want to ask you about like how we should think about the context of the long-term guidance because it doesn't seem like anything has changed with the financial model that you guys presented a couple of years ago.
You're a little disappointed with how some of the revenue lines came in and some of the moving pieces. And I guess as I think about the previous long-term guidance kind of -- has anything -- I guess I want to understand, has anything changed with some of the underlying moving pieces why so long as the bookings grows in 2015 and the mix stays kind of what you were talking about before that the kind of the tenets of the longer-term guidance doesn't hold up?
Richard J. Poulton
Yes. I mean, George, I think directionally and that's -- I mean, the message that we're delivering today is the fundamental plan we laid out, we're executing on, and it's largely playing out as we expected.
Some of these challenges we saw and tried to describe around some of these nonrecurring revenue areas were not things that we projected as well as -- with the benefit of hindsight, didn't project them as well a year ago. Those impacts are real, obviously.
And so it makes it marginally more difficult to think about the revenue range we set out a year ago. But I think from our standpoint, there's lots of things that we feel good about, lots of things that we're excited about.
And I'm certainly not telling you -- anybody that those ranges are impossible, but we think it's -- the right thing to do is pivot to an annual guidance, and that's what you should try to hold us to.
George Hill - Deutsche Bank AG, Research Division
No, that's fair. And I guess I was going to ask if we back out kind of the professional services and the software piece, it would seem like the underlying guidance still holds.
But we could kind of adjust till the cows come home. Maybe a quick follow-up then is I guess can you give us something or can you quantify the severity of the impact of the patient portal bookings, I guess, as we think about the back half of '13 and '14?
And maybe if you could kind of quantify what growth looks like x-portal. I'm just try to get a sense of the drag here.
Richard J. Poulton
For the quarter, George?
George Hill - Deutsche Bank AG, Research Division
Yes, for the quarter or for the back half, whatever you can quantify.
Richard J. Poulton
In absolute dollars, you could attribute the entire -- there's obviously several moving pieces, right, but if you just try to get a gauge what was the impact, you could attribute the entire variance to that.
George Hill - Deutsche Bank AG, Research Division
Okay. And unlike Michael, I'm going to be greedy on this.
So one last one in for Paul. Paul, the hardest thing for us to probably see on our side is the churn on the ambulatory side of the business.
And if you look at the class data, it seems like there's a real barbell approach. There's a group of clients who kind of really love what you guys do in the ambulatory and there's a group of clients who kind of seem to be disappointed.
I guess can you talk about what the churn looks like exiting '14, what you guys are looking like for '15 and kind of client satisfaction approach?
Paul M. Black
Yes. I think to that extent, George, that we have any clients that aren't happy, we're not -- we're not happy either.
We're trying to make sure that we align with our success and try to do everything we can to make them be successful. Any client that leaves is a sad day for us.
From my perspective, we are focusing on making sure that not only do they have all of the solutions that they need around MU2, EPCS, DSRIP, whatever else the requirements are that they may be working on, but importantly give them a future hope for -- with regard to how they can maintain their independence on the marketplace by helping them participate more actively in the broader ecosystem around population health and being able to potentially go at risk. A lot of them are at risk already, and they don't know it because they're doing some free care, et cetera.
But there's a lot of folks that are positioning themselves, and we're trying to ensure with them their capability to go at risk and to get more actively involved in ACOs and other arenas like that. We have some clients, organizations that are extraordinarily happy, and we have some that we have not been as good in supporting.
They might have had an upgrade issue, and as I said earlier, we're not happy if they're not happy. But I think broadly, George, we're not seeing anything in the 2015 guidance that's got a monster or any sort of huge impact on the ambulatory, if you will, attrition.
Operator
Your next question is from Jamie Stockton.
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
I guess maybe, Rick, if we think about the revenue guidance for 2015, you're saying pro services, somewhere around $200 million. I think you guys have said at least maybe for '14 and I'm assuming it's the same for '15 that maintenance is kind of flattish.
Should we be expecting a lot of the top line growth that come from that transaction, SaaS and other lines, essentially driving the 4% growth at the midpoint?
