Feb 16, 2018
Operator
Greetings, and welcome to the Allscripts' Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Dennis Olis.
Thank you, please go ahead.
Dennis Olis
Thank you, Darren, and thank you very much. Good afternoon, everyone.
Our speakers today are Paul Black, Allscripts' Chief Executive Officer; Rick Poulton, our President; and myself, Dennis Olis, Chief Financial Officer. We'll be making a number of forward-looking statements during the presentation and the Q&A part of the call.
These statements are based on current expectations and involve a number of risks and uncertainties that could cause our actual results to differ materially. We undertake no obligation to revise these forward-looking statements in light of new information or future events.
Please refer to our earnings release and SEC filings for more detailed descriptions of the risk factors that may affect our results. Also, as management reviews the fourth quarter details, please reference the GAAP and non-GAAP financial statements, as well as the non-GAAP tables in our earnings release and the supplemental data book that are both available on our Investor Relations Web site.
And with that, I'm going to hand the call over to Rick Poulton.
Rick Poulton
Okay. Thanks, Dennis.
Good afternoon, everybody. We hope everybody's New Year is off to a great start, and thanks for joining our 2017 year-end earnings call.
2017 was a transformational year for Allscripts, so I want to spend a few minutes discussing some of the moves we made and how that leads us position going forward. And then I'll briefly talk about some of the client specific accomplishments during Q4.
During the fourth quarter, we closed our acquisition of the McKesson EIS portfolio, we signed the letter of intent to acquire Practice Fusion and we signed a letter of incent to sell the One Content business, which again came to us as part of the McKesson EIS portfolio, and we're selling that to Hyland Software. And so then today, we announced the closing of the Practice Fusion acquisition, as well as the signing of a definitive agreement for the One Content sale.
So the net of all this activity is that is following: we've added hundreds of new client relationships to Allscripts for clinical, financial and data solutions; we have filed in solutions gaps to our EHR portfolio in important market segment where we’re previously underrepresented; we have created what we believe to be the largest actionable outpatient clinical data set and the largest platform to efficiently bring Payer and life science companies to the point of care; we have created significant cost scale and an opportunity to meaningfully increase EBITDA margins in future; we've added significant talent to the organization; we've added a net of more than $300 million in recurring annual revenue to the company; and we've done all this for a very modest net investment of approximately $50 million. So when we combined this activity with our previous corporate development initiatives, as well as our organic efforts to reorganize and reposition certain assets for better growth opportunities, as well as launch new solutions into new emerging growth areas, we feel a very well positioned for the longer term.
Dennis will share more color in a little bit about our outlook for 2018 financial performance, but we will achieve that largely through the hard work we've already done in positioning the company. Where we stand today roughly two thirds of our revenue footprint is now represented by core clinical, financial, population health and managed services solutions to our inpatient and outpatient EHR client base here in the U.S.
This is truly our core and we will continue to focus on ease of use of our solutions, lowering the cost of delivery and earning a greater share of clients’ wallets in this space. It’s no secret to any of you on this call that these clients in the U.S.
continue to feel financial pressures from the changing regulatory and competitive landscape. So on the one hand, long-term fundamentals remain strong for us as technology solutions should continue to afford their more efficiencies and lower the costs, but on the other hand all investments are scrubbed harder and harder for ROI requirements.
And as Paul will talk about little bit, sales cycles are expanding and increasingly difficult to predict. So we expect steady demand for solutions from these clients and we continue to expect to be a net share shift winner of new clients in this area as our industry continues to evolve.
But overall, we've built our forecast assuming modest growth with this portion of the client base. The other third of our revenue footprint is represented by higher growth opportunity areas, and we believe it is highly differentiated from most of our competitors.
These areas include first, our Netsmart and CarePort subsidiaries, who as we told you last quarter, are making great strides with clients in sharing and delivering on the vision of seamlessly connecting the traditional healthcare provider networks and the post acute healthcare providing networks. This is a challenge of ever increasing importance and nobody has the scale or market presence that we do to make this a reality.
Second, our Payer and Life Science businesses. We see tremendous opportunities to continue to bring efficiencies and access to these two important players in healthcare delivery.
The acquisition of Practice Fusion was essentially a doubling down for us in this area. And as I said earlier, we believe we now have by far the largest actionable clinical outpatient dataset in the industry.
We expect to continue to see strong growth in this area. Third is our EHR agnostic care tools, including dbMotion, EPSi, FollowMyHealth and 2bPrecise.
Each of these solutions have been growing list of clients outside of our EHR base, and they deliver industry leading solutions in increasingly important challenge areas for healthcare providers and employers; these challenges include data aggregation and true harmonization of data; they include cost modeling and financial decision support; these challenges also include patient engagement and empowerment; and lastly, these challenges include care protocols based on genomic testing and results. We continue to invest heavily across all these solutions as they tackle the challenges in these important areas, and we see these as significant growth areas for us in the future.
And finally, our growing international footprint and resume of successful delivery sets us up well for continued strong growth outside the United States. So with that overview of the markets, we are addressing in how we see ourselves positioned for the future.
Let me shift gears and put a bow on 2017 with a few comments on fourth quarter client activity. I'll start in the U.S.
health systems market. As Paul will discuss in some more detail, we had the largest most comprehensive Sunrise platform go-live in years at Baptist Pensacola.
Also, we had a nice early return on our EIS acquisition. As we put together a combination of Sunrise inpatient and outpatient clinicals with some newly acquired EIS solutions to win a competitive process at Dearborn County Hospital.
And finally, Robert Wood Johnson Barnes Health, a long time user of Allscripts Sunrise and TouchWorks Solutions, expanded its use of dbMotion to connect their non-Allscripts CMR hospitals and physician practices. In total now, more than 1,300 MDs are now connected via dbMotion.
Moving to the independent ambulatory segment. Allscripts’ strategy continues to focus on leveraging our significant install base to drive cross-selling and add-on services to our physician clients.
We continue to see strong interest from our clients in outsourcing their billing and collection requirements by adopting our revenue cycle management services. Sales were strong during the quarter.
And as this continues to expand, we will increasingly have more of our revenue in this area indexed to patient volumes at our clients. But for now, these volumes only drive modest variability in our results.
We also were pleased to expand the scope of our relationship with Optum in two places during the quarter. One of their larger practices adopted our Payerpath clearinghouse solution.
This is tightly integrated with our practice management system, which they were previously contracted for. And we hope that success here will lead to other owned practices in making the same decision.
We also had their MedExpress business unit install TouchWorks at three of their industrial medicine sites. This was not part of the scope of the original contract, and early returns on client satisfaction are very strong.
So we're very pleased with how our Optum relationship is going and the Optum to continue to expand that. Finally, I want to mention, while this incident happened in January, not the fourth quarter.
I want to also mention an unfortunate event that primarily impacted our ambulatory franchise. Four weeks ago two of our data centers that we use to host applications for certain clients were attacked by a powerful ransom ware virus.
This malware had never been seen before by law enforcement and was the work of very sophisticated criminals. We took immediate measures to prevent the spread of the attack and protect all client data.
So this day there has been no evidence that any client data was removed, and we are great full to our security and response teams for their efforts, as we know others in the industry have not been so lucky during similar attacks. We take data privacy and security very seriously and we spent tremendous amounts of money protecting our datacenters and our networks.
Much more than most every self hosted client could ever afford to spend. The lessons learned from this incident will help us get even better in the future in preventing and responding to such incidents, and we have been very busy communicating to our client specific steps that we’re taking to continue to improve.
So we hope that that's behind us and look forward to continuing to rebuild and strengthen the relationships with our clients that were impacted by this. Now, I want to move to our international business.
Like our third quarter, the fourth quarter was very active for our international franchise. We had another go-live in the UK with Maidstone, and we continue to expand our footprint in Australia as we continue to expand the reach of clinical systems beyond South Australia with several sales of the Sunrise-BOSSNet EHR platforms to hospitals in Western Australia.
These organizations are undergoing a transition from paper to electronic medical records and the Sunrise-BOSSNet platform is used to transition to digital order entry and used to move from paper based records. We see BOSSnet as an outstanding on-ramp to EHRs where they do not exist today, and we’re evaluating additional geographic opportunities to bring this to.
And finally, as we went live in Costa Rica with Sunrise, reg and sched functionality and this is delivered through an Azure public cloud instance. This is an exciting first for the company and we look to build on this momentum going forward.
Lastly, in our post-acute segment, Netsmart had a strong sales quarter, which continued recent trends. Netsmart added another 75 facilities during the quarter, bringing the total for the full year to approximately 600 facilities.
These new clients represented almost 50% of Netsmart bookings for the year. So they have a great balance in growing existing accounts, while also adding significant new footprint.
So with that summary, let me turn the call back over to Dennis to go through the financial highlights for the quarter.
Dennis Olis
Thanks, Rick. As we review this quarter's numbers, please reference the schedules in the earnings release, as well as the supplemental data work book available on the Allscripts Web site.
As a reminder, we closed the Enterprise Information Solutions transaction on October 2, 2017 and began consolidating the results as of that date. As such, Q4 includes a quarter, a full quarter contribution from EIS.
In Q4 and for the foreseeable future, we will provide the revenue contribution for EIS. However, since we have fully integrated the EIS business into the Allscripts cost centers we will not provide financial information for the former EIS business below the revenue line.
As previously reported, the financial results with Horizon Clinical and series 2000 product lines are reported as discontinued operations in Q4 and through the product’s end of life on March 31st of this year. My comments on the income statement will largely focus on non-GAAP metrics, unless otherwise stated.
Full reconciliations of GAAP and non-GAAP figures are available in the earnings release. All reference to Allscripts' current results are made before considering the impact of industry-wide revenue changes and revenue recognition issued jointly by FASB and ISV as Topic 606 and IFRS 15 respectively.
With Rick having briefly discussed bookings and Paul following with more color shortly, I'll begin with backlog, which stood at $4.6 billion in December. This reflects both the impact of bookings, as well as renewals in the quarter that are not included in the bookings metric.
The fourth quarter amount includes the addition of backlog from the McKesson Enterprise Information Solutions transaction. The software component of backlog comprises 59% of the total while service accounts for the remaining 41%.
Turning to the income statement. Fourth quarter non-GAAP revenue totaled $547 million, an increase of $117 million or 27% versus Q4 of 2016.
Non-GAAP revenue adds $30 million in acquisition related deferred revenue adjustments in the fourth quarter of 2017. In 2016, this adjustment totaled $4 million and therefore the Q4 2017 GAAP revenue growth is 22% versus the fourth quarter a year ago.
Netsmart Q4 non-GAAP revenues totaled $85 million, growing 14% year-over-year. EIS contributed non-GAAP revenue totaling $104 million.