Richard J. Poulton
Yes, Jamie. I mean, the -- by process of elimination, that's right.
Maintenance has some upside opportunity, but you're right, I mean, given that we're selling most of our stuff on a subscription basis, not getting a lot of new action in the system sales line or the maintenance line. So everything is kind of coming down to that line.
And I'll take the chance just since you asked the question, given that, we're actually thinking about maybe, in the first quarter, think about maybe changing our revenue line presentation to help give a little more transparency and a little more information because everything is tending to gravitate to that one line. So we'll talk about that later, but I just want to let everybody know that we're thinking about that.
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
Okay. That's great.
And maybe one other one, just on the EBITDA and EPS guidance. Can you give us some color on what is going to leave you guys at the low end of the range versus the high end of the range for the year?
Because on a relative basis, and I guess maybe on EBITDA especially, it seems like there's a pretty big range there.
Richard J. Poulton
I think the line items, Jamie, from my perspective, the line items hang together pretty well. So the revenue range, EBITDA range and EPS range are fairly internally consistent.
It comes down to roughly when you just talk about EBITDA, a 10% range. I guess I'll just tell you that, from my perspective, that was a range that gave you some sense of what we thought we could accomplish but also provided appropriate buffers around some of our thinking.
So not really a whole lot more scientific than that. I think if we see top line -- the flow-through of bookings, let's start with depending on if we see the bookings, we're assuming and we're seeing the flow-through, which is influenced by several things.
But if we see the flow-through come through consistent at or better than our current outlook, then you get toward the higher end of the range. And conversely, if a little softer bookings, a little softer flow-through, you'll get to the lower end of the revenue range.
And I think the EBITDA and the EPS flow from that based on our cost plans.
Operator
Your next question comes from Charles Rhyee.
Charles Rhyee - Cowen and Company, LLC, Research Division
Paul, I wanted to ask you, obviously, a lot of changes over the last years as some of your comments have been earlier and you feel pretty good about where you are with some of your strategic priorities over the last year, particularly improving sort of the product suite itself. So as we think going forward, you've done a good job managing client attrition and client satisfaction.
What do you think are the reasons if -- as you go forward if a client is leaving? Or what do you see as probably their primary issues with the company that was forcing the decision at some point, if and when those occur?
Paul M. Black
Sometimes when they leave, it's because they were acquired by somebody else and somebody else had a rip-and-replace strategy. And so we obviously go after that as aggressively as we can to remind them of the time and the effort, the energy that's going to be spent on taking our solution out and putting somebody else's in.
At other times, there may be an unfortunate issue where we've not been able to deliver some piece of functionality or something that would -- that have been expected by them and where we have not been able to generate success for them. But broadly, Charles, I don't -- there's not -- there's reasons why people depart.
But a lot of it is in environmental, and some of it is things that we've -- an issue that we have cost that we unfortunately are unable to remedy. In some cases, it could be there's an offering from somebody else that we don't have, and that's what we've been working extraordinarily diligently over the course of the last 24 months to increase the R&D to close those gaps.
So the list of reasons why someone would leave today would be shorter, a lot shorter than they would have been perhaps a while back.
Charles Rhyee - Cowen and Company, LLC, Research Division
No, that's helpful. And then as we think about the professional services side, I mean, overall service levels, how do you feel the organization is performing?
You obviously came from a high-performing services organization beforehand. Do you feel like you're at a spot that you're confident in?
Or do you feel you still have some more work to go? Any sort of additional color there would be helpful.
Paul M. Black
And so I'd say we still have some work to do there. The organization has been extraordinarily busy doing a lot of upgrades over the course of the last 18 to 24 months.
So the people have been working very, very hard. But when you look at the performance of the organization, nobody's pleased with it and we do still have some work to do.
We've changed some of the talent that's managing that organization, and my expectations from an internal operational standpoint is we've made progress and we have more to do and we are putting in the right set of metrics to continue to drive that business towards a higher margin set of capabilities. Because there's plenty of work out there to go get done.