This includes the EIS portion of the acquisition related deferred revenue adjustments of $27 million. In Q4, we also recognized a onetime favorable revenue adjustment of nearly 10% of the reported EIS revenue associated with the acceleration of revenue from project related work.
As we move into 2018, our non-GAAP revenue guidance for Allscripts reflects the removal of the one-time revenue adjustments in EIS that we experienced in Q4, the anticipation of future attrition in EIS as discussed on previous calls and the removal of revenue and cost associated with the onetime divestiture. Looking at our total revenue split.
Total recurring revenue grew 32% and non-recurring revenue grew 11% versus the same period a year ago. Thus, our total recurring revenue mix came in at 79% in Q4, 78% for the full year.
As we incorporate 606 revenue recognition changes into our 2018 reporting, we would expect to see more volatility in our recurring and non-recurring mix. Looking at revenue results by line items.
Total software revenue in Q4 increased 25% year-over-year, totaling $354 million. Recurring software revenue consisting of subscriptions, recurring transactions, support and new maintenance increased 35% year-over-year.
A large portion of this growth was driven by the consolidation of the EIS business. In the quarter, non-recurring software revenue decreased 23% year-over-year.
Given the multiple variables in this metric, we anticipate quarterly fluctuations in non-recurring software from quarter-to-quarter and would not view the Q4 percentage as reflective of our future results. Turning to client services.
Consolidated non-GAAP revenue grew 32% year-over-year to $193 million in Q4. Recurring service revenue increased 25% year-over-year, driven by the addition of EIS, revenue cycle services and other multi-year service offerings.
Similar offerings from Netsmart such as hosting, revenue cycle services and managed services, also contributed to this increase. Allscripts’ non-recurring service revenue increased 47% year-over-year, driven primarily by additional revenue from implementations and upgrades.
Moving to non-GAAP gross margin. Total gross margin was down by 30 basis points year-over-year.
We anticipate gross margins to improve as we enter 2018 and recognize the synergies from the EIS acquisition. Analyzing revenue by components, software gross margin decreased by 50 basis points year-over-year.
Client services, on the other hand for Q4, came in at 16.7% compared to 14.8% for the same period last year. While gross margins on services are trending consistently in the mid-teens as anticipated, the increase also reflects the addition of EIS, which runs at a slightly higher service margin than core Allscripts.
Looking at operating expenses. Non-GAAP SG&A totaled $114 million, a 15% increase year-over-year.
The non-GAAP SG&A figure excludes non-cash transaction related and other expenses. The increase in SG&A is primarily a function of the additional acquired expenses from EIS.
Gross R&D was $105 million, up 50% year-over-year, reflecting additional R&D expense attributed to the acquisitions at Netsmart and Allscripts. Allscripts' software capitalization rate was 30%, a step-down from Q3.
We anticipate a software capitalization rate in the low 30% range for 2018. Adjusted EBITDA totaled $107 million, a 28% year-over-year increase.
This equates to 20% adjusted EBITDA margin. Netsmart’s adjusted EBITDA was strong in the quarter and is trending in the mid-20% range as a percentage of Allscripts' total reported EBITDA, in line with our expectations and within the 2017 guidance range of between $90 million and $100 million.
Looking below the line. Total cash interest increased 28% to $20 million, which compares to $16 million from a year ago.
The largest contributor to this increase is the financing required to fund the EIS acquisition. Please note that GAAP results this quarter included transaction related costs, severance fees and other costs of $25 million, primarily related to the EIS transaction.
Finally, excluding non-cash adjustments and transaction related and other expenses, non-GAAP net income attributed to Allscripts' totaled $33 million and non-GAAP EPS with $0.18 for the quarter. As a reminder, non-GAAP EPS is calculated net of non-controlling interest to reflect the Allscripts’ ownership portion of the partially owned controlled and consolidated businesses.
Non-GAAP net income attributed to Allscripts Healthcare Solutions grew approximately 25% year-over-year. Today, we also announced that we amended the Allscripts credit agreement, providing for an increase in available liquidity in 10 years, as well as lower interest rates.
The amendment provides a $400 million term loan and a $900 million revolver facility. This represents an increase in borrowing capacity of $500 million.
The maturity date was extended to 2023 approximately three years after our convertible notes mature. Allscripts ended the quarter with a principal balance of $629 million in secured debt and $345 million on convertible senior notes, a $59 million increase in long-term debt quarter-over-quarter.
This increase reflects the financing required to fund the acquisition of the EIS business. Netsmart's total debt, which is non-recourse to Allscripts but reported for consolidation purposes, totaled $646 million, down slightly quarter-over-quarter due to required repayments.
Turning to cash. Q4 operating cash flow improved by $22 million year-over-year to $106 million due to strengthening business results and contributions from the EIS business.
Q4 free cash flow totaled $68 million after adjusting for capital expenditures, capital software, and purchase software. On a full year basis, operating cash flow improved to $279 million, a 4% increase year-over-year.
Free cash flow was 94 million versus $134 million in 2016. 2017 free cash flow was impacted by increased investments in developing software.
As we noted in the past, cash flow will vary from quarter-to-quarter. Turning to our outlook.
We're initiating our 2018 financial outlook as follows; the company anticipates non-GAAP revenue of between $2.15 billion to $2.25 billion; we anticipate adjusted EBITDA to be between $420 million and $460 million; excluding Netsmart, the adjusted EBITDA is expected to be between $310 million and $340 million; finally, we anticipate Allscripts’ non-GAAP earnings per share of between $0.72 and $0.82 per diluted share. We have built our most recent acquisition of Practice Fusion into this guidance.
In 2018, we expect this transaction to be marginally accretive. Additionally today, we announced our divestiture of the One Content business, a portion of the business we recently acquired from McKesson.
The impact of this is also reflected in our full year guidance. As stated in our Q3 call, we are reporting additional revenue and expense details attributed to the Horizon Clinical and Series 2000 business in our 10-K.
These discontinued operations will wind down by the end of Q1 in 2018. And therefore, our outlook for the year excludes the impact of this discontinued operation.
As we move into 2018, we have adjusted our guidance for our effective tax rate of 27% for the full year 2018. And with that, I'll turn it over to Paul Black.
Paul Black
Thanks, Dennis. And I'd like to acknowledge and congratulate Dennis on the interim role being removed from his title of CFO.
As I reflect back on 2017 in the past five years, I am very proud of what this team has been able to accomplish. Thinking back, we've made a number of important decisions that have made 2017 the year that it was.
We've invested in our core solutions, effectively spending the R&D to meet regulatory demand, increased solution breadth and depth and to innovate on the platforms we offer clients on a worldwide basis. This has contributed to the multiple consecutive quarterly bookings records and on an annual basis, we've been able to demonstrate client retentions, attract some new clients and cross sell new capabilities to our existing clients, expanding our market share.
We've also invested in new platforms in anticipation of the world in a post stimulus market reality, creating a number of growth platforms outside of our core EMR offerings. As we have been a team that has made and kept commitments with our clients and stakeholders, we have provided multiyear guidance and provided the models, which show the path to those projections.
Regarding bookings, I'd like to make the following observations. One, our bookings are for new relationships or expanded footprints to the company, we did not count existing client renewals in this number.
We also do not count the value beyond 12 month maintenance stream for new deals. Two, bookings in United States are harder to predict as we are working on hundreds of client opportunities every quarter, to be able to getting bigger and at times the timing of their closure does not align with the 90 days cycle.
Three, we have an exciting pipeline on a global basis. We have a new client base in EIS and as of yesterday, in Practice Fusion.
The EIS base has been reactivated and will benefit from the additional solutions and services that Allscripts has to offer. Four, our demonstrations to new clients in 2017 was an increase over 2016.
We have also built a solid pipeline in the Payer Life Sciences, global, consumer and managed services businesses. And fifth, included in our 2018 guidance, our revenue growth expectations beyond 2018 are the expectations for bookings.
Of interest, given that we have roughly 80% of our revenues coming in on a recurring basis, the reliance on in-year new bookings has decreased overtime as a percentage of recurring has increased steadily over the past five years. For the guidance we offer today, this represents about $300 million per quarter.
Turning to the 2017 highlights. We had significant new client signings during the year and announced our largest Sunrise agreement ever.
We went live in many organizations, highlighted with Baptist Pensacola where a single platform was deployed for inpatient EMR, outpatient EMR, inpatient revenue cycle and outpatient revenue cycle, a capstone event delivering on our investments and on the vision for an open community based EMR all-in-one platform. We also activated Sunrise at the Royal Adelaide Hospital in Australia, a brand new state-of-the-art 800 bed facility and the largest implementation in Australia.
We continue to be recognized by one of the industry's leading independent benchmarking companies who utilizes the most comprehensive survey technology. Allscripts has remained number one for EMRs over 250 beds and for population health management for the past four years.
This past Monday, we were selected as a number one vendor for many of the global regions that we compete in also. From a cultural standpoint, I'm extremely proud of Allscripts’ giveback efforts in 2017.
We suffered three major hurricanes in the United States. In Texas and Florida, we partnered with Surescripts to provide free access to patient-specific medication history to pharmacist.
In Puerto Rico, we partnered with Medshare to deliver critical medical supplies to those in need. Allscripts employees dedicated thousands of hours of their time and thousands of dollars out of their pockets to help those impacted by these natural disasters.
All of this is culminated in an exceptionally strong set of financials just highlighted earlier by Dennis. We enter 2018 with annual sales projected over $2 billion and climbing.
We have created a scale needed to be a relevant long-term player in this large and growing market. We are a much stronger vibrant company today than we were in late 2012.
And we expect much more in 2018. We will continue to innovate to create an open platform, which instills an entrepreneurial culture, which embraces third party developers.
We will continue to evaluate M&A opportunities where it makes sense and where clients will benefit. There will be continued consolidation in both the EHR, as well as in the post-acute market and we will be active in those segments when it makes sense.
We will not be complaisant with our success in 2017. We will continue to serve our clients in a manner, which will retain their trust and deepen their relationships with Allscripts.
We are committed to providing the highest quality and service levels to our clients, which in turn will benefit the patients that they care for. With that, I'll turn it back to the operator to take your questions.
Thank you.
Operator
At this time, we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from Jamie Stockton of Wells Fargo.
Please proceed with your question.
Jamie Stockton
I guess maybe the first one, just bookings and I am sure it's going to be a decent focus. And Paul I understand you tried to address it somewhat.
But it looked the weakness was at least year-over-year in the services bucket. I think Rick maybe you said that RCMS actually seemed like it had a decent quarter.
Just any incremental color you can give there would be great?