We would love to sign up for more of the work that has to be done, and we want to make sure we're doing it in a very profitable yet fair way for our clients.
Operator
Your next question is from David Larsen.
David Larsen - Leerink Swann LLC, Research Division
Paul, can you talk about the Sunrise solution? And I know you've made a lot of progress on the ambulatory product within Sunrise.
I think you won Best in KLAS for large physician groups or ranked high in KLAS for large physician groups. Can you talk about your presence there in midsize and small groups for Sunrise Ambulatory?
Is where it needs to be?
Paul M. Black
Yes. I think the benefit that we had was we had a substantial amount of experience in doing ambulatory solutions for a very long period of time, both from a billing component, registration, back office set of functionality as well as the workflows by specialty type.
So bringing that experience from other elements of the business into the Sunrise business unit helped us, I think, accelerate the acceptance of that and make sure that we came out of the box with solutions that people like. The amount of time it took us to get to that level of performance, I was very pleased with.
Quite frankly, we've got some clients that have enjoyed the benefit there for a long period of time, and we got to the total number that you needed to get to in order to make the grade with KLAS to remove the asterisk. But if you look historically, that asterisk has been there but we have had a very high rating.
So it's been a long time that we've been working on it. We've got a lot of clients that are very satisfied with it, and a key to it has to do with the fact that's a single integrated architecture and that it has a lot of clinical content that specialties are looking for out of the box.
Charles Rhyee - Cowen and Company, LLC, Research Division
Great. And then, Rick, for the EBITDA guidance for 2015, the growth rate, quite frankly, I think, is impressive on a year-over-year basis.
If you could just touch on like the 3 items that are going to drive that earnings growth and then just any high-level comments around the sustainability of those items into 2016 and beyond.
Richard J. Poulton
Sure, Dave. Thanks for the question.
Yes, I'm actually glad you make that observations because I've said it a few times, but I'll jump on it again. I mean, we really have always believed there's tremendous operating leverage in this model we have.
We're being absolutely maniacal about controlling our operating expenses. We're continuing to invest in our solutions heavily, but we hit that kind of level, we think, is the right level and it doesn't need to grow from there.
So when you think about a flat operating expense environment, even modest top line growth at the kind of margins we generate creates significant leverage down the P&L, and that's what gives you that type of EBITDA and EPS growth. And so those levels are very sustainable, and I think at the size we're at, I think we can continue to play this playbook for a while because we can scale off of our cost base, we think, a long way on the revenue side and do this.
So as long as gross margins kind of stay strong, you have that type of power. Thanks for the question, Dave.
Operator
Your next question is from Garen Sarafian.
Garen Sarafian - Citigroup Inc, Research Division
I appreciate the candor, but I wanted to just go back to long-term guidance again and how you guys are thinking about it. So Rick, you mentioned it's getting more difficult.
It sounds like it's more getting difficult to project revenues so you decided to follow what's more of a general practice. But in some of the things that you sort of characterized as taking a breather don't necessarily lead to withdrawing long-term guidance.
So I'm just trying to get a better understanding of, is there anything more that you can provide as to what you're seeing to withdraw guidance? Because -- maybe to reciprocate the candor back, looking at long-term guidance -- I mean, looking at 2015 guidance, the top line is certainly below consensus, but it's not necessarily a reason to withdraw long-term guidance.
So just trying to get a better understanding of what you're seeing beyond this year.
Richard J. Poulton
Well, Garen, I guess we would probably take issue maybe with the characterization that you're doing. And certainly, I respect your opinion, but I mean, we don't see it that way.
The way we have seen the progression is we put out 3-year guidance a year ago and found ourselves in a situation where just even in year 1 of that, we had a fairly large disconnect with The Street. It was too broad of an outlook, and The Street had a wide range of expectations of what that was going to translate into.
And it made it very difficult to have effective communications with The Street because of that. And so over the course of the last year in numerous settings of conferences, non-deal roadshows, you name it, we've gotten a very resounding feedback that there's a preference for annual guidance.
And so from our standpoint, we're not aware of anybody who has both annual guidance and multiyear guidance out there. If there is anybody, I'm not aware of them.
But in either case, from our standpoint, one set of guidance is the right thing to do. So I think we -- everybody who follows us has the benefit now of understanding what our aspirations were over a 3-year time period, but now we've given everybody a look at what we expect to do in the coming year -- or the year we're in, sorry.
So that's how we think about it.
Garen Sarafian - Citigroup Inc, Research Division
No, that's absolutely fair. I appreciate that.
And then just as a follow-up, one comment that you guys had made was also that -- again, I appreciate the candor in saying that you guys could have done better in terms of communicating some of the fourth quarter metrics. Was that truly communication?
Or were there some operational improvements that you guys have made or are making now that will allow you to more quickly update us? I just wanted to know if that's sort of a longer-term commitment or if it's something that's already been fixed.
Richard J. Poulton
It's a little bit of both, Garen. I don't -- we didn't have as tight a process as I feel like we do now in terms of visibility a couple of quarters out and that I think that has improved process-wise.
But frankly, some of it, we probably benefited a little bit now by having the longer cycle between year end and when we're reporting to really look at the numbers both historically as well as what we're seeing ahead and craft a better message. And sometimes at the end of quarters, on a shrunken timeline, you get a little pinched for time.
But I'm not going to use that as an excuse. We need to do a better job and we're committed to doing the best job we can.
Operator
Your next question is from Nick Jansen.
Nicholas Jansen - Raymond James & Associates, Inc., Research Division
I just want to talk a little bit more about free cash flow. Obviously, a lot of improvement in 2014, $70 million year-over-year.
And if you look at the midpoint of your EBITDA guidance for '15, you're talking about $40 million of improvement that should translate into cash flow. So I just want to get a sense of how you're thinking about free cash flow in '15 and maybe even to '16 and beyond and kind of the capital deployment priorities that you want to lay out forth given kind of where the stock is trading today?
Richard J. Poulton
Sure. Thanks.
Yes, I think the way you should think about it is we continue to have -- if you start with the EBITDA number, we clearly have some CapEx we have to fund. You saw what we did in 2013.
You saw what we did in 2014. And there's a fair amount of variability there.
I mean, the general guidepost I give to people is in the ZIP code of somewhere between $75 million and $100 million a year. This should be our run rate CapEx requirement.
As you grow, you got to fund the balance sheet a little bit. You got to fund working capital a little bit.
But I think you can sort of take an EBITDA number and subtract off assumptions for both of those 2 categories, and that's the kind of ZIP code of free cash that we should aspiring to generate, and that's what we are aspiring to generate. In terms of priorities, we still think this is a growth business.
And so we continue to -- our first priority would be to make smart investments that help grow long-term earnings opportunity. So we'll continue in that regard.
We're comfortable with our leverage levels. So I don't feel any burning need to pay down debt.
We would like to continue to keep dry powder available to us so that we're not inhibited by investments. But I don't feel uncomfortable with our debt levels.
So when we get to the point where we're generating the cash flow and building up a little war chest, I think then we'll have -- we'll come back to that question. But I have no hesitation to tell you, the board as well as this management team is very focused and committed to driving shareholder value.
So however we think drives the most shareholder value, that's what we'll do with the cash.
Operator
Your next question is from Eric Percher.
Eric Percher - Barclays Capital, Research Division
You mentioned in your prepared remarks that you weren't seeing some of the calendar variability or seasonality relative to purchasing variability. I think those are 2 words that you used.
Would you just unpack that for me?
Richard J. Poulton
Yes, I'm sorry If that came across as a riddle. I didn't -- that wasn't the intent.
I get -- what I'm -- what I was making sure everybody saw is if you look at the 4-quarter trend of 2014 and the 4-quarter trend of 2013 in our reported bookings, you would see from peak to trough in 2014, you had only a $20 million variance in any quarter versus peak to trough in 2013, you saw almost $100 million variance. And if you look prior to that, 2012, 2011, I think you would have seen similar variability in that ZIP code of peak to trough.