Rick Poulton
So, I'll go first and then Paul. So RCMS did have a good quarter, Jamie.
It's one of many services offerings that we have. I think we saw less activity around outsourcing and larger managed hosting or other managed -- more comprehensive managed services contracts that you might see in larger institutions.
So remember our rep cycle is at this point something we bring to our ambulatory clients. We have not delved into inpatient revenue cycle as of yet, so those two -- your observation is not inconsistent with what I was saying.
Jamie Stockton
And then maybe just one more. On the One Content platform that you guys are selling to Highland just any numbers around that would be great.
I mean the proceeds expected from the deal, how much revenue is getting carved out EBITDA that would be great?
Rick Poulton
So revenue and EBITDA, Jamie, we've never done that at a product level or at a product line level. So we're not going to start with this.
I guess I'd reiterate what Dennis said is our guidance -- I'd reiterate two things; one, our guidance reflects the transaction, so we counted that in; and I'd also point you maybe to my comments where I said the net impact of all of our corp dev activities recently adds is approximately $300 million in recurring revenue, not total revenue. So I think you could triangulate about around that and make some decent guesses.
Proceeds on the transaction we would expect to -- again, I gave a number that's net of all that, it's about $50 million of capital, that's inclusive of transaction costs and things like that. So you'll see a lot of details when we file an 8-K on the transaction.
But you should think of it as mid-200s of proceeds.
Jamie Stockton
Rick, the $50 million number, does that also include the Practice Fusion transaction?
Rick Poulton
Yes, all three…
Operator
Our next question comes from Ross Muken of Evercore ISI. Please proceed with your questions.
Ross Muken
So maybe on -- you talked a bit earlier on international and some of the momentum there. And obviously, you've had some good results in Australia.
Could you just give us a feel or the size or the scope of bookings that are available in maybe other parts of the world in Asia or in the UK, et cetera, just so we can get a sense for the upcoming year what that opportunity set looks like?
Paul Black
And I would also add to the prior question that international did not have a great Q4. I mean if you look at places that were a bit tough, compare this to what they've done over the rest of the year.
So in the markets that we compete in, we are typically either selling Sunrise or we’re selling dbMotion. So on average, those deals probably are 50% bigger than the average deal size here in the United States when they close, so something south to $20 million and north of $10, and so there is pretty good size transactions.
The pipeline looks pretty decent, but as we have experienced overtime in the business is outside of United States, those are government driven and the government led and are pre-rigorous procurement process that is less predictable on a quarter-by-quarter basis. We've got some pretty good size deals that we’re working on, they are larger than that.
But again, those are not something that we have talked about or projecting right now in the bookings number that we would be using internally.
Ross Muken
And just one Netsmart, it seems like that business the momentum as you stated has been quite good. I guess how are you thinking -- you've added a few assets there, the internal is good, the margins are great.
I guess how are you just thinking about where that asset is situated right now and what else you can do to help unlock value there?
Rick Poulton
Well, our focus right now, Ross, is on growing value there. And I think we've accomplished a lot in with not quite two years yet since we put that together.
And that's the focus for now. So we continue to work with the management team and our other owner partner and deal on strategies for growth and strategies for becoming the factor solution in some of the verticals that they participate in.
The question of how do you unlock that value, I think we're going to continue to provide as we provided in the guidance, transparency on what some of their contribution is coming from that asset. So that folks like yourself and folks like our investors can properly assess what the value of it is and therefore what our ownerships stake is.
And after that, we’ll continue to think about it and when we make decisions, we'll let you guys know but right now the focus is on growing.
Operator
Our next question comes of Richard Close with Canaccord Genuity. Please proceed with your question.
Richard Close
Yes, first part actually would be, is there any update in terms of the long-term targets that you have now that we’re I think two years or so into that?
Dennis Olis
Yes, as far as the guidance that we've provided, we're given the '18 guidance with all the moving parts. We haven't updated a three-year guidance at this point.
It’s something we may consider later in the year, but at this point we're just providing the 2018 guidance.
Paul Black
Yes, I think -- so I’ll add to that Richard is if you remember, we introduced the three year outlook at our Investor Day last March, which was meant to give you some -- give everybody a lens into how we thought about life beyond 2017. We updated that when we did the McKesson deal.
And so then we debated what do we do now, do we refresh so one year, do we stick with this three year and we just thought it was more traditional and probably little user friendly -- more user friendly right now to go back to the annual guidance, and that's we decided for '18. I think, we’ll -- as Dennis said, we’ll think about it later this year and maybe even on our next investor session or before that, we’ll come out with something about what our aspirations are beyond those.
Richard Close
Can you just give us a little bit of an update on the Practice Fusion? What are your thoughts in and around that acquisition?
Now that it’s complete. And just on a go forward basis, where do you see opportunities, what do you need to do to make that a really good transaction for you?
Paul Black
Well, the product itself fits a void that we have, so it is the value solution. And we've talked for some time now about how we think about EHR market in segments.
We think about value solutions, both in the inpatient and the outpatient world and we think about more of a premium solution in both the inpatient and the outpatient world. And there're different solutions designed to meet different needs and clients self select, whether they want a more rudimentary pool or they want a more sophisticated tool.
So that represents the value solutions in the industry and I think is a great add to what we have already for ambulatory solutions. Why we did it though?
As I said in my comments, Richard, their business model has been to use the clinical data they capture and the clinical presence they have at the point of care to bring the payer and life science communities to the marketplace and we do that ourselves already. And so the combination with Practice Fusion is as I mentioned is a doubling down for us in that opportunity set, and we really like the asset base we put together and we’re looking forward to some good things happening in that space.
Operator
Our next question comes from Anne Samuel with JP Morgan. Please proceed with your question.
Anne Samuel
On margins you've done a nice job of moving expenses out of the base over the past couple of years. How should we be thinking about your cost structure and ability to leverage expenses going forward, as you integrate some of these acquisitions?
And is there any more room to cut?
Dennis Olis
So from margin perspective, we still have room on the -- to improve when we talked about the EIS synergies that we expect to get throughout the course of the year, we talked about a pretty significant improvement expected as we work through 2018 going from the mid EBITDA range for the businesses that we acquire to somewhere in the 18% to 20% range as we go into 2019. So you'll continue to see expansion in margins associated with the synergies that we'll recognize, at EIS and to a much, much smaller extent with Practice Fusion.
We also, in the second quarter, mentioned that we had entered into an agreement with Atos who is our hosting partner, and that's a long term agreement that we have with them to consolidate some of our hosting facilities and generate additional savings in that regard. And then the third thing I would mention would be that we did we have noted that we are moving to in the ambulatory space a cloud-based offering.
We'll talk a bit more about that again, but again that has opportunity to improve our margins over the next few years.
Operator
Our next question comes from Eric Percher of Nephron Research. Please proceed with your question.
Eric Percher
Let's start with EBITDA guidance. If I look at the range and I take out Netsmart, we've got $30 million variance from bottom to top.
So I know it's about two- three times what's it's been in the past. You've got a lot more complexity this year.
But how much of that range is revenue dependent versus expense and margin dependent?
Dennis Olis
So first the revenue, the range that we provided this year is slightly bigger but again that I think coincides with the fact that we've significantly improved -- increased our revenue overtime. As it relates to the EBITDA variance and the range that we have, it's roughly at a 20% EBITDA margin at both the low end and the high end of that range.
So it's really nice cost driven. We will continue to drive the cost initiatives that I just spoke about in last question.
But it's really revenue driven and how we can recognize some of the growth opportunities that Rick and Paul have laid out.
Eric Percher
And one notable item on the expense side would be the McKesson TSA. Do you expect, I know you had spoken earlier about your hope to move off of that earlier.
Do you expect that so mid-year or could it come earlier in the year and is that meaningful?
Dennis Olis
It is meaningful and it's part of the guidance that we've provided as we've talked about the improvements that we’re going to see through the synergies that we’re going to recognize over time. So as it relates to the TSA, there is many different components within that TSA.
So we’re still tracking to terminating the entire TSA by the summer, but we're able to move off a certain component of that TSA sooner than we had originally planned, things like IT and some of the systems that we’re working on, we anticipate moving off those a few months sooner than originally planned. So that's going well and we will continue to be off the TSA by middle of summer.
Operator
Our next question comes from George Hill of RBC. Please proceed with your question.
George Hill
I guess, for Paul. Paul, first I want to check an assumption that it was interesting that we called out the point of Barnabas Robert Wood Johnson deal, where you guys told dbMotion.
I guess first, should we think of that as basically eliminating any churn risk in that client? And then my follow-up question would be, how do you think about the experience of selling dbMotion into that client.
And like how is that a leveragable opportunity as you think of that EIS customer base a way to minimize churn there?
Paul Black
Rick, is the one that actually talked about it, but I'm happy to do it since I've been here recently. George, I would absolutely expect that a client like that who has two extraordinarily capable electronic medical record suppliers both us and the other folks that are in there.
We have long advocated a position of not reaping and replacing and user capital to use for other solutions like population health, like analytics and some of the other things that we supply. So we're very pleased and as a result of their usage of dbMotion inside of the former Barnabas solutions to bring that over -- the Robert Wood Johnson solution site to bring that over across the entire enterprise.
So I would expect that to be a hedge against churn, to answer your question. In working with those guys, we worked with them for quite a while but at HIMSS a couple of years ago, Bob was on the podium with us and he was talking about what they’re doing with population health when he was just part of the Robert Wood Johnson organization and has been a long-term client there and he has been a big believer in and been a long-term supporter of what dbMotion could be.
Broadly then taking that dbMotion platform into other organizations, whether it’d be all Epic site or an all center site, it has a lot to do with who they are attached to in the marketplace, not only the affiliated and the owned physician practices if you’re a large -- speaking about a large IDN but also in the post acute arena where they are increasingly more interested in having that data come into a single harmonized data set that they can actually perform the analytics on. When you're accountable for those people financially, you want to know what they're -- where they've been and how much consumed inside and outside that organization.
Specifically with EIS base, there's a lot of very large integrated delivery networks that have the -- the McKesson star patient financials and the McKesson Medipac or HealthQuest patient financials, and that is another door that we can go into if you will through the CFO to have similar conversations about what their interoperability strategies are inside those organizations. Rick mentioned that there's a lot of ROI discussion and there's a lot of discussion around making sure that these people are spending the capital dollars that they have very wisely, and dbMotion is popping up as a extraordinarily relevant topic these days.
George Hill
Maybe if I can do a quick follow-up, and I'll talk little bit on this one, any chance to sell that functionality into the VA?
Paul Black
We certainly hope so. We have been talking to anybody that will listen to us in that zip code about what our capabilities are, and we've been pretty active in that regard, there's no promises there George.