So it's a much, much more consistent bookings pattern that, frankly, makes for an inefficient sales effort on our part, but I'm just -- I just want to make sure everybody saw that. We're not sure what to make of it yet, but I want to make sure everybody saw that.
Eric Percher - Barclays Capital, Research Division
And when you go a level deeper and look within the SaaS line and transaction, I know you said you're thinking about providing more details there. I imagine that SaaS there is that you're seeing stability.
How much of it is a function of that?
Richard J. Poulton
Is the SaaS revenue a function of the more or less volatile bookings, is that the question?
Eric Percher - Barclays Capital, Research Division
No. Do you think the larger trend is a symptom of an increasing SaaS sales?
Richard J. Poulton
Yes. Well, that was what I speculated.
I don't know if it's a 1-year anomaly or if it is indicative of -- if you look at what we're selling now, it's predominantly multi period and multiyear services offerings or subscription software. And I think given that, that might be -- might have something to do with why we don't see as much variability.
But it's more of just something I observed and I wanted to share, and I'm not really ready to conclude on it yet.
Eric Percher - Barclays Capital, Research Division
And there's nothing to do to adjust your forecasting or financial planning in advance of that?
Richard J. Poulton
Do I think we need to do anything to adjust that? No, not at this point.
And we're giving annual guidance, not quarterly guidance.
Operator
Your next question is from Bob Jones.
Adam Noble - Goldman Sachs Group Inc., Research Division
It's Adam Noble calling in for Bob. Definitely -- I just wanted to go to the revenue conversion.
Your revenue conversion, I think especially in system sales and transaction processing, was pretty slow this quarter, for system sales similar to third quarter levels. Anything you could share around why backlog isn't converting to revenue in those 2 segments at historical levels?
Richard J. Poulton
Well, system sales, I think, Adam, is really -- is 2 things. One, there's not a lot -- you're talking about a small base and there's not a lot going into it.
Most things are being sold on a subscription basis now. Some of the area -- items that we have been selling, we've been selling our financial solution for our Sunrise platform, and that is driving -- that is a solution we're selling now, but it's a prolonged go live install and therefore revenue recognition.
So that's certainly influencing some of the conversion on that line. Transaction processing, there's just so much in that big bucket.
I'm not sure I could give you a real answer to that now. We probably have to study that a little and get inside your head about what trend line you're looking at compared to what you're seeing now.
It certainly -- what I will say is this, I mean, what drives that line is longer-term contracts, right, longer-term contractual arrangements. So you are definitely filling up, if you will, the top of that funnel with multiyear contracts, and those contracts are probably on the margin getting a little longer.
5, 7-year agreements are not unusual now. Sometimes you even have agreements that go out as far as 10 years.
Adam Noble - Goldman Sachs Group Inc., Research Division
No, that's definitely fair. Just to go to R&D in particular, the second half of '14 saw a step-down in gross R&D spend year-over-year and then also relative to the first half of the year.
I think you previously had mentioned R&D being kind of flat to very modest growth overall. Thinking about the opportunities, whether in population health, analytics, some of the other areas you guys are working on and some of the investments some of your competitors are continuing to make in these areas, do you think that the 2014 R&D base is high enough?
Or could we see you in the future kind of ramp up spending for that?
Richard J. Poulton
We look at it on an overall basis. We think our spend levels are very competitive with others as a percent of revenue and relative to the number of platforms we're supporting.
So we think it's the right base, and I know that it's up significantly from where it was a few years ago. So I think the company probably underinvested a few years ago.
We think we're at the right levels now. But in terms of the quarterly trend you observed, yes, I mean, we were up -- we had a little bit of spike earlier in the year, Q1 and Q2 of 2014.
Those were higher levels than you would have seen on a quarterly basis in 2013. Had a little spike and then it tailed off a little later in the year.
I think Q4 might have been impacted a little bit -- a little lower than our run rate because of some turnover we had. But those are just -- those aren't indicative of any different set of viewpoint or trend or anything like that.