And until the contract is actually let or who the EMR supplier is then we will work with that person, because that person will probably also be the prime contractor and that would be the person with whom we would deploy this type of technology if that's the way that VA decides to go. There's a reality to the environment there that we point out and that is over a 10 year period, you’re going to have a DoD environment on a new platform, you’re going to have a DoD environment on an old platform, you’re going to have a VA environment on a new platform and you’re going to have a VA environment on the old platform as you from the West Coast to the East Coast.
And also inside VA, you’ve got the 30% of the current record that supplied through non-VA entities like community physician groups, so a very heterogeneous environment. All of which we think play nicely to a very robust interoperability strategy that we are quite confident that we could produce at scale benefits for the VA.
Operator
Our next question comes from Sandy Draper of SunTrust. Please proceed with your question.
Sandy Draper
I guess first and I apologize I've got on a little late, so Rick you may have covered, that I don’t think you did. Just trying to understand you said there's $300 million of recurring revenue that is built into the guidance, I think that's correct.
And I am just trying to understand, did you breakout what total acquisition revenue is expected to be in 2018, thinking about Practice Fusion and then the others or just right now you're only focused on giving a comment about the $300 million of recurring revenue?
Rick Poulton
Sandy, my focus was on trying to synthesize all the corporate development activities that we've been involved in last couple of quarters, and unless you try to cut through it all and see what the net impact of all that is. So that was my comments on $300 million of recurring revenue, that's been added, at what was a very small capital cost.
The issue as to what's in the guidance picture is, again that's a little -- remember a little apples and oranges. I mean McKesson was in the numbers for all of Q4, so I'm not -- that you shouldn’t think of that as an incremental statement.
We also obviously are disposing off a business that was probably in the Q4 numbers as well. So I think the best way for you to think about it, Sandy if you’re trying -- if I'm reading between the lines.
I think you’re probably trying to think about organic growth versus non-organic perhaps.
Sandy Draper
Yes, exactly…
Rick Poulton
I think what you should do is step out with what the Q4 run rate was, listen to what Dennis told you about unusual items that didn’t belong in there, hair cut it for the business that we're getting rid off and then you could multiply that times four and so to start with that anything growth beyond that is organic.
Sandy Draper
And then the second question, just thinking about your comments about the continued -- or maybe as Paul said, continued consolidation in the industry, your expansion of your debt capabilities. Just in terms of your appetite ability to continue to do acquisitions, you've got EIS only at quarter end, Practice Fusion just closed.
Is there need to be at pause button or do you feel like you've got the capability if another asset came to market that you’d be willing to do it or do you really need to pause for a bit before you continue to look at opportunities. Thanks.
Paul Black
We are not at all acquisition enough all of a sudden that is not our growth strategy. We think we accomplished a lot both strategically and financially with the deals we did.
And we’re integrating those very well. Frankly, the integration on those is not that tough.
So there is work to be done but it's -- from a products rationalization side, it's not that tough, there is not much overlap. So the work is really more about getting the organization at the right cost structure, which is easier to control.
So work to be done but on the grand scheme of acquisition integration, not that hard. So then to your question, do we need to hit the pause button?
I don’t know about need. I mean, I was certainly not looking to do anything today, but it's needed and probably the way I would think about it, we're not going to raise off and buy everything that’s on the street, and believe me there is lots of stuff available on the street.
But we're going to be smart we're going to be disciplined, we are big believers. And we said out for years that the industry needs to evolve, it's going to happen so we might as well happen and do things -- lead that charge and do things that make sense for us.
So it's with that same filter that we’ll look at other opportunities. Credit facility, that's just good old fashion business sense finance, we restructured the tenure of our debt, we expanded it so we have more dry powder if you want it.
But I wouldn’t read too much into that.
Operator
Our next question comes from Charles Rhyee of Cowen & Company. Please proceed with your question.
Charles Rhyee
I appreciate your earlier comments on bookings that you do not include any kind of business with existing clients, that's all need client relationships. But when I look at the backlog or the ending backlog of about 15% at $4.6 billion, if I were to simply add new bookings in the quarter, subtract the $546 million of revenues recognized in the quarter and then compare to that to the end of quarter backlog last quarter -- in the third quarter, I see it a delta around $770 million.
I mean is that maybe indicative of business signs with existing clients or am I doing the math wrong there?
Rick Poulton
Charles, the way we determine backlog is different than the way we report bookings. So for example, when we have a large renewal for a client, we have on a pretty regular basis.
We do not consider that a booking in the quarter but the value of that does fall into backlog, it's not a simpler thing…
Charles Rhyee
But if compared to like maybe some of your peers, you do include maybe renewal in the bookings number, if we were to think of it more like-like, we could think of -- you do get credit for that right, because that ends up going into revenues in the future?
Rick Poulton
And that's what -- yes, you're correct and that's why we include that in the backlog number, but we do not include renewals in our bookings.
Charles Rhyee
Is the sizing of it -- am I in the ballpark because when I look and I kind of run that going backwards that number typically runs in the couple of hundred million plus or minus seems a little bit larger at this time. Is there any kind of large renewals specifically I think maybe you mentioned one earlier.
Is that what we're looking at here in this quarter?
Rick Poulton
I think the increase -- the biggest increase from last quarter where we were at $4.1 billion to the $4.6 billion is really the inclusion of the EIS business into the base.