I think we feel like we're spending at the right levels. You may remember a year ago I said our goal was to take a lot of the spend that we had identified as having little value, and we had a fair amount of what we thought was inefficient spend back in the 2012, earlier 2013 timeframe, and we wanted to get a lot more yield out of it.
So we've been working on that a lot. We feel pretty good what we're getting from our significant investment, and I just -- I wouldn't read too much into those quarter-to-quarter trends.
We are expecting to spend in the same ZIP code in 2015.
Operator
Your next question is from Ricky Goldwasser.
Saurabh Singh - Morgan Stanley, Research Division
This is actually Saurabh Singh in for Ricky Goldwasser. I was just hoping to get a sense of when we look at like the top line going from slightly down 1% in 2014 to a range of 3% to 5% growth for '15.
How much of the targeted 2015 revenues are you expecting to generate from what you already have in backlog versus new bookings?
Richard J. Poulton
Yes, sure. I just want to correct something you said there.
I mean, revenue was up slightly in 2014, not down, just so we're clear. The answer is roughly 35% of our backlog will convert to revenue in 2015.
That's a little better than $1.2 billion in revenue. So that gives you a sense for how much of it comes from what's in backlog versus what we expect to sell this year.
Saurabh Singh - Morgan Stanley, Research Division
All right. And then my second question was more on the composition of operating expenses.
A, I wanted to clarify that like should we be thinking of operating expenses as being flat year-over-year in '15? And -- because I'm not sure in that front?
And then the second question was within that, I mean, should we expect like SG&A to maybe decline a little bit but R&D to go up? Or how should we think about that?
Richard J. Poulton
We expect gross or absolute dollar SG&A to be down in 2015 compared to 2014.
Saurabh Singh - Morgan Stanley, Research Division
Okay. And R&D, you would expect to maintain at current levels?
Richard J. Poulton
Yes. I think plus or minus, 5-ish percent or so.
That's kind of what we're targeting right now.
Operator
And your last question comes from Jeff Garro.
Jeffrey Garro - William Blair & Company L.L.C., Research Division
Just a quick one. I didn't hear a ton of about Sunrise on the call, and I think we're, in general, expecting an active replacement market in the acute care space over the next couple of years.
So I want to hear what your strategy is to gain market share over that time.
Paul M. Black
This is Paul. The Sunrise ratings that we're getting and the new footprints that we received over the course of the last 24 months has been on an uptick, both domestically and globally.
And my expectation is that the team that we put in place continue to do that. We have dedicated teams that all they do is sell new business and sell in the hospitals, small IDN and the rural hospital marketplace.
So there is -- if you look at the KLAS data that are out there these days, they talk about the number of replacements. There's a number of opportunities out there for folks that are thinking about moving from their current supplier to somebody else.
And according to KLAS, there's like 453 different provider organizations and over 1,500 hospitals that will be buying something in 2015. So the market is there.
We are giving you the guidance we've given you, but my expectation is on the -- from my sales team standpoint, that I want them in front of the opportunities that are out there, KLAS and other organizations are showing it. And in our own direct sales force activities, we're seeing increase in our pipeline.
That doesn't always convert in the timeframe that we want it to, and obviously, last year, it didn't, which is what we're disappointed about with regard to the same revenue that didn't come in. But broadly, the Sunrise solution set is substantially more competitive today than it has been over the course of the last 24 months.
And it's -- in our opinion, it's overlooked, and in our opinion, we will do everything that we can to make sure that our voice is heard.
Operator
We have reached our allotted time for today's conference. Are there any closing remarks?
Paul M. Black
There are. To summarize, while not pleased with the revenue performance for 2014, I am optimistic about Allscripts' future.
We are better positioned to increase market share and to participate competitively in the United States and around the globe. We are adding new service offerings and positioning Allscripts health care providers to transition both financially and clinically to value-based care.
You're all invited to the Sixth Annual Financial Community Town Hall on Monday, April 13 at the McCormick Place during HIMSS. And finally, we've provided 2015 financial guidance and expect you to measure management's performance against these metrics.
We are committed to achieving these goals. Thank you very much.
Good night.
Operator
This does conclude today's conference call. You may now disconnect.