Charles Rhyee
If I look at the -- just another question then on Practice Fusion. Can you -- you're adding Practice Fusion and other platform, you have actually Sunrise TouchWorks and I understand you run this as a portfolio and give options to clients.
Can you talk about your internal controls to manage different suites of products given the fact that, it doesn't look like you're really looking to really integrate any of these into each other, but then it would be standalone offering. Can you just talk about like how are you managing this and adding Practice Fusion to that?
And also what is the support in terms of R&D thinking of the need not only just this year but as we go the next couple of years? Thanks.
Rick Poulton
So Charles, I'll take a shot. You had a lot of sub-questions within that question, but only take a shot.
I mean listen as we've said several times and I think I said earlier in the call, but I’ll repeat it again. The market has very different and very real segments to it.
And I'd say very real, because I mean we didn’t just invent this, you can see from behavior. I mean there's a slew of healthcare providers, for instance when you talk about Practice Fusion, who decided they want a very rudimentary tool possibly just to pass meaningful use requirements, possibly just to get out of paper, but they want a fairly rudimentary tool and in exchange for that, they paid very little and they're okay with that.
And you compare that to the other ends of the market where we have traditionally participated where you have clients that are very complex clients that need sophisticated work flow, sophisticated content as part of their EHR. And as such, they're looking for something very different.
So those market segments are real today. When you -- when any competitor, not just Allscripts, anybody thinks about addressing these different segments of the market whether they've been on the ambulatory side or the inpatient side they have a choice to say do I have a tool that's built for that market segment or do I try to dumb down a different tool that I already own, or dumb up in the different tool.
And our competitors have all taken different strategies. We don't believe in the dumbing down strategy, we believe in offering a solution that was built for that market segment.
So Practice Fusion is here to stay in our portfolio, it's built on modern technology platforms, it's a single database multi-tenant architected solution efficient in that regard and its R&D requirements are what modest but certainly are appropriate for the business and then what we expect to generate from the business. So that's how we think about the portfolio of the EHRs.
Charles Rhyee
I guess, what I was really asking is like in terms of when all these units are reporting to you, your comfort in being able to manage another set of solutions. Is it just -- are they all reporting to the same people, just more from a oversight perspective that's all.
Thanks.
Rick Poulton
So we have solution leaders over all of our EHRs, each of our EHRs, and their job is to really understand the requirements of its market segment and where the functionality is today, where it's going, what our competitors are doing. And they are tasked with building a solutions roadmap.
When we now -- I think maybe at the core of your question, so how do we make sure those guys don’t start stepping on each others’ toes or overlapping. And yes, we do have a governance and control structure for that to ensure that the product roadmaps stay appropriate for the market segments that they are addressing.
Operator
Our next question comes from Stephanie Davis of Citi. Please proceed with your question.
Stephanie Davis
Just given the timing as you guys mentioned a little bit for bolt-ons this quarter, could you talk to any potential push outs that could impact the first half of ’18? And just on that note, do you have any update and the timing of the Singapore EHR opportunity?
Paul Black
We have not yet been notified about Singapore, we expect something to be broadcast there this quarter. And then on the things that happened and didn’t happened.
I've said this in the past and it's been something that has been what happens in the real world in every single quarter. There is a lot of deals that are there.
If you look back to Q4 of 2016, there were four pretty good size deals that came in. And in this quarter, we didn’t have those four deals.
So that's part of the reasons why had we had those we would have another record. So on any given quarter, there could be one, two, three, four or five things that pushed out and that's just the reality of the world that we live in.
We do everything we can possibly to bring and have that be consistent with the timing of the 90-day time cycle, but it doesn’t always work that way. When I look at 2018, in total, I see the pipeline I see the teams, I see an energized EIS base, I see an energized EIS employee population.
We had a really nice kick off where we brought some 700 people together and talked to them about what it’s like to work at Allscripts, what our expectations are what resources they have at their disposal. And you got a lot of people that were pretty excited about being part of organization that just does healthcare information technology and services.
So I'm not being overly blunt about what's going to happen in any particular quarter, but as I look at over the balance of 2018, I feel confident that we’ll continue to be successful in driving new business to the company, as well as retaining clients as well as taking the new clients that we have that have not yet been exposed to the capabilities that Allscripts offers them. Our expectation there is pretty high with regard to the cross selling of the solutions that we have into those base.
Stephanie Davis
And one follow-up and forgive me if I missed this. But could you just talk to the impact of tax or any movable line items in your '18 guide.
I am just trying to reconcile the strength of the EBITDA guide compared to the EPS guide?
Paul Black
So again the effective tax rate that we're using for 2018 is 27%, that's really comprised of the federal plus United States and some other penalties associated with being having some foreign entities that have profit protections, that's the one big adjustment. Otherwise, everything is pretty much in line with…
Rick Poulton
But I think if you’re trying to square EBITDA to EPS, Stephanie, don't forget interest costs have gone up and debts gone up a bit and the cost of the money has gone up a little bit too with rising rates. So you need to check that in your model as well.
Stephanie Davis
Okay, thank you. Appreciate it guys.
Rick Poulton
Well, thank you for your time today. As I mentioned earlier, Allscripts enters 2018 with top line growth, earnings momentum, strong financial capabilities and a good cash outlook.
We are positioned for profitable growth. We appreciate your time and appreciate your investments in Allscripts and thank you very much.
Operator
This concludes today's conference. You may disconnect your lines at this time.
Thank you for your participation.